<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1998.
REGISTRATION NO. 333-62235
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
CORNERSTONE BRANDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
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
----------------
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. [_]
----------------
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 OCTOBER 28, 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 the New York
Stock Exchange (the "NYSE") under the symbol "CSB". At the request of the
Company, the Underwriters have reserved up to shares of the Common Stock
offered hereby for sale to certain employees of the Company and certain other
persons, at the initial public offering price.
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.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders(2)
- ------------------------------------------------------------------------------
<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>
[The front cover of the Prospectus opens out in a "double-gatefold"
arrangement. When opened fully, two pages of text and artwork adjoin the
outside of the front cover to the right and face outward with the front cover
and three pages of text and artwork face inward from the back sides of the
outward-facing pages. On the outward-facing adjoining page immediately to the
right of the outside front cover, the following text is located in a column
down the left side:]
CORNERSTONE BRANDS
Cornerstone was founded in 1995 to capitalize on the opportunity to build a
family of direct marketing brands which serve discriminating and well-
educated consumers in upscale households.
The Cornerstone family currently consists of seven direct marketing
companies that offer high-quality home, leisure and casual apparel
products, primarily through catalogs. These companies are Ballard Designs,
Frontgate, Garnet Hill, Smith+Noble, The Territory Ahead, TravelSmith
Outfitters and Whispering Pines. Each Cornerstone company is distinguished
by a strong brand image, a clearly focused merchandising concept, high-
quality creative execution and exceptional customer service.
[A panel on the right side of the page contains a photograph of catalog covers
from the seven companies that make up Cornerstone Brands, Inc. The following
text is located at the bottom of the 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>
[The following text is located on the outward-facing adjoining page two to the
right of the outside front cover:]
A family of distinctive direct marketing brands
Cornerstone Brands
<PAGE>
[The three inward-facing pages are divided into seven columnar panels, each
highlighting one of the Cornerstone companies. At the top of the leftmost
panel is a photograph of a Ballard Designs catalog cover. The following text
is located below the photograph:]
Ballard Designs
Accents for the home and garden
.Atlanta, Georgia
.Founded 1982
.Provides decorating ideas, furnishings and finishing touches
[At the bottom of the first panel are photographs of a clock with a moon face
and of a dining table with chairs, both of which are products from the Ballard
Designs catalog. At the top of the second panel from left is a photograph of a
Frontgate catalog cover. The following text is located below the photograph:]
Frontgate
Accessories and furnishings to enhance the quality of life at home
.Cincinnati, Ohio
.Founded 1991
.Focus on quality and service
[At the bottom of the second panel are photographs of an outdoor grill, of a
decorative glass bird and of an outdoor dining table with chairs, all of which
are products from the Frontgate catalog.]
<PAGE>
[At the top of the third panel from left is a photograph of a Garnet Hill
catalog cover. The following text is located below the photograph:]
Garnet Hill
A source of natural fiber bedding, home furnishings, clothing and
accessories
.Franconia, New Hampshire
.Founded 1976
.Customers appreciate fresh designs and consistently high quality products
[At the bottom of the third panel are photographs of a bed with linens and of
a pile of linens, both of which are products from the Garnet Hill catalog. At
the top of the fourth panel from left is a photograph of a Smith+Noble catalog
cover. The following text is located below the photograph:]
Smith+Noble
Custom window treatments for customers who appreciate good design and
value
.Corona, California
.Founded 1992
.Provides design, selection and service at competitive prices
[At the bottom of the fourth panel are photographs of wooden blinds and of
fabric draperies, both of which are products from the Smith+Noble catalog. At
the top of the fifth panel from left is a photograph of a The Territory Ahead
catalog cover. The following text is located below the photograph:]
The Territory Ahead
Clothing and accessories for serious adventures or casual weekends
.Santa Barbara, California
.Founded 1988
.Inviting photographs and copy appeal to customers
[At the bottom of the fifth panel are photographs of a shirt and vest and of a
jacket, all of which are products from the The Territory Ahead catalog.]
<PAGE>
[At the top of the sixth panel from left is a photograph of a TravelSmith
catalog cover. The following text is located below the photograph:]
TravelSmith Outfitters
Clothing and accessories for leisure and adventure travelers
.Novato, California
.Founded 1992
.Special fabrics, features and gear make TravelSmith a fine travel resource
[At the bottom of the sixth panel are photographs of a women at the helm of a
sailboat, of a shirt and of a camera, all of which are from the TravelSmith
catalog. At the top of the seventh panel from left is a photograph of a
Whispering Pines catalog cover. The following text is located below the
photograph:]
Whispering Pines
Casual apparel, decorative accessories and home furnishings for life in
the cabin
.Fairfield, Connecticut
.Founded 1993
.Product offerings help customers achieve a comfortable, nostalgic feeling
of family retreats
[At the bottom of the seventh panel are photographs of a woman in a sweater, of
two throw pillows and of a lamp and coffee mugs, all of which are from the
Whispering Pines catalog.]
<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 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. An important strategy of the Company is to
feature "branded" products (i.e., sold under a 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 1997, the Company's net
sales, net income and pro forma net income (adjusted to include tax provisions
for non-taxed companies) were $216.3 million, $9.5 million and $7.4 million,
respectively. In the six months ended August 1, 1998, the Company's net sales,
net income and pro forma net income were $139.3 million, $5.7 million and $4.0
million, respectively.
Cornerstone was founded in 1995 to capitalize on the opportunity to build a
family of 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 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 direct marketing companies in the
home, leisure and casual apparel markets. Cornerstone believes the competitive
strengths listed below are critical to its success. For a more detailed
description of these competitive strengths, see "Business--Competitive
Strengths."
. 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. 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. Cornerstone believes that
its branded product offerings and 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. 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.
. 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. 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.
4
<PAGE>
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 listed below. For a more detailed description of these growth
initiatives, see "Business--Growth Initiatives."
. Build Existing Catalogs. Cornerstone's primary growth strategy is to build
aggressively the sales and productivity of its existing catalog titles. To
accomplish this, Cornerstone is focusing on increasing the size of its
customer database through initiatives such as increasing catalog circulation
to prospective customers and developing proprietary mailing lists; and
increasing the productivity of its customer database and mailings through
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 acquisition criteria. 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.
. 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.
The competitive strengths and growth initiatives listed above are subject to
a number of factors and risks that could impair the Company's competitive
position and hinder its growth initiatives. For a discussion of such issues,
please see "Risk Factors."
CORPORATE OVERVIEW
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 (directly or through a
subsidiary) all of the outstanding capital stock of or membership interest in
Ballard Designs, Frontgate, Garnet Hill, Smith+Noble and The Territory Ahead;
owns approximately 60% of the outstanding capital stock of TravelSmith; and
owns 80% of the membership interest in Whispering Pines. As described further
in "Business," Cornerstone has control over the business strategy and
significant corporate decisions for each of the Cornerstone companies other
than TravelSmith. Cornerstone believes it exerts
5
<PAGE>
significant influence over the business strategy and significant corporate
decisions for TravelSmith, but this control is limited by certain contractual
provisions. See "Certain Transactions--Contractual Arrangements with Other
Equityholders of Cornerstone Companies--TravelSmith."
The Company is a holding company without independent operations, although
certain subsidiaries of the Company (other than the seven Cornerstone
companies) support the front-end business functions of the Cornerstone
companies by providing certain back-end services, as described elsewhere in
this Prospectus. 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."
NYSE symbol....................... CSB
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding on September 26,
1998. Excludes an aggregate of (i) 1,511,815 shares of Common Stock
issuable pursuant to options outstanding as of September 26, 1998 at a
weighted average exercise price of $4.35 per share and (ii) 31,000 shares
of Common Stock issuable upon the exercise of warrants outstanding as of
September 26, 1998 at an exercise price of $.01 per share.
6
<PAGE>
SUMMARY 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(1) 1997 1998 FORMA)(2) 1997 FORMA)(2) 1998
-------- -------- -------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $82,412 $106,100 $216,335 $240,129 $80,807 $104,601 $139,269
Gross profit............ 38,721 51,350 104,084 115,472 38,398 49,785 68,253
General and
administrative......... 5,664 6,911 13,450 15,695 4,992 7,238 9,168
Restructuring charge.... -- -- 943 943 -- -- 2,838
Operating income........ 489 6,296 10,733 9,985 5,551 4,802 3,724
Equity in net income
(loss) of affiliate.... (20) 392 1,809 1,809 995 995 2,208
Net income.............. 167 6,070 9,506 9,024 4,983 4,500 5,653
Pro forma net
income(3).............. 111 4,600 7,381 6,899 3,854 3,371 4,007
</TABLE>
<TABLE>
<CAPTION>
AUG. 1, 1998
---------------------
PRO PRO FORMA AS
FORMA(4) ADJUSTED (5)
-------- ------------
<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(6):
Net sales growth....................... 75% 104% 26% 34%
Total catalogs circulated (000s)....... 41,939 77,144 65,038 84,853
12-month buyers (000s) (7)............. 512 1,033 884 1,128
Average order value.................... $ 160 $ 170 $ 158 $ 169
</TABLE>
- --------
(1) The statement of operations data for the year ended January 27, 1996
combine the Company's consolidated financial statements for the year ended
January 27, 1996 with those of Frontgate and Cornerstone Holdings Group,
Inc., a predecessor entity ("Cornerstone I"), for periods prior to their
acquisition by the Company. Frontgate and Cornerstone I are considered
predecessors of the Company for purposes of this presentation, but their
results are not included in the Company's results of operations for the
purpose of reporting under generally accepted accounting principles.
Accordingly, the statement of operations data for the year ended January
27, 1996 differ from the audited consolidated financial statements of the
Company for the same period included elsewhere in this Prospectus.
(2) 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
7
<PAGE>
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.
(3) Pro forma net income has 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) Reflects conversion of all outstanding shares of Convertible Preferred
Stock into an aggregate of 14,148,786 shares of Common Stock as if it had
occurred on August 1, 1998. Such conversions occurred in August and
September 1998. See Notes 6 and 7 of Notes to Consolidated Financial
Statements.
(5) 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."
(6) 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.
(7) 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.
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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.
Although Cornerstone expects to fund a majority of this cost by selling this
facility and leasing it back from the purchaser, there can be no assurance
that this sale-leaseback arrangement will be completed. In addition, 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, William T. End, Donald J. Steiner, John A. O'Steen, Mark
Fasold and Paul D. Tarvin. 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."
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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.
In the six months ended August 1, 1998, these five companies represented 64%
of Cornerstone's net sales. 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 makes the integration process
somewhat more difficult and prevents 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. Moreover, the Company's revolving credit agreement
contains certain restrictions on acquisitions by the Company. 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 (for example, the Smith+Noble acquisition resulted in transaction
expenses of approximately $3.8 million), or the amortization of goodwill and
other acquired intangible assets (as has been the case with five of the
Company's seven acquisitions to date), 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."
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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 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 Smith+Noble's primary vendor,
or the loss of several other principal vendors of other Cornerstone companies,
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, The Territory
Ahead purchases (directly or indirectly) substantially all, and Garnet Hill
purchases (directly or indirectly) a majority, of its 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
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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.
RISKS ASSOCIATED WITH BRANDED MERCHANDISE AND OVERSTOCKS
An important strategy of the Company is to feature branded products (i.e.,
products sold under a 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 has in the past limited, and is likely to continue to
limit, the Company's ability to return unsold products to vendors, which
results 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 five of the seven Cornerstone companies (Ballard
Designs, Frontgate, Garnet Hill, Smith+Noble and The Territory Ahead).
Cornerstone owns approximately 60% of TravelSmith and 80% 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. In addition, under
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the terms of a contract among Cornerstone, Mr. Slaughter, Mr. Sklar and
another stockholder of TravelSmith (collectively, the "TravelSmith
Stockholders"), Cornerstone has the right to designate only three of the seven
directors of TravelSmith (with three directors to be designated by Mr.
Slaughter and Mr. Sklar, and the seventh director to be mutually acceptable to
the other directors); the consent of at least two-thirds of the members of the
Board of Directors then in office, including the consent of one of the
directors designated by Messrs. Slaughter and Sklar, is required for certain
corporate actions by TravelSmith; and 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. 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
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
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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 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 has experienced significant growth in recent years, as it has
consummated five acquisitions since the beginning of 1997 and its net sales
have increased approximately 72% between the first six months of 1997 and the
first six months of 1998. In addition, each of the Cornerstone companies has
grown over the last 12 months, in terms of both revenues and employees. 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
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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."
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; REGISTRATION RIGHTS
Of the shares of Common Stock to be outstanding after this offering,
based upon the number of shares outstanding at September 30, 1998,
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 5,251,815 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. In addition, the holders of substantially
all of the shares of Common Stock outstanding prior to this offering are party
to a Registration Agreement with the Company under which they may, under
certain circumstances, require the Company to register their shares of Common
Stock under the Securities Act for sales to the public and include their
shares of Common Stock in a Registration Statement under the Securities Act
filed by the Company. Sales of a substantial
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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."
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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,
promptly following the closing of this offering, outstanding indebtedness
under its revolving credit agreement with Fleet National Bank and certain
other participating lenders. As of September 26, 1998, there was $47.9 million
of outstanding indebtedness, which bore interest at the rate of 6.6% per year
and matures on July 22, 2002. Of this outstanding indebtedness, approximately
$13.2 million was incurred to fund acquisitions by the Company, approximately
$4.8 million was used to fund the purchase by the Company of the minority
interest in The Territory Ahead, and the balance was incurred for general
corporate purposes. This credit agreement would not be terminated by the
repayment of such borrowings and would remain available for future borrowings
by Cornerstone. In addition, the Company may use a portion of the net proceeds
to acquire direct marketing companies that address the home, leisure and
casual apparel markets and that target an affluent customer base; 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. Cornerstone cannot
determine at this time the amount of net proceeds that will actually be
expended by the Company for acquisitions and for working capital purposes, or
the specific working capital needs for which the net proceeds will be used;
this will depend upon the number and size of the acquisitions consummated by
the Company, its future revenue growth, the amount of cash generated by its
operations, and other factors which may affect the Company's business. Pending
the uses described above, 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 prohibits the Company
from paying dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
17
<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 (actu-
al), no shares authorized, issued or out-
standing (pro forma and pro forma adjust-
ed)......................................... -- -- --
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..................... 42,968 103,286
Unrealized gains on available for sale securi-
ties.......................................... 29 29 29
Accumulated deficit............................ (12,590) (12,590) (12,590)
------- ------- -------
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.
18
<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.
19
<PAGE>
SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The selected statement of operations (other than certain pro forma data) and
balance sheet data set forth below for the years ended 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 balance sheet data set forth below
as of January 27, 1996 are derived from the Company's unaudited consolidated
financial statements. The selected statement of operations data for the year
ended January 27, 1996 combine the Company's audited consolidated financial
statements for the year ended January 27, 1996, presented elsewhere in this
Prospectus, with the audited financial statements of Frontgate, a predecessor
entity, for the period from January 1, 1995 to September 12, 1995, also
presented elsewhere in this Prospectus, and the unaudited financial statements
of Cornerstone Holdings Group, Inc., a predecessor entity, for the period from
January 1, 1995 to September 12, 1995. The selected statement of operations
and balance sheet data for the years ended and as of December 31, 1993 and
1994 combine the Company's unaudited consolidated financial statements
(consisting of the financial statements of Ballard Designs and Smith+Noble)
with the unaudited financial statements of the Company's predecessors. The
selected 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
----------------------------------------------------------- ----------------------------
JAN. 31, AUG. 2,
DEC. 31, DEC. 31, JAN. 27, JAN. 25, JAN. 31, 1998 (PRO AUG. 2, 1997 (PRO AUG. 1,
1993 1994 1996(1) 1997 1998 FORMA)(2) 1997 FORMA)(2) 1998
-------- -------- -------- -------- -------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............... $40,524 $63,016 $82,412 $106,100 $216,335 $240,129 $80,807 $104,601 $139,269
Cost of sales........... 21,153 32,500 43,691 54,750 112,251 124,657 42,409 54,816 71,016
------- ------- ------- -------- -------- -------- ------- -------- --------
Gross profit............ 19,371 30,516 38,721 51,350 104,084 115,472 38,398 49,785 68,253
------- ------- ------- -------- -------- -------- ------- -------- --------
Operating expenses:
Selling, catalog and
fulfillment expenses.. 14,892 24,266 31,624 36,408 73,249 82,366 25,873 34,989 49,288
General and
administrative........ 2,032 3,118 5,664 6,911 15,636 17,881 5,570 7,816 9,964
Amortization and
depreciation.......... 223 497 944 1,735 3,523 4,297 1,404 2,178 2,439
Restructuring charge... -- -- -- -- 943 943 -- -- 2,838
------- ------- ------- -------- -------- -------- ------- -------- --------
Total operating
expenses............... 17,147 27,881 38,232 45,054 93,351 105,487 32,847 44,983 64,529
------- ------- ------- -------- -------- -------- ------- -------- --------
Operating income........ 2,224 2,635 489 6,296 10,733 9,985 5,551 4,802 3,724
Investment income
(expense), net......... (83) (42) (144) 367 (208) (73) 78 213 (199)
------- ------- ------- -------- -------- -------- ------- -------- --------
Income before income
taxes, equity income in
affiliate and minority
interest............... 2,141 2,593 345 6,663 10,525 9,912 5,629 5,015 3,525
Income taxes............ -- -- 158 985 3,103 2,972 1,723 1,592 324
Equity in net income
(loss) of affiliate.... -- (154) (20) 392 1,809 1,809 995 995 2,208
Minority interest....... -- -- -- -- 275 275 82 82 244
------- ------- ------- -------- -------- -------- ------- -------- --------
Net income.............. 2,141 2,439 167 6,070 9,506 9,024 4,983 4,500 5,653
Deemed dividend on
redeemable convertible
preferred stock........ -- -- -- -- (21,069) (21,069) (3,718) (3,718) --
Accretion of redeemable
convertible preferred
stock.................. -- -- (360) (1,309) (2,301) (2,301) (938) (938) (1,517)
------- ------- ------- -------- -------- -------- ------- -------- --------
Net income (loss)
available to common
stockholders........... $ 2,141 $ 2,439 $ (193) $ 4,761 $(13,864) $(14,346) $ 326 $ (156) $ 4,136
======= ======= ======= ======== ======== ======== ======= ======== ========
Pro forma net
income(3).............. $ 1,350 $ 1,879 $ 111 $ 4,600 $ 7,381 $ 6,899 $ 3,854 $ 3,371 $ 4,007
Net income (loss) per
share(4)............... $ 0.24 $ 0.27 $ (0.02) $ 0.39 $ (1.08) $ (1.08) $ 0.03 $ (0.01) $ 0.29
Pro forma net income
(loss) per
share(3)(4)............ $ 0.15 $ 0.21 $ (0.02) $ 0.27 $ (1.24) $ (1.24) $ (0.06) $ (0.10) $ 0.18
Weighted average shares
outstanding(4)......... 8,895 8,895 10,495 12,342 12,871 13,246 12,408 13,158 14,221
Net income (loss) per
share, assuming
dilution(4)............ $ 0.20 $ 0.23 $ (0.02) $ 0.31 $ (1.08) $ (1.08) $ 0.03 $ (0.01) $ 0.19
Pro forma net income
(loss) per share,
assuming
dilution(3)(4)......... $ 0.13 $ 0.18 $ (0.02) $ 0.23 $ (1.24) $ (1.24) $ (0.06) $ (0.10) $ 0.13
Weighted average shares
outstanding, assuming
dilution(4)............ 10,653 10,653 10,495 19,789 12,871 13,246 12,408 13,158 29,812
</TABLE>
20
<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 1,033 884 1,128
Average order value......................... $ 160 $ 170 $ 158 $ 169
</TABLE>
- --------
(1) The selected statement of operations data for the year ended January 27,
1996 combine the Company's consolidated financial statements for the year
ended January 27, 1996 with those of Frontgate and Cornerstone Holdings
Group, Inc., a predecessor entity ("Cornerstone I"), for periods prior to
their acquisition by the Company. Frontgate and Cornerstone I are
considered predecessors of the Company for purposes of this presentation,
but their results are not included in the Company's results of operations
for the purpose of reporting under generally accepted accounting
principles. Accordingly, the statement of operations data for the year
ended January 27, 1996 differ from the audited consolidated financial
statements of the Company for the same period included elsewhere in this
Prospectus.
(2) 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.
(3) Pro forma net income, pro forma net income per share 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) See Note 16 of Notes to Consolidated Financial Statements. Dilutive
securities have been excluded from weighted average shares outstanding,
assuming dilution for the years ended January 27, 1996 and January 31,
1998 (actual and pro forma) and the six months ended August 2, 1997
(actual and pro forma) because the inclusion of such securities for
purposes of calculating net income (loss) per share, assuming dilution and
pro forma net income (loss) per share, assuming dilution for such periods
would be anti-dilutive.
(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.
21
<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 two 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 60% 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; Cornerstone purchased
the remaining 20%, for cash and a promissory note, in September 1998. 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; Cornerstone purchased an additional 29% interest in
Whispering Pines in September 1998 for a combination of cash, Common Stock and
a contingent payment obligation. 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." For all periods following the purchase
by Cornerstone of the remaining minority interest in The Territory Ahead in
September 1998, the "Minority Interest" line item will not include any portion
of The Territory Ahead's operating results.
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.
22
<PAGE>
Selected Operating Principles
The Company's net sales are generated primarily through its catalog
operations. Catalog sales accounted for approximately 98% of net sales for
each of 1995, 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, Cornerstone features branded products (i.e., sold under
the name of a Cornerstone company), and Cornerstone expects that the
proportion of net sales derived from branded products will increase in the
future. Branded product offerings generally provide higher profit margins than
other merchandise because they are generally purchased directly from the
manufacturer, thus avoiding the mark-ups that result from additional
distribution tiers. However, this strategy also requires Cornerstone to incur
additional costs relating to the design and purchase of those products which
might otherwise be assumed by a wholesaler or distributor of such 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 expects to fund a majority of this cost pursuant to a
sale-leaseback arrangement. See "--Liquidity and Capital Resources." 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, of which $1,485,000
related to employee termination costs, $1,257,000 related to incremental
consulting and $96,000 related to 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
23
<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. The total number of catalogs circulated by the Company during
1996 and 1997 (excluding TravelSmith, whose financial results are not
consolidated with those of the Company) was 41,939,000 and 77,144,000,
respectively. These catalog circulation figures would have been 65,038,000
and 84,853,000, respectively, if data for The Territory Ahead, Garnet Hill
and Whispering Pines had been included for the entirety of both periods
(i.e., including circulation prior to their acquisition by Cornerstone).
The combined customer database of all Cornerstone companies as of
January 25, 1997, January 31, 1998 and August 1, 1998 included the names of
approximately 884,000 customers, 1,028,000 customers and 1,575,000
customers, respectively, who had purchased goods within the previous 12
months. See "Business--Customer Database Management and Marketing--Customer
Databases."
. 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. The Company's average order value for 1997 and
1998 was $160 and $170, respectively.
. 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.
24
<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 33.9 32.0 35.4
General and
administrative............ 5.8 6.5 7.2 6.9 7.2
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)
----- ----- ----- -------- --------
Income before equity in net
income of affiliate,
minority interest and income
taxes....................... 0.8 6.2 4.9 7.0 2.5
Income taxes................. 0.3 0.9 1.4 2.1 0.2
----- ----- ----- -------- --------
Income before equity in net
income of affiliate and
minority interest........... 0.5 5.3 3.5 4.9 2.3
Equity in net income of
affiliate................... -- 0.4 0.8 1.2 1.6
Minority interest............ -- -- 0.1 0.1 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, which companies represented approximately 31% of
the Company's net sales during the first six months of 1998. 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 90% from $25,873,000 in the
first six months of 1997 to $49,288,000 in the first six months of 1998. As a
percentage of net sales, selling, catalog and fulfillment expenses increased
from 32.0% to 35.4% 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
25
<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 79% from $5,571,000 in the
first six months of 1997 to $9,964,000 in the first six months of 1998. As a
percentage of net sales, general and administrative expenses increased from
6.9% to 7.2% 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 (including the leasing of
additional space, the hiring of additional personnel and the purchase of
additional assets) 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
26
<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. At the time
of the acquisition of The Territory Ahead and Garnet Hill, $4,900,000 of the
purchase price, representing the excess of the fair market value of inventory
over its historical cost, was allocated to inventory and then charged to cost
of sales as the inventory was sold. Excluding that charge, gross profit in
1997 would have been 50.4% of net sales.
Selling, catalog and fulfillment expenses increased 101% from $36,408,000 in
1996 to $73,249,000 in 1997. As a percentage of net sales, selling, catalog
and fulfillment expenses decreased slightly from 34.3% to 33.9% between these
periods. This decrease as a percentage of net sales was primarily due to the
impact of companies acquired during 1997 and to an increase in the average
order value between 1996 and 1997. These factors were partially offset by an
increase in catalog circulation and higher average page counts per catalog.
General and administrative expenses increased 126% from $6,911,000 in 1996
to $15,636,000 in 1997. As a percentage of net sales, general and
administrative expenses increased from 6.5% to 7.2% 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.
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.
27
<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 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
28
<PAGE>
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
Net income (loss) per
share..................... (0.20) 0.22 (1.28) 0.20 0.18 0.11
Pro forma net income (loss)
per share................. (0.23) 0.16 (1.30) 0.15 0.15 0.03
Weighted average shares
outstanding............... 12,405 12,409 13,159 13,509 14,209 14,234
Net income (loss) per
share, assuming dilution.. (0.20) 0.14 (1.28) 0.12 0.11 0.08
Pro forma net income (loss)
per share assuming
dilution.................. (0.23) 0.11 (1.30) 0.09 0.10 0.03
Weighted average shares
outstanding............... 12,408 22,888 13,159 29,694 29,792 29,832
</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. The Company's
working capital needs relate primarily to the production, printing and mailing
of catalogs, the purchase of inventory, the operation of the Company's
fulfillment centers and other facilities and offices, and the expansion and
upgrade of its facilities and systems to support its recent acquisitions and
its anticipated future growth.
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. See Notes 6 and 7 of Notes to
Consolidated Financial Statements of the Company for a description of the
preferred stock issued in such financings; all of such preferred stock has
been converted into Common Stock. 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 revolving 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 restrictions on acquisitions contained in the credit agreement,
including requirements that the acquired business be engaged in catalog sales
or a related business, that Cornerstone acquire 100% of the business, that the
acquired business satisfy certain financial standards, and that the amount of
borrowed funds used for business acquisitions by Cornerstone be limited to
$35,000,000 for any single acquisition and an aggregate of $50,000,000 for
acquisitions during any 12-month period. 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; in addition,
Cornerstone has agreed that it will not (except in certain
29
<PAGE>
limited circumstances) incur any liens on any of its assets. The agreement
contains various financial covenants and also prohibits the Company from
paying dividends. Cornerstone paid initial fees totaling approximately
$607,000 in connection with the execution of this agreement in August 1998,
and is required to pay minimum fees totaling approximately $145,000 from
August 1998 through the end of fiscal 1998 under this revolving credit
agreement. Each of the Cornerstone companies has guaranteed the Company's
borrowings under this credit agreement, although the liability of TravelSmith
and Whispering Pines is limited to any borrowings made directly by such
company under the credit agreement. As of August 1, 1998, Cornerstone had
approximately $30,235,000 of outstanding borrowings under this credit
agreement. This revolving credit agreement will remain in effect following
this offering.
The Company's operating activities provided net cash of $2,786,000
$7,936,000 and $3,452,000 in 1995, 1996 and 1997 and used cash of $3,992,000
in the first six months of 1998. Net cash provided by operating activities in
1995, 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. Inventory increased
significantly during 1997 and the first six months of 1998, primarily due to
acquisitions by the Company and to ensure an adequate in-stock level as the
Company increased catalog circulation and average page counts per catalog for
many of the Cornerstone companies following acquisition. Prepaid catalog costs
also increased significantly in the first six months of 1998, due to the
Company's acquisitions and increases in catalog circulation and page counts.
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.
The Company's investing activities used cash of $6,279,000 $4,541,000,
$47,110,000 and $6,886,000 in 1995, 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. The Company made capital expenditures totaling $1,441,000,
$1,647,000, $3,497,000 and $8,440,000 during 1995, 1996, 1997 and the first
six months of 1998, respectively. The significant increase during the first
six months of 1998 relates primarily to costs associated with the new
operations center currently under construction. Funds used for acquisitions
totaled $1,047,000 and $48,735,000 during 1996 and 1997, respectively.
Cornerstone's financing activities generated $7,000,000 in 1995, 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 intends to finance approximately $42 million of
this cost by selling this facility and leasing it back from the purchaser.
Cornerstone expects that such sale will take place upon completion of
construction in the spring of 1999. Cornerstone plans to use its revolving
credit facility to fund the costs associated with the construction of this
facility pending receipt of this purchase price for the facility, as well as
to fund the facility costs in excess of the purchase price.
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.
30
<PAGE>
RECENT ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in fair value of the hedged assets, liabilities, or firm
commitments will either be immediately recognized in earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivatives change in fair value will be
immediately recognized in earnings. The Company has not yet determined what
the effect of Statement 133 will be on the earnings and financial position of
the Company.
YEAR 2000
The year 2000 issue relates to computer programs and systems that 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. If the year 2000 issue were to cause
disruptions to Cornerstone's internal information technology systems or to the
information technology systems of entities with whom Cornerstone has
commercial relationships, material adverse effects to Cornerstone's operations
could result.
Cornerstone's internal computer programs and operating systems consist of
programs and systems relating to virtually all segments of Cornerstone's
business, including merchandising, customer database management and marketing,
order-processing, fulfillment, inventory management, customer service and
financial reporting. These programs and systems are primarily comprised of:
. "Front-end" systems. These systems automate and manage business functions
such as order-taking and order-processing, inventory management and
financial reporting.
. Warehouse management systems. These systems manage and automate fulfillment
operations at the warehouses that service each of the Cornerstone companies
(except for Smith+Noble and Whispering Pines, which outsource their
warehouse management functions to product vendors and external service
providers). Currently each of Cornerstone's internal warehouse management
systems is integrated with the internal front-end system of its respective
Cornerstone company.
. Customer database management systems. These systems facilitate the storage
of customer data and catalog mailings for each of the Cornerstone companies
(except for Whispering Pines, which outsources its customer database and
mailing functions to an external service provider). Currently each of
Cornerstone's internal customer database management systems is integrated
with the existing front-end system of its respective Cornerstone company.
. Telecommunications systems. These systems enable the Cornerstone companies
to manage their order-taking and customer service functions.
. Personal computers and local area networks. These systems are used for word
processing and other administrative purposes at individual Cornerstone
companies.
. Voicemail systems. These systems are used for receiving and storing
messages to employees at individual Cornerstone companies.
. Ancillary services systems. These include such systems as heating,
ventilation and air conditioning control systems and security systems.
Cornerstone has completed reviews of its internal front-end systems, its
internal warehouse management systems, its customer database management
systems, its internal telecommunications systems and its personal computers
and local area networks, to assess the potential impact of the year 2000
issue. These reviews were completed by Cornerstone's existing workforce at no
identifiable incremental cost. Based upon these reviews, Cornerstone believes
that these systems and equipment will operate correctly when processing data
that include
31
<PAGE>
dates after December 31, 1999. Although Cornerstone believes that no specific
remediation or expenditures are required to ensure continued proper operation
of such systems and equipment notwithstanding the year 2000 issue, Cornerstone
estimates that approximately $4 million of the $60 to $65 million budgeted for
its new operations center will be spent on information technology
infrastructure, all of which will be year 2000 compliant. These expenditures
will eventually facilitate the consolidation of warehouse management functions
at the new operations center and the expansion of the Cornerstone companies'
capabilities with respect to analyzing, merging and purging their customer
databases. See "Business -- Management Information Systems."
Cornerstone has not yet completed reviews of its internal voicemail and
ancillary services systems, but does not expect that any remediation relating
to such systems that might be necessary following such reviews will cause
Cornerstone to incur material costs or present implementation challenges that
cannot be addressed prior to the end of calendar year 1999. Cornerstone
expects to complete its reviews of these systems in the first half of calendar
year 1999.
The computer programs and operating systems used by entities with whom
Cornerstone has commercial relationships also pose potential problems relating
to the year 2000 issue, which may affect Cornerstone's operations in a variety
of ways. These risks are more difficult to assess than those posed by internal
programs and systems and Cornerstone has not yet completed the process of
formulating a plan for assessing them. Cornerstone believes that the programs
and operating systems used by entities with whom it has commercial
relationships generally fall into two categories:
First, all of the Cornerstone companies rely upon programs and systems used
by providers of services necessary to enable the Cornerstone companies to
reach and communicate with their customers. Examples of such providers include
the United States Postal Service, UPS, telephone companies and banks. Services
provided by such entities affect almost all facets of Cornerstone's
operations, including processing of orders, printing and mailing of catalogs,
shipping of goods and certain financial services (e.g., credit card
processing). Programs and services in this first category generally are not
specific to Cornerstone's business and disruptions in their availability would
likely have a negative impact on most enterprises within the direct marketing
industry and on many enterprises outside the direct marketing industry.
Cornerstone believes that all of the most reasonably likely worst case
scenarios involving disruptions to its operations stemming from the year 2000
issue relate to programs and systems in this first category. Cornerstone
intends to include an evaluation such scenarios in its plan for assessing the
programs and systems of the entities with whom it has commercial
relationships.
Second, all of the Cornerstone companies rely upon programs and systems used
by a variety of vendors of the products they market (in 1997, the Cornerstone
companies purchased goods from over 2000 such vendors, none of which accounted
for more than 4% of the aggregate purchases by Cornerstone for the year) and
some of the Cornerstone companies rely upon the programs and systems of
entities that provide front-end services (i.e., Whispering Pines) and
warehouse management services (i.e., Whispering Pines and Smith+Noble). In the
case of risks posed by the year 2000 issue relating to programs and systems in
this second category that are used by product vendors, such risks are well
diversified. In the case of risks posed by the year 2000 issue relating to
programs and systems in this second category that are used by entities who
provide front-end and warehouse management services, such risks have already
been assessed and determined not to require remediation. Cornerstone intends
to include in its plan for assessing the programs and systems of the entities
with whom it has commercial relationships the solicitation of assurances of
year 2000 compliance from each product vendor that accounts for more than
approximately 1% of the aggregate purchases by Cornerstone on an annual basis
and from other significant vendors and service providers.
Cornerstone expects to complete the formulation of its plan for assessing
the programs and systems of the entities with whom it has commercial
relationships by the end of fiscal 1998 and the identification of related
risks and uncertainties by the end of the first quarter of fiscal 1999. Once
such identification has been completed, Cornerstone intends to resolve any
material risks and uncertainties that are identified by communicating further
with the relevant vendors and providers, by working internally to identify
alternative sourcing and by formulating contingency plans to deal with such
material risks and uncertainties. Cornerstone expects the resolution of such
material risks and uncertainties to be an ongoing process until all year 2000
problems are satisfactorily resolved.
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BUSINESS
Cornerstone is a family of seven 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. An important strategy of the Company is to
feature branded products (i.e., sold under a 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 1997, the Company's net
sales, net income and pro forma net income (adjusted to include tax provisions
for non-taxed companies) were $216.3 million, $9.5 million and $7.4 million,
respectively. In the six months ended August 1, 1998, the Company's net sales,
net income and pro forma net income were $139.3 million, $5.7 million and $4.0
million, respectively.
Cornerstone was founded in 1995 to capitalize on the opportunity to build a
family of 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 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
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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. 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%. These growth rates, however, do not necessarily reflect the
rates at which the Company's business will grow. 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. Jupiter
Communications, an industry analyst, has estimated that the number of
households 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 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
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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 marketing
industry. The Company complements the talents and entrepreneurial spirit of
these management teams with Cornerstone's corporate-level management, which
helps establish and implement the business strategy of each Cornerstone
company. 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. An important
strategy of the Company is to feature branded products (i.e., sold under a
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;
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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; 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 is
currently building 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. The
net sales of each Cornerstone company which has been operated by the Company
for at least 12 months were higher in the 12 months immediately following
acquisition than in the 12 months immediately preceding acquisition, and 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
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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. The
Company's acquisition strategy also involves certain risks, including an
inability to identify suitable acquisition candidates, problems in
successfully integrating acquired businesses, and the diversion of management
attention from operational issues. See "Risk Factors--Risks Associated With
Acquisitions."
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 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.
The growth initiative on which Cornerstone places the highest priority is
building the sales and productivity of its existing catalog titles. This is an
ongoing initiative which management of Cornerstone and the Cornerstone
companies attends to on a continuous basis. The pursuit of strategic
acquisitions and the development of additional market opportunities are next
in order of importance to Cornerstone management. Cornerstone continuously
monitors acquisition opportunities and may make an acquisition at any time,
although it currently has no commitments or understandings for an acquisition.
The status of Cornerstone's efforts to develop additional market opportunities
are described below under "--Additional Market Opportunities." The development
of new titles, while an important growth initiative, is not currently as high
a priority to management as the other growth initiatives, although this is
reviewed by management on a regular basis.
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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 August 1997
Designs Ballard Designs 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 March 1997 Casual apparel
Territory The Territory Ahead
Ahead Isabella Bird
TravelSmith TravelSmith July 1996* Casual apparel
Whispering Whispering Pines September 1997 Home, leisure and casual
Pines apparel
</TABLE>
- --------
* represents date on which Cornerstone acquired a majority interest.
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.
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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.
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.
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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 offers 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.
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.
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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 and acquired
the remaining 20% in September 1998. 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 provides a convenient 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.
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 1992. Cornerstone acquired (through a predecessor
company) a minority interest in TravelSmith in July 1993 and in July 1996
increased its ownership position to approximately 60% 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.
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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, and
acquired an additional 29% interest in September 1998; the 20% 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.
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 because they
are generally purchased directly from the manufacturer, thus avoiding the
mark-ups that result from additional distribution tiers. Branded
merchandise also involves certain risks, as described under "Risk Factors--
Risks Associated with Branded Merchandise and Overstocks."
. 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
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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.
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.
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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. Certain proposed legislation that would restrict
disclosure of consumers' personal information may make it more difficult for
Cornerstone to generate additional names for its mailing lists and restrict
its right to send unsolicited electronic mail or printed catalogs. See
"Business--Regulatory Matters."
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.
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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 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a discussion of the cost and
financing of this facility.
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
(currently expected to be Ballard Designs, Frontgate and Whispering Pines),
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 (currently expected to be Ballard Designs, Frontgate and
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Whispering Pines) 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 than Smith+Noble) will be transitioned to the
facility during the balance of 1999 and 2000. 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. There are a number of risks
associated with the construction and transition to the new operations center,
including the risk of cost overruns, a delay in the completion of the
facility, delays or difficulties in implementing its new information systems,
disruptions in fulfillment services due to difficulties transitioning to the
new facility (although Cornerstone believes its planned gradual transition
should mitigate that risk to some extent) and economic inefficiencies
resulting from the operation of multiple fulfillment centers during the
transition period. See "Risk Factors--Risks Associated with New Operations
Center."
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.
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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. (other than temporary fulfillment centers covered by short-term
leases).
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. Currently, three Cornerstone companies (Frontgate, The Territory
Ahead and TravelSmith) accept orders via the Internet, while the other
Cornerstone companies use the Internet primarily for promotional purposes.
Although the sales generated by Cornerstone through the Internet have not been
significant to date, Cornerstone believes that the Internet represents a
significant business opportunity and is currently working on a strategic plan
to develop the Internet business of each of the Cornerstone companies.
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, The Territory
Ahead purchases (directly or indirectly) substantially all, and Garnet Hill
purchases (directly or indirectly) a majority, of its 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 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. Cornerstone's reliance on foreign
suppliers, and Smith+Noble's practice of purchasing a majority of its products
from a single vendor, subject the Company to certain risks generally
associated with foreign sourcing and reliance on a principal vendor. See "Risk
Factors--Dependance on Suppliers; Foreign Sourcing."
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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 (other than Whispering Pines, which outsources
these functions to a management information systems service provider) utilizes
a "front-end" system that automates and manages business functions such as
order-taking and order-processing, inventory management and financial
reporting. These front-end systems (other than that of Smith+Noble, whose
products are made to order and delivered directly by the manufacturer to the
customer) are linked with inventory receipts and provide real-time information
on product availability. These systems also facilitate the updating of
customer databases 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.
Any difficulties experienced by the Company in operating its management
information systems or implementing its planned new systems could adversely
affect the Company's business. See "Risk Factors--Dependence on Management
Information Systems."
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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
49
<PAGE>
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 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.
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.
50
<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. After the relocation of
fulfillment operations to the new Cornerstone operations center, Cornerstone
intends to sell those fulfillment centers currently used by the Cornerstone
companies (other than temporary fulfillment centers covered by short-term
leases). Cornerstone is currently engaged in discussions regarding a
transaction in which Cornerstone would sell its new operations center, as well
as its fulfillment centers in Lebanon, Ohio and Bethlehem, New Hampshire, and
lease them back (under a long-term lease in the case of the new operations
center and short-term leases in the case of the other two fulfillment centers)
from the purchaser.
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.
51
<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................ 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.
52
<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 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 co-founded 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 co-founded 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.
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.
53
<PAGE>
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.
The Company's success will depend to a significant extent on retaining the
services of its five executive officers and the management teams of the
Cornerstone companies, as well as on the ability of both Cornerstone and the
Cornerstone companies to continue to attract and retain qualified personnel.
See "Risks Factors-- Dependence on Key Personnel."
DIRECTOR COMPENSATION
Directors of the Corporation are not paid a retainer or other annual fee for
their services as directors, except that chairpersons of each standing
committee of the Board of Directors are paid an annual cash retainer of
$2,500. Non-employee directors are paid a fee of $1,000 for each Board of
Directors meeting attended and (with certain exceptions) $500 for each meeting
of a committee of the Board of Directors attended. All of the directors are
reimbursed for expenses incurred in connection with their attendance at Board
of Directors and committee meetings. 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>
54
<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, 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 $ 19,541 $ 45,538
Mark Fasold............. -- -- -- -- -- --
Paul D. Tarvin.......... 8,000 1.7 6.00 3/26/04 $ 19,541 $ 45,538
</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.
55
<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 October 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.
Under the Director Plan, each non-employee director of the Company will be
granted a nonstatutory stock option to purchase 12,000 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
6,000 shares
56
<PAGE>
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 September 30, 1998, options to purchase 1,251,815 shares of
Common Stock were outstanding under the 1995 Plan. The 1995 Plan is
administered by the Board of Directors. Options for an additional 260,000
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 October 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. No stock options or other stock awards
have been granted to date under the Incentive Plan.
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.
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
57
<PAGE>
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 October 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 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. 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. were
converted into 7,692,308, 4,395,604 and 109,890 shares of the Company's Common
Stock in August 1998.
58
<PAGE>
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. Approximately one-third
of the shares of tracking stock issued to Messrs. O'Steen and Tarvin was
converted into Common Stock and redeemed for cash in January 1997. The
remaining shares of tracking stock issued to Messrs. O'Steen and Tarvin were
converted into Common Stock and redeemed for cash in January 1998. A small
portion of the shares of Series B and Series C Convertible Preferred Stock
issued to Messrs. O'Steen and Tarvin was converted into an aggregate of 766
shares of Common Stock in October 1997; the remaining shares of Series B and
Series C Convertible Preferred Stock issued to Messrs. O'Steen and Tarvin were
converted into Common Stock in August and September of 1998.
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 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. Although the Company believes these summaries cover all
provisions of such agreements which are material to the Company, 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.
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 60% 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.
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<PAGE>
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), the incurrence of certain indebtedness 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.
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.
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<PAGE>
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.
Whispering Pines
Cornerstone acquired a 51% interest in Whispering Pines, a Delaware limited
liability company, in September 1997, and acquired an additional 29% interest
in October 1998. Cabin Life Studies, Inc. ("CLI"), a corporation owned by
Susan Kelly Panian, Margaret Kelly Murray and Edward R. Panian, holds the
remaining 20% 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.
In October 1998, Cornerstone purchased from CLI an additional 29% membership
interest in Whispering Pines (bringing Cornerstone's total membership interest
in Whispering Pines to 80%). The purchase price paid by Cornerstone for such
interest consisted of $700,000 in cash, 17,647 shares of Common Stock of
Cornerstone, and an obligation to pay such additional amount (if any) as is
equal to (a) 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 three and (B) 25% of Whispering Pines' net sales for fiscal
1999, less (b) $1,000,000. Such additional amount would be payable within
three months after the completion of fiscal 1999, and 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 additional amount 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."
Cornerstone has 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 the foregoing option to acquire the
remaining interest 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 September 30, 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 7,692,308 26.8%
Partners, L.P.......... -- 7,692,308
Suite 3800
Three First National
Plaza
Chicago, Illinois 60602
Chase Venture Capital
Associates, L.P........ 4,395,604 15.3% -- 4,395,604
380 Madison Avenue,
12th Floor
New York, New York
10017
Fred E. and Moira E. 2,916,277 10.1%
Kamgar (4)............. 1,029,412 1,886,865
c/o Smith & Noble LLC
1750 California Avenue
#201
Corona, California
91719
Boston Capital Ventures 2,047,390 7.1%
(5).................... -- 2,047,390
Old City Hall
45 School Street
Boston, Massachusetts
02108
A. Ray Weeks, Jr. and
Helen Ballard
Weeks (6).............. 1,777,084 6.2% 100,000 1,677,084
c/o Weeks Corporation
4497 Park Drive
Norcross, Georgia 30093
John A. O'Steen (7)..... 1,549,878 5.4% -- 1,549,878
c/o Cinmar, Inc.
2800 Henkle Drive
Lebanon, Ohio 45036
William T. End (8)...... 1,501,015 5.2% -- 1,501,015
c/o Cornerstone Brands,
Inc.
415 Congress Street,
Suite 600
Portland, Maine 04101
Paul D. Tarvin (9)...... 1,495,971 5.2% -- 1,495,971
c/o Cinmar, Inc.
2800 Henkle Drive
Lebanon, Ohio 45036
Donald J. Steiner (10).. 1,451,015 5.0% -- 1,451,015
c/o Cornerstone Brands,
Inc.
600 Atlantic Avenue,
Suite 2800
Boston, Massachusetts
02210
</TABLE>
62
<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
(11)................... -- -- -- -- --
William J. Hunckler, III
(12)................... -- -- -- -- --
Stephen P. Murray (13).. -- -- -- -- --
Thomas G. Stemberg(14).. 175,000 * -- 175,000 *
H.J. von der Goltz(15).. -- -- -- -- --
John Walter............. 55,555 * -- 55,555 *
Other Named Executive
Officers
Mark Fasold(16)......... 587,500 2.0% -- 587,500
Other Selling
Stockholders
Robert M.
Perkowitz(17).......... 1,249,834 4.3% 441,176 808,658
Estate of Gladney
Heazel(18)............. 443,333 1.5% 83,333 360,000
All executive officers
and directors as a
group (11
persons)(19)........... 6,815,935 23.3% -- 6,815,935
</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 September 30, 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 September 30, 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 28,742,071 shares
outstanding as of September 30, 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 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.
(5) 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 1,115,100 shares of Common Stock and Boston Capital
Ventures III, L.P. holds 932,290 shares of Common Stock.
(6) 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.
(7) Includes 133,250 shares issuable pursuant to options held by Mr. O'Steen,
761,231 shares held in a trust of which Mr. O'Steen is a beneficiary and
20,000 shares held for the benefit of certain family members.
(8) Includes 750,000 shares held by a limited partnership for the benefit of
certain family members.
(9) Includes 133,250 shares issuable pursuant to options held by Mr. Tarvin.
(10) Includes 750,000 shares held in trust for certain family members.
(11) Excludes 7,692,308 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 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.
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<PAGE>
(12) Excludes 7,692,308 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.
(13) Excludes 4,395,604 shares held by Chase Venture Capital Associates, L.P.,
of which Mr. Murray is a general partner.
(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
and 94,812 shares held in trust for the benefit of certain family
members.
(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.
64
<PAGE>
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 September 30, 1998, there were outstanding (i) 28,742,071
shares of Common Stock held by 44 stockholders of record, (ii) options to
purchase an aggregate of 1,511,815 shares of Common Stock and (iii) warrants
to purchase an aggregate of 31,000 shares of Common Stock.
Although the Company believes 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") covers all
material provisions affecting the rights of holders of capital stock of the
Company, such summary 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 September 30, 1998, there were outstanding warrants for the purchase
of an aggregate of 31,000 shares of Common Stock, at an exercise price of $.01
per share. The warrants were issued in June 1995 to certain of the initial
investors in the Company and expire in June 2005.
65
<PAGE>
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.
66
<PAGE>
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 .
67
<PAGE>
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 September 30, 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 27,088,150 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, 791,353 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 23,216,719 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
3,080,078 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 filing. Shares issued pursuant to those
registration statements will be eligible for resale in the public market,
68
<PAGE>
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
The holders of approximately % of the outstanding shares of Common Stock
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,
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 26,759,150 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 15,087,830 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.
69
<PAGE>
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.
The holders of approximately % of the outstanding shares of Common Stock
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
70
<PAGE>
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 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.
The Common Stock has been approved for listing on NYSE under the symbol
"CSB," subject to notification by the Company of the commencement of this
offering. In order to satisfy a condition to such approval, the Underwriters
have undertaken to sell the Common Stock offered hereby in round lots of 100
shares to a number of beneficial holders that meets NYSE's public distribution
requirements.
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.
71
<PAGE>
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 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.
72
<PAGE>
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-25
Statements of Income for the years ended July 29, 1995, July 26, 1996 and
July 25, 1997........................................................... F-26
Statements of Cash Flows for the years ended July 29, 1995, July 26, 1996
and July 25, 1997....................................................... F-27
Notes to Financial Statements............................................ F-28
CINMAR L.P.
Report of Ernst & Young LLP, Independent Auditors........................ F-31
Statement of Income for the period from January 1, 1995 to September 12,
1995.................................................................... F-32
Statement of Cash Flows for the period from January 1, 1995 to September
12, 1995................................................................ F-33
Notes to Financial Statements............................................ F-34
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Statements of Operations for the year ended
January 31, 1998........................................................ PF-2
Unaudited Pro Forma Combined Statements of Operations for the six months
ended August 2, 1997.................................................... PF-3
Unaudited Pro Forma Consolidated Balance Sheet as of August 1, 1998...... PF-4
Notes to Unaudited Pro Forma Financial Statements........................ PF-5
</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 29,272,128 34,702,768
Deferred income taxes................ -- 953,842 2,518,643
Prepaid expenses and other current
assets.............................. 3,157,764 8,920,532 12,102,192
----------- ------------ ------------
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 (13,199,653) 42,968,350
Retained earnings (accumulated
deficit)............................. 3,524,341 43,985,333 (12,589,582)
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 73,249,119 25,872,609 49,287,984
General and
administrative........ 3,508,435 6,910,994 15,636,186 5,570,637 9,963,837
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
affiliate, minority
interest and income
taxes.................. 483,237 6,662,829 10,524,760 5,629,343 3,525,499
----------- ------------ ------------ ----------- ------------
Income taxes............ 157,794 984,999 3,103,038 1,723,632 324,295
----------- ------------ ------------ ----------- ------------
Income before equity in
net income (loss) of
affiliate and minority
interest............... 325,443 5,677,830 7,421,722 3,905,711 3,201,204
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
Net income.............. 320,442 6,069,655 9,505,863 4,982,593 5,652,698
----------- ------------ ------------ ----------- ------------
Deemed dividend of
redeemable convertible
preferred stock........ -- -- (21,069,203) (3,718,453) --
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 $(13,863,854) $ 325,628 $ 4,135,550
=========== ============ ============ =========== ============
Net income (loss) per
share of common stock.. $ (0.003) $ 0.39 $ (1.08) $ 0.03 $ 0.29
=========== ============ ============ =========== ============
Net income (loss) per
share of common stock,
assuming dilution...... $ (0.003) $ 0.31 $ (1.08) $ 0.03 $ 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 $ (1.24) $ (0.06) $ 0.18
=========== ============ ============ =========== ============
Pro forma net income
per common share,
assuming dilution..... $ (0.01) $ 0.23 $ (1.24) $ (0.06) $ 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) (5,430,640)
Other assets........... 338,263 (1,128,699) (2,874,537) (2,014,467) (4,116,797)
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 3,451,997 (1,442,730) (3,992,223)
INVESTING ACTIVITIES
Purchase of available
for sale securities.... (6,002,048) (9,824,052) (7,442,308) (5,221,154) (1,480,075)
Sale of available for
sale securities........ 1,150,000 7,975,985 12,564,472 8,293,786 3,033,736
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) (47,110,277) (39,221,170) (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 long-term
debt and capital
leases................. 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 RETAINED
CONVERTIBLE ADDITIONAL EARNINGS AND
PREFERRED COMMON PREFERRED PAID-IN ACCUMULATED TREASURY UNREALIZED STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL DEFICIT 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)
Undistributed earnings
reclassified to
additional paid-in-
capital due to the
termination of S
corporation status..... -- -- -- 497,628 (497,628) -- -- --
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)
Deemed dividend of
redeemable convertible
preferred stock........ -- -- -- 21,069,203 (21,069,203) -- -- --
Net income.............. -- -- -- -- 9,505,863 -- -- 9,505,863
----------- ------- ---- ----------- ------------ ----- --------- -----------
Balances at January 31,
1998................... 58,815,151 14,539 80 43,985,333 (13,199,653) (330) 167,936 30,967,905
Issuance of common stock
upon exercise of
warrants (unaudited)... -- 25 -- 225 -- -- -- 250
Sale of common stock
(unaudited)............ -- 55 -- 499,940 -- -- -- 499,995
Distributions to members
of Smith & Noble LLC
(unaudited)............ -- -- -- -- (5,042,627) -- -- (5,042,627)
Unrealized (loss) on
available for sale
securities
(unaudited)............ -- -- -- -- -- -- (138,892) (138,892)
Accretion of redeemable
convertible preferred
stock to redemption
value (unaudited)...... 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 $42,968,350 $(12,589,582) $(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.
The consolidated financial statements as of January 25, 1997 and for the years
ended January 25, 1997 and January 27, 1996 include the accounts of Ballard
and Smith & Noble as of December 31, 1996 and for the calendar years 1996 and
1995, respectively. The consolidated financial statements of the Company as of
and for the year ended January 31, 1998 include the accounts of Ballard for
the period from January 1, 1997 to January 31, 1998 (thirteen months) and the
accounts of Smith & Noble for the calendar year 1997. The effect on
consolidated revenues and net income for fiscal 1997 of including the extra
month of operations was not significant.
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.
Risks and Uncertainties
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.
F-9
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Smith+Noble purchases a majority of its products from a single vendor. The
Territory Ahead purchases (directly or indirectly) substantially all, and
Garnet Hill purchases (directly or indirectly) a majority, of its merchandise
from foreign suppliers.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
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. At January 25, 1997 and
January 31, 1998, the Company capitalized approximately $2,076,000 and
$7,404,000 of catalog costs, respectively. These costs are amortized over the
estimated periods in which the related revenues are generated, generally three
months or less. Total advertising and catalog expense for fiscal 1995, 1996
and 1997 was approximately $17,150,000, $27,335,000 and $52,785,000,
respectively.
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>
F-10
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 four years. 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).
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
F-11
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
Recent Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in fair value of the hedged assets, liabilities, or firm
commitments will either be immediately recognized in earnings, or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivatives change in fair value will be
immediately recognized in earnings. The Company has not yet determined what
the effect of Statement 133 will be on the earnings and financial position of
the Company.
2. ACQUISITIONS
On September 12, 1995, the Company acquired all of the business assets of
Frontgate for an aggregate purchase price of approximately $16 million,
including related fees and expenses. For financial reporting purposes, the
acquisition was accounted for under the purchase method. The operating results
of the acquired business have been included in the Company's consolidated
operating results since the date of acquisition.
F-12
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with the acquisition of 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.
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.
F-13
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C>
Revenues................................................... $240,129,274
============
Net income................................................. $ 9,024,028
============
Pro forma net income per common share...................... $ (1.08)
============
Pro forma net income per common share, assuming dilution... $ (1.08)
============
</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 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.
F-14
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<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
Cornerstone(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
reported........... $ 320,442 $6,069,655 $9,505,863 $4,982,593 $5,652,698
========= ========== ========== ========== ==========
Pro forma net income:
Net income as
reported(2).......... $ 320,442 $6,069,655 $9,505,863 $4,982,593 $5,652,698
Pro forma tax
provision of
Smith & Noble........ 383,054 969,228 1,973,544 977,200 1,646,007
Pro forma tax
provision (benefit)
of Ballard........... (326,641) 500,067 151,551 151,551 --
--------- ---------- ---------- ---------- ----------
Pro forma net
income............. $ 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 is party to a
stockholders agreement with certain stockholders of TravelSmith (the
"TravelSmith Stockholders") under which the Company has the right to designate
three of the seven directors of TravelSmith (the "Cornerstone Directors") and
two of the TravelSmith Stockholders have the right to designate three of the
seven directors (the "TravelSmith Directors"), with the seventh director to be
an individual mutually acceptable to the other directors. The Company reflects
its investment in TravelSmith under the equity method of accounting in 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>
Current assets......................... $4,558,000 $13,627,000 $14,831,000
Long-term assets....................... 473,000 559,000 731,000
Total assets........................... 5,031,000 14,186,000 15,562,000
Current liabilities.................... 2,824,000 8,770,000 6,415,000
Long-term liabilities.................. 102,000 49,000 21,000
Total liabilities...................... 2,926,000 8,819,000 6,436,000
Net sales.............................. 18,054,000 35,995,000 33,546,000
Gross profit........................... 9,043,000 18,150,000 16,932,000
Net income............................. 707,000 3,140,000 3,713,000
</TABLE>
F-15
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The total consolidated retained
earnings which represent the undistributed earnings of TravelSmith as of
January 31, 1998 is approximately $1,946,000.
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>
The contractual maturities of available for sale securities, which include
bond investments, certificate of deposits and U.S. government securities, at
January 31, 1998 is as follows:
<TABLE>
<S> <C>
Within one year................................................. $1,250,000
One year to five years.......................................... 101,216
Five years to ten years......................................... 72,757
Greater than ten years.......................................... 28,071
</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.
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
F-16
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-17
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
At January 31, 1998 and August 1, 1998, warrants for 340,000 and 315,000
shares of Common Stock were outstanding, respectively. The exercise price of
warrants for 200,000 shares was $1.50 per share and the exercise price of
warrants for 140,000 shares was $.01 per share at January 31, 1998. The
exercise price of warrants for 200,000 shares was $1.50 per share and the
exercise price of warrants for 115,000 shares was $.01 per share at August 1,
1998.
The following table summarizes stock option activity to August 1, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Outstanding at January 28, 1995........................ --
Granted during the year................................ 280,000 $ .93
--------- -----
Outstanding at January 27, 1996........................ 280,000 .93
Granted during the year................................ 575,000 1.50
--------- -----
Outstanding at January 25, 1997........................ 855,000 1.31
Granted during the year................................ 457,342 6.92
--------- -----
Outstanding at January 31, 1998........................ 1,312,342 3.27
Granted during the period.............................. 159,850 8.14
--------- -----
Outstanding at August 1, 1998.......................... 1,472,192 $3.80
========= =====
Exercisable stock options
January 27, 1996..................................... 280,000
January 25, 1997..................................... 280,000
January 31, 1998..................................... 423,750
August 1, 1998....................................... 603,404
</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-18
<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 $ (1.13)
========= ========== ==========
Pro forma net income per common share,
assuming dilution...................... $ (0.02) $ 0.31 $ (1.13)
========= ========== ==========
</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 weighted average interest rate on borrowings outstanding at January
31, 1998 was 6.72%. In addition, the Company pays a fee of 0.25% of the
unborrowed portion of the line of credit. The line is secured by the capital
stock of the Company's subsidiaries, contains financial covenants and
prohibits the payment of dividends.
Additional borrowings of approximately $23 million were permitted under the
line at January 31, 1998.
F-19
<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-20
<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-21
<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................... $ 165,000 $2,266,000 $ 3,578,000
State taxes, net of federal benefit...... 20,000 203,000 438,000
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) 347,000
--------- ---------- -----------
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
assets and other............................................ 96,000
----------
$2,838,000
==========
</TABLE>
F-22
<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
Deemed dividend of
redeemable
convertible preferred
stock................ -- -- (21,069,203) (3,718,453) --
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 (13,863,854) 325,628 4,135,550
Accretion of
redeemable
convertible preferred
stock................ -- 1,308,685 -- -- 1,517,148
---------- ----------- ------------ ---------- -----------
Numerator for earnings
per common share,
assuming dilution--
income available to
common stockholders.. $ (39,623) $ 6,069,655 $(13,863,854) $ 325,628 $ 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 -- -- 1,442,388
Convertible preferred
stock................ -- 6,713,406 -- -- 14,148,786
Tracking stock........ -- 67,284 -- -- --
---------- ----------- ------------ ---------- -----------
Denominator for
earnings per common
share assuming
dilution--adjusted
weighted-average
shares and assumed
conversions.......... 12,465,408 19,788,682 12,871,036 12,408,343 29,812,327
========== =========== ============ ========== ===========
Earnings per common
share.................. $(0.003) $0.39 $(1.08) $0.03 $0.29
========== =========== ============ ========== ===========
Earnings per common
share--assuming
dilution............... $(0.003) $0.31 $(1.08) $0.03 $0.19
========== =========== ============ ========== ===========
</TABLE>
- --------
(1) The impact of dilutive securities have been excluded from the calculation
of earnings per common share, assuming dilution for the years ended
January 27, 1996 and January 31, 1998 and the six months ended August 2,
1997 as the impact is anti-dilutive.
F-23
<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
Deemed dividend of
redeemable
convertible preferred
stock................ -- -- (21,069,203) (3,718,453) --
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 (15,988,949) (803,123) 2,489,543
Accretion of
redeemable
convertible preferred
stock(2)............. -- 1,308,685 -- -- 1,517,148
---------- ----------- ------------ ---------- -----------
Numerator for earnings
per common share,
assuming dilution--
income available to
common stockholders.. $ (96,036) $ 4,600,360 $(15,988,949) $ (803,123) $ 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 -- -- 1,442,388
Convertible preferred
stock................ -- 6,713,406 -- -- 14,148,786
Tracking stock........ -- 67,284 -- -- --
---------- ----------- ------------ ---------- -----------
Denominator for
earnings per common
share assuming
dilution--adjusted
weighted-average
shares and assumed
conversions.......... 12,465,408 19,788,682 12,871,036 12,408,343 29,812,327
========== =========== ============ ========== ===========
Pro forma earnings per
common share........... $(0.01) $0.27 $(1.24) $(0.06) $0.18
========== =========== ============ ========== ===========
Pro forma earnings per
common share--assuming
dilution............... $(0.01) $0.23 $(1.24) $(0.06) $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 years ended
January 27, 1996 and January 31, 1998 and the six months ended August 2,
1997 as the impact is anti-dilutive.
F-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<PAGE>
CORNERSTONE BRANDS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements consist of unaudited
Pro Forma Combined Statements of Operations for the year ended January 31,
1998 and the six months ended August 2, 1997 and an unaudited Pro Forma
Consolidated Balance Sheet as of August 1, 1998.
The Unaudited Pro Forma Combined Statements of Operations give effect to the
Company's acquisitions of (i) 80% of the outstanding shares of The Territory
Ahead, Inc. ("Territory Ahead") on March 31, 1997, (ii) 100% of the
outstanding shares of Garnet Hill, Inc. ("Garnet Hill") on July 28, 1997 and
(iii) a 51% ownership interest in Whispering Pines LLC ("Whispering Pines") on
September 4, 1997. Territory Ahead, Garnet Hill and Whispering Pines are
referred collectively as the "Acquired Companies." Each of these acquisitions
was accounted for using the purchase method of accounting.
The Unaudited Pro Forma Consolidated Balance Sheet as of August 1, 1998
reflects the offering and the application of the net proceeds therefrom,
including the repayment of certain indebtedness, and the conversion of the
convertible preferred stock into common stock, as if such transactions had
occurred on August 1, 1998.
The Unaudited Pro Forma Financial Statements may not be indicative of the
results that would have been obtained if the transactions reflected therein
had occurred on the dates indicated or which may be realized in the future.
The Unaudited Pro Forma Financial Statements should be read in conjunction
with the Consolidated Financial Statements of the Company included elsewhere
in this Prospectus.
PF-1
<PAGE>
CORNERSTONE BRANDS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
RESULTS OF ACQUIRED
COMPANIES PRIOR TO ACQUISITION
HISTORICAL(A) ACQUISITION(D) ADJUSTMENTS PRO FORMA
------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales............... $216,334,704 $23,794,472 $240,129,176
Cost of sales........... 112,250,872 12,406,375 124,657,247
------------ ----------- --------- ------------
Gross profit............ 104,083,832 11,388,097 115,471,929
------------ ----------- --------- ------------
Operating expenses:
Selling catalog and
fulfillment ex-
penses............... 73,249,119 9,116,587 82,365,706
General and adminis-
trative.............. 15,636,186 2,244,788 17,880,974
Amortization and de-
preciation........... 3,522,884 $774,541 (C) 4,297,425
Restructuring charge.. 943,000 943,000
------------ ----------- --------- ------------
Total operating
expenses............... 93,351,189 11,361,375 774,541 105,487,105
------------ ----------- --------- ------------
Operating income........ 10,732,643 26,722 (774,541) 9,984,824
Investment income (ex-
pense), net............ (207,883) 135,354 (72,529)
------------ ----------- --------- ------------
Income before equity in
net income (loss) of
affiliates, minority
interest and income
taxes.................. 10,524,760 162,076 (774,541) 9,912,295
Income taxes............ 3,103,038 (130,630) 2,972,408
------------ ----------- --------- ------------
Income before equity in
net income (loss) of
affiliate and minority
interest............... 7,421,722 292,706 (774,541) 6,939,887
Equity in net income
(loss) of affiliate ... 1,808,942 1,808,942
Minority interest....... 275,199 275,199
------------ ----------- --------- ------------
Net income.............. 9,505,863 292,706 (774,541) 9,024,028
Deemed dividend of re-
deemable convertible
preferred stock........ (21,069,203) (21,069,203)
Accretion of redeemable
convertible preferred
stock.................. (2,300,514) (2,300,514)
------------ ----------- --------- ------------
Net income (loss) appli-
cable to common stock.. $(13,863,854) $ 292,706 $(774,541) $(14,345,689)
============ =========== ========= ============
Net income (loss) per
share of common stock.. $ (1.08) $ (1.08)(D)
============ ============
Net income (loss) per
share of common stock
assuming dilution...... $ (1.08) $ (1.08)(D)
============ ============
Pro forma:
Historical net in-
come................. $ 9,505,863 $ 9,024,028
Provision for income
taxes on previously
untaxed earnings of
pooled S-Corpora-
tion................. 151,551 151,551
Provision for income
taxes on previously
untaxed earnings of
pooled limited lia-
bility company....... 1,973,544 1,973,544
------------ ------------
Pro forma net income.. $ 7,380,768 $ 6,898,933
============ ============
Pro forma net income
per common share..... $ (1.24) $ (1.24)(D)
============ ============
Pro forma net income
per common share, as-
suming dilution...... $ (1.24) $ (1.24)(D)
============ ============
</TABLE>
See accompanying notes.
PF-2
<PAGE>
CORNERSTONE BRANDS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 2, 1997
<TABLE>
<CAPTION>
RESULTS OF ACQUIRED
COMPANIES PRIOR TO ACQUISITION
HISTORICAL(A) ACQUISITION(B) ADJUSTMENTS PRO FORMA
------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............... $80,807,393 $23,794,472 104,601,865
Cost of sales........... 42,409,598 12,406,375 54,815,973
----------- ----------- ---------- -----------
Gross profit............ 38,397,795 11,388,097 49,785,892
----------- ----------- ---------- -----------
Operating expenses:
Selling, catalog and
fulfillment
expenses............. 25,872,609 9,116,587 34,989,196
General and
administrative....... 5,570,637 2,244,788 7,815,425
Amortization and
depreciation......... 1,403,794 $ 774,541 (C) 2,178,335
----------- ----------- ---------- -----------
Total operating ex-
penses............. 32,847,040 11,361,375 774,541 44,982,956
----------- ----------- ---------- -----------
Operation income........ 5,550,755 26,722 (774,541) 4,802,936
Investment income
(expense), net......... 78,588 134,851 213,439
----------- ----------- ---------- -----------
Income before equity in
net income (loss) of
affiliates, minority
interest and income
taxes.................. 5,629,343 161,573 (774,541) 5,016,375
Income taxes............ 1,723,632 (130,630) 1,593,002
----------- ----------- ---------- -----------
Income before equity in
net income (loss) of
affiliate and minority
interest............... 3,905,711 292,203 (774,541) 3,423,373
Equity in net income
(loss) of affiliate.... 995,000 995,000
Minority interest....... 81,882 81,882
----------- ----------- ---------- -----------
Net income.............. 4,982,593 292,203 (774,541) 4,500,255
Deemed dividend of
redeemable convertible
preferred stock........ (3,718,453) (3,718,453)
Accretion of redeemable
convertible preferred
stock.................. (938,512) (938,512)
----------- ----------- ---------- -----------
Net income (loss)
applicable to common
stock.................. $ 325,628 $ 292,203 $ (774,541) $ (156,710)
=========== =========== ========== ===========
Net income (loss) per
share of common stock.. $ 0.03 $ (0.01)(D)
=========== ===========
Net income (loss) per
share of common stock,
assuming dilution...... $ 0.03 $ (0.01)(D)
=========== ===========
Pro forma:
Historical net
income............... $ 4,982,593 $ 4,500,255
Provision for income
taxes on previously
untaxed earnings of
pooled S-
Corporation.......... 151,551 151,551
Provision for income
taxes on previously
untaxed earnings of
pooled limited
liability company.... 977,200 977,200
----------- -----------
Pro forma net income.. $ 3,853,842 $ 3,371,504
=========== ===========
Pro forma net income
per common share..... $ (0.06) $ (0.10)(D)
=========== ===========
Pro forma net income
per common share,
assuming dilution.... $ (0.06) $ (0.10)(D)
=========== ===========
</TABLE>
See accompanying notes.
PF-3
<PAGE>
CORNERSTONE BRANDS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AUGUST 1, 1998
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS(E) PRO FORMA ADJUSTMENTS AS ADJUSTED
------------ -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents.......... $ 2,014,326 $ 2,014,326 $ --
Investments........... 2,403,334 2,403,334
Accounts receivable... 4,682,432 4,682,432
Inventory............. 34,702,768 34,702,768
Deferred income
taxes................ 2,518,643 2,518,643
Prepaid expenses and
other current
assets............... 12,102,192 12,102,192
------------ ------------ ----
Total current assets.... 58,423,695 58,423,695
Property and equipment,
net.................... 19,799,078 19,799,078
Investment in
affiliate.............. 6,050,187 6,050,187
Goodwill................ 59,136,375 59,136,375
Deferred income taxes... -- --
Other assets............ 5,904,881 5,904,881
------------ ------------ ----
Total assets............ $149,314,216 $149,314,216
============ ============ ====
Liabilities and
stockholders' equity
Current liabilities:
Borrowings under line
of credit............ $ 30,235,000 $ 30,235,000
Accounts payable...... 16,722,813 16,722,813
Accrued expenses and
other current
liabilities.......... 9,628,915 9,628,915
Payable to related
parties.............. 573,821 573,821
Deferred income
taxes................ -- --
Debt and capital
losses maturing
within one year...... 75,000 75,000
------------ ------------ ----
Total current liabili-
ties................... 57,235,549 57,235,549
Long term debt and
capital leases......... 313,364 313,364
Deferred income taxes... 735,781 735,781
Payable to related
parties, less current
portion................ -- --
Minority interest....... 275,042 275,042
Commitments of
contingencies
Redeemable convertible
preferred stock:
Series A, $0.01 par
value, 56,500 shares
authorized, 16,385
issued and outstanding
(actual) and 0 shares
issued and outstanding
(pro forma and pro
forma as adjusted)..... 60,332,299 $(60,332,299) --
Stockholders' equity:
Series B convertible
preferred stock, $0.01
par value, 9,000 shares
authorized; 7,242
issued and outstanding
(actual) and 0 shares
issued and outstanding
(pro forma and pro
forma as adjusted)..... 72 (72) --
Series C convertible
preferred stock, $0.01
par value, 2,250 shares
authorized; 750 issued
and outstanding
(actual) and 0 shares
issued and outstanding
(pro forma and pro
forma as adjusted)..... 8 (8) --
Common stock, $0.001 par
value, 28,499,400
shares authorized;
14,619,266 issued and
outstanding (actual),
28,768,071 issued and
outstanding (pro forma)
and issued and
outstanding pro forma
as adjusted)........... 14,619 14,148 28,767 $ --
Additional paid-in
capital................ 42,968,350 60,318,231 103,286,581 --
Retained earnings....... (12,589,582) (12,589,582)
Unrealized gains on
available for sale
securities............. 29,044 29,044
Less; treasury stock-
330,000 shares......... (330) (330)
------------ ------------ ----
Total stockholders' eq-
uity................... 30,422,181 30,422,181
------------ ------------ ----
Total liabilities and
stockholders' equity... $149,314,216 $149,314,216
============ ============ ====
</TABLE>
See accompanying notes.
PF-4
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(A) Represents the historical consolidated statement of operations for the
year ended January 31, 1998 and for the six months ended August 2, 1997.
(B) Represents historical statements of operations of Garnet Hill for the six
months ended July 28, 1997 and the historical statements of operations of
Territory Ahead for the period from February 1, 1997 to March 31, 1997.
The operations of Whispering Pines prior to September 4, 1997 were not
significant.
(C) Reflects the adjustments to amortization expense to reflect the allocation
of the purchase price of Garnet Hill and Territory Ahead, in each case
using 4 years for amounts allocated to customer master file and 40 years
for goodwill.
(D) Reflects the issuance of 750,000 shares of common stock in connection with
the Garnet Hill acquisition.
(E) Reflects the conversion of the preferred stock into common stock. The
Series A preferred stock and B preferred stock was converted into common
stock on August 25, 1998, and the Series C preferred stock was converted
into common stock on September 7, 1998.
PF-5
<PAGE>
[The inside of the back cover of the Prospectus reproduces on a larger scale
certain of the photographs from the inside of the front cover "gate-fold" and
labels each with the appropriate Cornerstone company's name. Clockwise from
top left: a photograph of a dining table with four chairs from the Ballard
Designs catalog; a photograph of a jacket from the The Territory Ahead
catalog; a photograph of a lamp and coffee mugs from the Whispering Pines
catalog; a photograph of draperies from the Smith+Noble catalog; a photograph
of outdoor dining furniture from the Frontgate catalog; a photograph of a bed
with linens from the Garnet Hill catalog; and a photograph of a woman at the
helm of a sailboat from the TravelSmith catalog.]
<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.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 33
Management............................................................... 52
Certain Transactions..................................................... 58
Principal and Selling Stockholders....................................... 62
Description of Capital Stock............................................. 65
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 70
Legal Matters............................................................ 71
Experts.................................................................. 72
Additional Information................................................... 72
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...................................................... *
NYSE 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 former stockholders of Garnet Hill 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. The Company received
representations from these individuals as to their sophistication as investors
and as to their investment intent in connection with the acquisition
transaction and issued the securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.
II-2
<PAGE>
On August 13, 1997, the Company issued 2,216,667 shares of its Common Stock
to four former stockholders of Ballard Designs in connection with the
acquisition of Ballard Designs by stock merger. The Company received
representations from these individuals as to their sophistication as investors
and as to their investment intent in connection with the merger transaction
and issued the securities in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act.
In October of 1997, the Company issued an aggregate of 1,762 shares of its
Common Stock to five former stockholders of Frontgate in lieu of fractional
shares of its Series B Convertible Preferred Stock in connection with the
conversion into Series B Convertible Preferred Stock of certain shares of its
Series C Convertible Preferred Stock that were issued to them in connection
with the Company's acquisition of Frontgate. The Company received
representations from these individuals as to their sophistication as investors
in connection with the acquisition transaction and issued the securities in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act.
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 former
stockholders of Frontgate in exchange for certain securities previously issued
to such stockholders by the Company in connection with the acquisition of
Frontgate. The Company received representations from these individuals as to
their sophistication as investors and as to their investment intent in
connection with the acquisition transaction and issued the securities in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act.
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. Mr. Kensington was Secretary of
the Company and through its relationship with Mr. Kensington the Company had
acquired a reasonable basis for concluding that Mr. Kensington was a
sophisticated investor. The securities were issued in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act.
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. The Company received
representations from Mr. Walter as to his sophistication as an investor and as
to his investment intent in connection with the sale of the securities and
issued the securities in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act.
On August 25, 1998, the Company issued 4,166,111 shares of its Common Stock
to two former members of Smith+Noble as consideration for its acquisition of
all the outstanding equity interests of Smith+Noble. The Company received
representations from these individuals as to their sophistication as investors
and as to their investment intent in connection with the acquisition
transaction and issued the securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.
On September 15, 1998, the Company (i) issued to Boston Capital Ventures II,
L.P. 46,040 shares of its Common Stock for an aggregate purchase price of
$460.40 upon exercise of a warrant issued in June 1995 and 11,510 shares of
its Common Stock for an aggregate purchase price of $11,510 upon exercise of
an option granted in September 1995 and (ii) issued to Boston Capital Ventures
III, L.P. 33,960 shares of its Common Stock for an aggregate purchase price of
$339.60 upon exercise of a warrant issued in June 1995 and 8,490 shares of its
Common Stock for an aggregate purchase price of $8,490 upon exercise of an
option granted in September 1995. The Company received representations from
Boston Capital Ventures II, L.P. and Boston Capital Ventures III, L.P. as to
their sophistication as investors in connection with the formation of the
Company and issued the securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.
On September 16, 1998, the Company issued 4,000 shares of its Common Stock
to Nicholas F. Kourtis for an aggregate purchase price of $40 upon exercise of
a warrant originally issued to Nicolas A. Kensington in June 1995 and
subsequently transferred to Mr. Kourtis, a law partner of Mr. Kensington. Mr.
Kourtis had served as one the Company's legal advisors and through its
relationship with Mr. Kourtis the Company had acquired a
II-3
<PAGE>
reasonable basis for concluding that Mr. Kourtis was a sophisticated investor.
The securities were issued in reliance upon the exemption from registration
set forth in Section 4(2) of the Securities Act.
On September 16, 1998, the Company issued 200,000 shares of its Common Stock
to Bruce Willard for an aggregate purchase price of $300,000 upon exercise of
a warrant issued in March 1997. The Company received representations from Mr.
Willard as to his sophistication as an investor and as to his investment
intent in connection with this transaction and issued the securities in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act.
On October 8, 1998, the Company issued 17,647 shares of its Common Stock to
Cabin Life Studios, Inc. in partial payment of the purchase price for the
acquisition of an additional 29% interest in Whispering Pines. The Company
received representations from Cabin Life Studios, Inc. as to its
sophistication as an investor and as to its investment intent in connection
with this transaction and issued the securities in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act.
(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 1,538,462 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 1,538,462 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.
The Company received representations from Madison Dearborn Capital Partners,
L.P. as to its investment intent in connection with the transactions referred
to above and issued such securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.
(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 1,758,242 shares of Common
Stock) to Chase 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 879,121 shares of Common Stock) to Chase Venture
II-4
<PAGE>
Capital Associates, L.P. for an aggregate purchase price of $4,000,000 in
connection with a private placement transaction.
On October 16, 1997, pursuant to commitments entered into in November 1995,
the Company issued 4,000 shares of its Series A-2 Preferred Stock (convertible
into 879,121 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.
The Company received representations from Chase Venture Capital Associates,
L.P. as to its investment intent in connection with the transactions referred
to above and issued such securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.
(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 121,757 shares of
Common Stock) to five professional investors for an aggregate purchase price
of $554,000 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 60,880 shares of Common Stock) to the same
five professional investors 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 60,880 shares of Common Stock) to the
same five professional investors 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 60,878 shares of Common Stock) to the
same five professional investors for an aggregate purchase price of $277,000
in connection with a private placement transaction.
The Company received representations from each of such investors as to their
investment intent in connection with such private placement transactions and
issued such securities in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act.
(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 Company had
acquired a reasonable basis for concluding that Mr. Willard was a
sophisticated investor during the course of its dealings with Mr. Willard. The
securities were issued in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act.
No underwriters were involved in the foregoing sales of securities. All
stock certificates issued in connection with the foregoing sales of capital
stock were issued with a legend indicating the securities represented thereby
were restricted securities under the Securities Act.
II-5
<PAGE>
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 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>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.19 Third Amended and Restated Loan Agreement dated August 24, 1998,
as amended, among Fleet National Bank, as agent and a Lender,
certain other Lenders named therein, the Registrant and the Brands
Group.
10.20* Limited Liability Company Agreement dated as of September 4, 1997
between the Brands Group and Cabin Life Studios, Inc.
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.
27* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
**To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts is included.
All other 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.
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-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN PORTLAND, MAINE, ON
THIS 28TH DAY OF OCTOBER, 1998.
Cornerstone Brands, Inc.
/s/ William T. End
By:__________________________________
WILLIAM T. END
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AS OF THIS 28TH DAY OF OCTOBER, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ William T. End Chief Executive Officer and
___________________________________________ Chairman of the Board
WILLIAM T. END (Principal Executive
Officer)
Mark Fasold * Executive Vice President and
___________________________________________ Chief Financial Officer
MARK FASOLD (Principal Financial and
Accounting Officer)
Benjamin D. Chereskin* Director
___________________________________________
BENJAMIN D. CHERESKIN
William J. Hunckler, III* Director
___________________________________________
WILLIAM J. HUNCKLER, III
Stephen P. Murray* Director
___________________________________________
STEPHEN P. MURRAY
John A. O'Steen* Director
___________________________________________
JOHN A. O'STEEN
Donald J. Steiner* Director
___________________________________________
DONALD J. STEINER
Thomas G. Stemberg* Director
___________________________________________
THOMAS G. STEMBERG
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
H.J. von der Goltz* Director
___________________________________________
H.J. VON DER GOLTZ
John Walter* Director
___________________________________________
JOHN WALTER
</TABLE>
/s/ William T. End
*By:____________________________
WILLIAM T. END
ATTORNEY-IN-FACT
II-9
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
CORNERSTONE BRANDS, INC.
JANUARY 31, 1998
<TABLE>
<CAPTION>
BALANCE AT BEGINNING CHARGED TO COSTS BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES DEDUCTIONS OF PERIOD
- ----------- -------------------- ---------------- ---------- --------------
<S> <C> <C> <C> <C>
Year Ended January 31,
1998:
Deducted from assets
accounts:
Reserve for inventory
obsolescence........... $496,000 $1,739,000 $2,235,000
Year Ended January 25,
1997:
Deducted from assets
accounts:
Reserve for inventory
obsolescence........... $257,000 $ 239,000 $ 496,000
Year Ended January 25,
1996:
Deducted from assets
accounts:
Reserve for inventory
obsolescence........... $ 40,000 $ 217,000 $ 257,000
</TABLE>
<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 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 Third Amended and Restated Loan Agreement dated August 24, 1998,
as amended among Fleet National Bank, as agent and a Lender,
certain other Lenders named therein, the Registrant and the Brands
Group.
10.20* Limited Liability Company Agreement dated as of September 4, 1997
between the Brands Group and Cabin Life Studios, Inc.
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.
27* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
**To be filed by amendment.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
THE INTERNATIONAL CORNERSTONE GROUP, INC.,
CORNERSTONE BRANDS, INC.,
CORNERSTONE SN ACQUISITION CORP.,
SMITH & NOBLE LLC
AND
THE MEMBERS OF SMITH & NOBLE LLC
___________________
August 25, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE I
MERGER OF TRANSITORY SUBSIDIARY INTO CORNERSTONE
<TABLE>
<CAPTION>
Page
<C> <S> <C>
1.1 The Merger .......................................................... 1
1.2 The Closing ......................................................... 2
1.3 Actions at the Closing .............................................. 2
1.4 Additional Action ................................................... 2
1.5 Conversion of Shares ................................................ 2
1.6 Options and Warrants ................................................ 3
1.7 Certificate of Incorporation ........................................ 4
1.8 By-laws ............................................................. 5
1.9 Directors ........................................................... 5
1.10 Assignment of Agreements ............................................ 5
1.11 No Further Rights ................................................... 5
</TABLE>
ARTICLE II
CONTRIBUTION OF MEMBERS' INTERESTS IN S&N
TO NEWCO; LLC MERGER
<TABLE>
<C> <S> <C>
2.1 Transfer of Membership Interests .................................... 5
2.2 Delivery of Shares .................................................. 6
2.3 Actions at the Closing .............................................. 6
2.4 Additional Action ................................................... 6
2.5 Managers ............................................................ 6
2.6 No Further Rights ................................................... 7
</TABLE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE MEMBERS
<TABLE>
<C> <S> <C>
3.1 Organization, Qualification and Corporate Power ..................... 7
3.2 Capitalization ...................................................... 7
3.3 Authorization of Transaction ........................................ 8
3.4 Noncontravention .................................................... 8
3.5 Subsidiaries ........................................................ 9
3.6 Financial Statements ................................................ 9
3.7 Absence of Certain Changes .......................................... 9
3.8 Undisclosed Liabilities ............................................. 9
3.9 Tax Matters ......................................................... 10
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
<C> <S> <C>
3.10 Assets .............................................................. 11
3.11 Owned Real Property ................................................. 12
3.12 Real Property Leases ................................................ 13
3.13 Inventory ........................................................... 13
3.14 Intellectual Property ............................................... 14
3.15 Contracts ........................................................... 15
3.16 Accounts Receivable ................................................. 16
3.17 Powers of Attorney .................................................. 16
3.18 Insurance ........................................................... 16
3.19 Litigation .......................................................... 16
3.20 Employees ........................................................... 17
3.21 Employee Benefits ................................................... 17
3.22 Environmental Matters ............................................... 19
3.23 Legal Compliance .................................................... 20
3.24 Permits ............................................................. 21
3.25 Certain Business Relationships With Affiliates ...................... 21
3.26 Brokers' Fees ....................................................... 21
3.27 Books and Records; Bank Accounts .................................... 21
3.28 Product Warranty .................................................... 22
3.29 New Delaware LLC .................................................... 22
3.31 Investment Representations .......................................... 22
3.32 Disclosure .......................................................... 23
</TABLE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CORNERSTONE
<TABLE>
<C> <S> <C>
4.1 Organization ....................................................... 23
4.2 Capitalization ..................................................... 24
4.3 Authorization of Transaction ....................................... 27
4.4 Noncontravention ................................................... 28
4.5 Cornerstone Subsidiaries ........................................... 29
4.6 Financial Statements ............................................... 30
4.7 Absence of Certain Changes ......................................... 30
4.8 Undisclosed Liabilities ............................................ 30
4.9 Tax Matters ........................................................ 30
4.10 Assets ............................................................. 32
4.11 Owned Real Property ................................................ 32
4.12 Real Property Leases ............................................... 32
4.13 Inventory .......................................................... 33
4.14 Intellectual Property .............................................. 33
4.15 Contracts .......................................................... 34
4.16 Accounts Receivable ................................................ 35
4.17 Insurance .......................................................... 35
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
<C> <S> <C>
4.18 Litigation .......................................................... 35
4.19 Employee Benefits ................................................... 35
4.20 Environmental Matters ............................................... 37
4.21 Legal Compliance .................................................... 37
4.22 Permits ............................................................. 38
4.23 Certain Business Relationships With Affiliates ...................... 38
4.24 Books and Records ................................................... 38
4.26 Interim Operations .................................................. 38
4.27 Tax Consequences of the Merger ...................................... 38
4.28 Initial Public Offering ............................................. 39
4.30 Disclosure .......................................................... 39
</TABLE>
ARTICLE V
PRE-CLOSING COVENANTS
<TABLE>
<C> <S> <C>
5.1 Reasonable Best Efforts; Notice and Consents;
Hart-Scott-Rodino Act ............................................... 39
5.2 Operation of Business ............................................... 40
5.3 Full Access ......................................................... 43
5.4 Exclusivity ......................................................... 43
5.5 Net Worth ........................................................... 44
5.6 Pooling Accounting .................................................. 44
5.7 Transaction Expenses ................................................ 44
5.8 Final Form S-1 ...................................................... 44
</TABLE>
ARTICLE VI
CONDITIONS TO CLOSING
<TABLE>
<C> <S> <C>
6.1 Conditions to Obligations of Cornerstone and Affiliates ............. 45
6.2 Conditions to Obligations of S&N and the Members .................... 47
</TABLE>
ARTICLE VII
POST-CLOSING COVENANTS
<TABLE>
<C> <S> <C>
7.1 Stock Options ....................................................... 49
7.2 Stay Bonus Agreements ............................................... 50
7.3 Board Observation Rights ............................................ 50
7.4 Agreements Regarding Disposition of NewCo Stock ..................... 50
7.5 Filing of Form S-1 .................................................. 51
</TABLE>
-iii-
<PAGE>
ARTICLE VIII
INDEMNIFICATION
<TABLE>
<CAPTION>
Page
<C> <S> <C>
8.1 Indemnification by the Members ...................................... 52
8.2 Indemnification by Cornerstone ...................................... 52
8.3 Indemnification Claims .............................................. 52
8.4 Survival of Representations and Warranties .......................... 54
8.5 Limitations ......................................................... 55
</TABLE>
ARTICLE IX
TERMINATION
<TABLE>
<C> <S> <C>
9.1 Termination of Agreement ............................................ 55
9.2 Effect of Termination ............................................... 56
</TABLE>
ARTICLE X
OTHER AGREEMENTS
<TABLE>
<C> <S> <C>
10.1 Press Releases and Announcements .................................... 57
10.2 No Third Party Beneficiaries ........................................ 57
10.3 Entire Agreement .................................................... 57
10.4 Succession and Assignment ........................................... 57
10.5 Counterparts; Facsimile Signature ................................... 57
10.6 Headings ............................................................ 57
10.7 Notices ............................................................. 57
10.8 Governing Law ....................................................... 58
10.9 Amendments and Waivers .............................................. 58
10.10 Severability ........................................................ 59
10.11 Construction ........................................................ 59
10.12 Incorporation of Exhibits and Schedules ............................. 59
</TABLE>
SCHEDULE:
Schedule 1.10 - Assigned Agreements
EXHIBITS:
A Agreement of Merger
B LLC Merger Documents
C Contribution Documents
-iv-
<PAGE>
D Draft Form S-1
E Executive Agreement
F Amended and Restated Registration Agreement
G Letter Agreement
H Amendment to Stockholders Agreement
I Opinion of Vedder, Price, Kaufman & Kammholz
J Opinion of Hale and Dorr LLP
K Stock Options
L Form of Stay Bonus Agreement and
List of Stay Bonus Recipients
-v-
<PAGE>
TABLE OF DEFINED TERMS
Each of the following terms is defined in the Section of this Agreement
indicated below.
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
ADR Service 8.3(d)
ADR Procedure 8.3(d)
Affiliates 3.15(e)
Agreed Amount 8.3(c)
Agreement Introduction
Agreement of Merger 1.1
Amendment to Stockholders Agreement 6.1(j)
Articles 3.1
CERCLA 3.22(a)
Claim Notice 8.3(b)
Claimed Amount 8.3(b)
Closing 1.2
Closing Date 1.2
Closing Transactions 6.1
Code Introduction
Contribute 2.1
Contribution Documents 2.3(b)
Controlling Party 8.3(a)
Cornerstone Introduction
Cornerstone Certificate 6.2(f)
Cornerstone Disclosure Schedule Article IV
Cornerstone Employee Benefit Plans 4.19(a)
Cornerstone ERISA Affiliate 4.19(a)
Cornerstone Financial Statements 4.6
Cornerstone Lease 4.12
Cornerstone Material Contract 4.15
Cornerstone Material Adverse Effect 4.1(a)
Cornerstone Subsidiary 4.5(a)
Damages 8.1
Dispute 8.3(c)
Draft Form S-1 4.28
Effective Time 1.1
Employee Benefit Plan 3.21(a)
Encumbrance 3.2(b)
Environmental Law 3.22(a)
ERISA 3.21(a)
ERISA Affiliate 3.21(a)
Exchange Act 3.15(e)
</TABLE>
-vi-
<PAGE>
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
Expected Claim Notice 8.4
Filed Form S-1 4.28
GAAP 3.6
Governmental Entity 3.4(a)
Hart-Scott-Rodino Act 3.4(a)
Indemnified Party 8.3(a)
Indemnifying Party 8.3(a)
Intellectual Property 3.14(a)
LLC Merger 2.3(a)
Materials of Environmental Concern 3.22(b)
Members Introduction
Merger 1.1
Most Recent Cornerstone Balance Sheet 4.8
Most Recent Cornerstone Balance Sheet Date 4.6
Most Recent S&N Balance Sheet 3.8
Most Recent S&N Balance Sheet Date 3.6
NewCo Introduction
NewCo/S&N Shares 2.2
Non-Controlling Party 8.3(a)
Operating Agreement 3.1
Options 1.6(a)
Ordinary Course of Business 3.8
Parties Introduction
Permits 3.24
Reasonable Best Efforts 5.1
Registration Agreement 6.1(h)
Related Party Transactions 3.25
Response 8.3(c)
S&N Introduction
S&N Certificate 6.1(f)
S&N Disclosure Schedule Article III
S&N Employee Benefit Plans 3.21(a)
S&N Financial Statements 3.6
S&N Interest Contribution 2.1
S&N Leases 3.12
S&N Material Adverse Effect 3.1
S&N Material Contracts 3.15
SEC 4.28
Securities Act 3.4(a)
Surviving Corporation 1.1
Taxes 3.9(a)
Tax Returns 3.9(a)
Transitory Subsidiary Introduction
Warrants 1.6(b)
</TABLE>
-vii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered into
---------
as of August 25, 1998 by and among The International Cornerstone Group, Inc., a
Delaware corporation ("Cornerstone"), Cornerstone Brands, Inc., a Delaware
-----------
corporation and a wholly owned subsidiary of Cornerstone ("NewCo"), Cornerstone
-----
SN Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
NewCo (the "Transitory Subsidiary"), Smith & Noble LLC, a California limited
---------------------
liability company prior to the effectuation of the LLC Merger (as defined in
Section 2.3 below) and thereafter a Delaware limited liability company ("S&N"),
---
and Fred E. Kamgar, Moira E. Kamgar and Robert M. Perkowitz, being all of the
members of S&N (the "Members"). Cornerstone, NewCo, the Transitory Subsidiary,
-------
S&N and the Members and the are referred to collectively herein as the
"Parties".
-------
This Agreement contemplates (i) a merger of the Transitory Subsidiary into
Cornerstone pursuant to Section 251(g) of the Delaware General Corporation Law,
in which Cornerstone is the surviving corporation, all of the securityholders of
Cornerstone receive like securities of NewCo, and NewCo becomes the sole
stockholder of Cornerstone, (ii) a merger of S&N into a newly-organized Delaware
limited liability company and (iii) a contribution, assignment and transfer by
the Members of 100% of their interest in such Delaware limited liability company
to NewCo, in exchange for shares of common stock of NewCo. It is intended that
the merger of the Transitory Subsidiary into Cornerstone constitute a tax-free
reorganization within the meaning of Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended (the "Code"), that the reorganization and the
----
contribution, assignment and transfer by the Members of their S&N membership
interests constitute tax-free transfers of property under Section 351 of the
Code and that the transactions contemplated by this Agreement be accounted for
as a "pooling of interests".
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained, the Parties agree as follows.
ARTICLE I
MERGER OF TRANSITORY SUBSIDIARY INTO CORNERSTONE
1.1 The Merger. Upon and subject to the terms and conditions of this
----------
Agreement, the Transitory Subsidiary shall merge with and into Cornerstone
pursuant to Section 251(g) of the Delaware General Corporation Law (with such
merger referred to herein as the "Merger") at the Effective Time (as defined
------
below). From and after the Effective Time, the separate corporate existence of
the Transitory Subsidiary shall cease and Cornerstone shall continue as the
surviving corporation in the Merger (the "Surviving Corporation"). The
---------------------
"Effective Time" shall be the time at which the Surviving Corporation files an
- ---------------
agreement of merger prepared and executed in accordance with Section 251(g) of
the Delaware General Corporation Law (the
<PAGE>
"Agreement of Merger") with the Secretary of State of the State of Delaware.
-------------------
The Merger shall have the effects set forth in Section 259 of the Delaware
General Corporation Law. A copy of the Agreement of Merger is attached hereto
as Exhibit A.
---------
1.2 The Closing. The closing of the transactions contemplated by this
-----------
Agreement, including the S&N Interest Contribution (as defined in Section 2.1)
(the "Closing"), shall take place at the offices of Hale and Dorr LLP in Boston,
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Massachusetts, commencing at 9:00 a.m. local time on August 25, 1998, or, if all
of the conditions to the obligations of the Parties to consummate the
transactions contemplated hereby have not been satisfied or waived by such date,
on such mutually agreeable later date as soon as practicable (and in any event
no later than three business days) after the satisfaction or waiver of all
conditions (excluding the delivery of any documents to be delivered at the
Closing) set forth in Article VI hereof (the "Closing Date").
------------
1.3 Actions at the Closing. At the Closing (in addition to the Closing
----------------------
actions contemplated by Section 2.3):
(a) S&N and the Members shall deliver, or cause to be delivered, to
Cornerstone the various certificates, instruments and documents referred to in
Section 6.1;
(b) Cornerstone shall deliver, or cause to be delivered, to the
Members the various certificates, instruments and documents referred to in
Section 6.2; and
(c) the Surviving Corporation shall file with the Secretary of State
of the State of Delaware the Agreement of Merger.
1.4 Additional Action. The Surviving Corporation may, at any time after
-----------------
the Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either Cornerstone or the Transitory
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
1.5 Conversion of Shares. At the Effective Time, by virtue of the Merger
--------------------
and without any action on the part of any Party or the holder of any of the
following securities:
(a) Each share of common stock, $.001 par value per share, of
Cornerstone issued and outstanding immediately prior to the Effective Time shall
be converted into and represent the right to receive one share of common stock,
$.001 par value per share, of NewCo.
2
<PAGE>
(b) Each share of Series A-1 Convertible Preferred Stock, $.01 par
value per share, of Cornerstone issued and outstanding immediately prior to the
Effective Time shall be converted into and represent the right to receive one
share of Series A-1 Convertible Preferred Stock, $.01 par value per share, of
NewCo.
(c) Each share of Series A-2 Convertible Preferred Stock, $.01 par
value per share, of Cornerstone issued and outstanding immediately prior to the
Effective Time shall be converted into and represent the right to receive one
share of Series A-2 Convertible Preferred Stock, $.01 par value per share, of
NewCo.
(d) Each share of Series A-3 Convertible Preferred Stock, $.01 par
value per share, of Cornerstone issued and outstanding immediately prior to the
Effective Time shall be converted into and represent the right to receive one
share of Series A-3 Convertible Preferred Stock, $.01 par value per share, of
NewCo.
(e) Each share of Series B Convertible Preferred Stock, $.01 par value
per share, of Cornerstone issued and outstanding immediately prior to the
Effective Time shall be converted into and represent the right to receive one
share of Series B Convertible Preferred Stock, $.01 par value per share, of
NewCo.
(f) Each share of Series C Convertible Preferred Stock, $.01 par value
per share, of Cornerstone issued and outstanding immediately prior to the
Effective Time shall be converted into and represent the right to receive one
share of Series C Convertible Preferred Stock, $.01 par value per share, of
NewCo.
(g) Each share of capital stock of Cornerstone held in Cornerstone's
treasury immediately prior to the Effective Time shall be cancelled and retired
without payment of any consideration therefor.
(h) Each share of common stock, $.001 par value per share, of the
Transitory Subsidiary issued and outstanding immediately prior to the Effective
Time shall be converted into and thereafter evidence one share of common stock,
$.001 par value per share, of the Surviving Corporation.
(i) Each share of common stock, $.001 par value per share, of NewCo
issued and outstanding immediately prior to the Effective Time shall be
cancelled and retired without payment of any consideration therefor and any
certificates representing such shares shall be cancelled.
1.6 Options and Warrants.
--------------------
(a) As of the Effective Time, all options to purchase shares of
capital stock of Cornerstone issued by Cornerstone pursuant to its stock option
plans or otherwise ("Options"), whether vested or unvested, shall be assumed by
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NewCo.
3
<PAGE>
Immediately after the Effective Time, each Option outstanding immediately prior
to the Effective Time shall be deemed to constitute an option to acquire, on the
same terms and conditions as were applicable under such Option at the Effective
Time, an equal number and class of shares of capital stock of NewCo. The
exercise price per share of each such assumed Option shall be equal to the
exercise price of such Option immediately prior to the Effective Time. The term,
exercisability, vesting schedule, status as an "incentive stock option" under
Section 422 of the Code, if applicable, and all of the other terms of the
Options shall otherwise remain unchanged.
(b) As of the Effective Time, all warrants to purchase shares of
capital stock of Cornerstone ("Warrants"), whether vested or unvested, shall be
--------
assumed by NewCo. Immediately after the Effective Time, each Warrant
outstanding immediately prior to the Effective Time shall be deemed to
constitute a warrant to acquire, on the same terms and conditions as were
applicable under such Warrant at the Effective Time, an equal number and class
of shares of capital stock of NewCo. The exercise price per share of each such
assumed Warrant shall be equal to the exercise price of such Warrant immediately
prior to the Effective Time. The term, exercisability and all of the other
terms of the Warrants shall otherwise remain unchanged.
(c) As soon as practicable after the Effective Time, NewCo shall
deliver to the holders of Options and Warrants appropriate notices setting forth
such holders' rights pursuant to such Options and Warrants, as amended by this
Section 1.6, and the agreements currently evidencing such Options and Warrants
shall continue in effect on the same terms and conditions (subject to the
amendments provided for in this Section 1.6 and such notice).
(d) NewCo shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of NewCo capital stock for delivery upon
exercise of the Options and Warrants assumed in accordance with this Section
1.6.
1.7 Certificate of Incorporation. The Certificate of Incorporation of the
----------------------------
Surviving Corporation shall be the same as the Certificate of Incorporation of
Cornerstone immediately prior to the Effective Time, except that (a) the name of
the corporation set forth therein shall be changed to "The Cornerstone Brands
Group, Inc.", (b) the authorized capital stock of the Surviving Corporation
shall be the same as the authorized capital stock of the Transitory Subsidiary
and (c) a provision shall be added requiring that any act or transaction by or
involving the Surviving Corporation that requires for its adoption under the
Delaware General Corporation Law or the Certificate of Incorporation of the
Surviving Corporation the approval of the stockholders of the Surviving
Corporation shall, as required by Section 251(g) of the Delaware General
Corporation Law, require, in addition, the approval of the stockholders of NewCo
(or any successor by merger) by the same vote as is required
4
<PAGE>
by the Delaware General Corporation Law and/or by the Certificate of
Incorporation of the Surviving Corporation.
1.8 By-laws. The By-laws of the Surviving Corporation shall be the same
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as the By-laws of the Transitory Subsidiary immediately prior to the Effective
Time, except that the name of the corporation set forth therein shall be changed
to "The Cornerstone Brands Group, Inc."
1.9 Directors. The persons serving as directors of Cornerstone
---------
immediately prior to the Effective Time shall become the directors of NewCo
effective as of the Effective Time.
1.10 Assignment of Agreements. Upon the Closing, Cornerstone shall assign
------------------------
to NewCo, effective upon the Effective Time, those agreements listed on Schedule
--------
1.10 attached hereto.
- ----
1.11 No Further Rights. From and after the Effective Time, no shares of
-----------------
capital stock of Cornerstone shall be deemed to be outstanding, and holders of
certificates formerly representing shares of capital stock of Cornerstone shall
cease to have any rights with respect thereto, except as provided herein or by
law.
ARTICLE II
CONTRIBUTION OF MEMBERS' INTERESTS IN S&N
TO NEWCO; LLC MERGER
2.1 Transfer of Membership Interests. Upon and subject to the terms and
--------------------------------
conditions of this Agreement, and immediately following the Effective Time and
the consummation of the LLC Merger (as defined in Section 2.3 below), each of
the Members shall contribute, assign, transfer and convey ("Contribute") to
----------
NewCo his or her entire right, title and interest in and to S&N (the "S&N
---
Interest Contribution"), and thereafter withdraw from S&N, and NewCo shall be
- ---------------------
admitted to S&N as a substitute member of S&N. Such Contribution by the Members
shall transfer good and valid and marketable title to such interests, free and
clear of all liens, mortgages, pledges, security interests, encumbrances,
charges, contractual restrictions or covenants, options or other adverse claims,
in each case whether arising by contract or by operation of law, except for
those imposed by the S&N Limited Liability Company Agreement. If and to the
extent the membership interests in S&N are represented by certificates or other
written instruments, each Member shall deliver to NewCo the certificate or other
written instrument reflecting its interest, duly endorsed for transfer. Each
Member shall Contribute 100% of his or her respective interest in S&N to NewCo.
5
<PAGE>
2.2 Delivery of Shares. In consideration of the contribution of interests
------------------
in S&N contemplated by Section 2.1 above, NewCo shall cause to be issued to the
Members an aggregate of 4,166,111 of fully-paid and nonassessable common stock,
$.001 par value per share, of NewCo (collectively, the "NewCo/S&N Shares").
----------------
Seventy percent (70%) of the NewCo/S&N Shares shall be issued to Fred E. and
Moira E. Kamgar, as community property, and thirty percent (30%) of such shares
shall be issued to Robert M. Perkowitz.
2.3 Actions at the Closing. At the Closing:
----------------------
(a) Immediately following the Merger, S&N shall be merged with and
into a newly-organized Delaware limited liability company, which shall be the
surviving entity in such merger (the "LLC Merger"), and the owners of and
ownership interests in such surviving entity shall be identical to those of S&N.
The LLC Merger shall be effectuated pursuant to and on the terms of a Merger
Agreement in the form attached hereto as Exhibit B and certificates of merger to
---------
be filed in the Offices of the Secretary of State of the State of Delaware and
the Secretary of State of the State of California.
(b) Each of the Members shall deliver, or cause to be delivered, to
NewCo, an instrument of contribution, assignment and assumption, and amendments
to the Limited Liability Company Agreement and the Certificate of Formation of
the surviving entity in the LLC Merger (which surviving entity shall be referred
to herein as S&N in respect of all periods of time after the LLC Merger),
substantially in the form and on the terms of Exhibit C attached hereto
---------
(collectively, the "Contribution Documents"), the certificates or other written
----------------------
instruments representing their respective interests in S&N, if any, and such
other agreements, instruments or certificates as may be reasonably necessary or
appropriate to reflect the Contribution of their membership interests in S&N
contemplated by Section 2.1; and
(c) NewCo shall deliver, or cause to be delivered, to the Members
certificates representing the NewCo/S&N Shares.
The consummation of the S&N Interest Contribution shall be deemed to occur
immediately after the consummation of the Merger and the LLC Merger.
2.4 Additional Action. NewCo may, at any time after the Closing, take any
-----------------
action, including executing and delivering any document, in the name and on
behalf of S&N or any Member, in order to consummate the transactions
contemplated by this Article II.
2.5 Managers. Fred E. Kamgar, the sole Manager of S&N immediately prior
--------
to the Contribution described in Section 2.1 above shall tender his written
resignation to S&N, which resignation shall be effective upon the Closing.
6
<PAGE>
2.6 No Further Rights. From and after the consummation of the S&N
-----------------
Interest Contribution, the Members shall cease to have any rights in or to S&N,
including without limitation, rights with respect to distributions of cash or
property from S&N (whether in respect of periods prior to or after the Closing
Date). The members shall have the right to request that Cornerstone amend, or
cause S&N to amend, the income tax returns of S&N for periods ended prior to the
Closing Date provided, however, that any such amendment shall not affect the
content of the income tax returns for periods ending on or after the Closing
Date and, provided further, that all expenses in connection with any such
amendment shall be borne by the Members.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE MEMBERS
Each of the Members jointly and severally represents and warrants to
Cornerstone and NewCo that the statements contained in this Article III are true
and correct, except as set forth in the S&N Disclosure Schedule delivered by the
Members to Cornerstone upon the execution of this Agreement (the "S&N Disclosure
--------------
Schedule"). The S&N Disclosure Schedule shall be arranged in paragraphs
- --------
corresponding to the numbered and lettered paragraphs contained in this Article
III, and the disclosures in any paragraph of the S&N Disclosure Schedule shall
qualify other paragraphs in this Article III only to the extent it is clear from
a reading of the disclosure that such disclosure is applicable to such other
paragraphs.
3.1 Organization, Qualification and Corporate Power. S&N is a limited
-----------------------------------------------
liability company duly organized, validly existing and in good standing under
the laws of the State of California. S&N is duly qualified to conduct business
and is in good standing under the laws of each jurisdiction in which the nature
of its business or the ownership or leasing of its properties requires such
qualification, except where the failure to be so qualified or in good standing
would not have a material adverse effect on the assets, business, financial
condition, results of operations or future prospects of S&N, taken as a whole,
or on the ability of the Parties to consummate the transactions contemplated by
this Agreement (an "S&N Material Adverse Effect"). S&N has all requisite limited
---------------------------
liability company power and authority to carry on the businesses in which it is
engaged and to own and use the properties owned and used by it. S&N has
furnished to Cornerstone true and complete copies of its Articles of
Organization (the "Articles") and Operating Agreement (the "Operating
-------- ---------
Agreement"), each as amended and as in effect on the date hereof. S&N is not in
- ---------
default under or in violation of any provision of its Articles or Operating
Agreement.
7
<PAGE>
3.2 Capitalization.
--------------
(a) The Members constitute all of the legal and beneficial owners of
interests in S&N, and Section 3.2 of the S&N Disclosure Schedule sets forth a
complete and accurate list of each Member's Percentage Interest (as defined in
the Operating Agreement) in and capital contribution to S&N. There are no
outstanding or authorized options, warrants, rights, agreements or commitments
to which S&N is a party or which are binding upon S&N providing for the
issuance, disposition or acquisition of any of its membership interests. There
are no outstanding or authorized membership interest appreciation, phantom
membership interest or similar rights with respect to S&N. All of the issued
and outstanding interests in S&N were issued in compliance with applicable
federal and state securities laws.
(b) Each Member has good and marketable title to the membership
interest described in Section 3.2 of the S&N Disclosure Schedule as being owned
by him or her, free and clear of any lien, mortgage, pledge, security interest,
encumbrance, charge, contractual restriction or covenant, option or other
adverse claim, in each case whether arising by contract or by operation of law
(an "Encumbrance").
-----------
3.3 Authorization of Transaction. S&N and each Member have all requisite
----------------------------
power and authority to execute and deliver this Agreement and to perform its,
his or her respective obligations hereunder. The execution and delivery of this
Agreement by S&N and the consummation by S&N of the transactions contemplated
hereby have been duly and validly authorized by all necessary limited liability
company action on the part of S&N. This Agreement has been duly and validly
executed and delivered by S&N and each Member and constitutes a valid and
binding obligation of S&N and each Member, enforceable against S&N and each
Member in accordance with its terms.
3.4 Noncontravention.
----------------
(a) Subject to (x) compliance with the applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
--------------
state securities laws and the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "Hart-Scott-Rodino Act"), (y) the filing of the Agreement
---------------------
of Merger as required by the Delaware General Corporation Law, and (z) the
filing of Certificates of Merger in respect of the LLC Merger as required by the
limited liability company statutes of the States of California and Delaware,
neither the execution and delivery of this Agreement by S&N or any of the
Members, nor the consummation by S&N or any of the Members of the transactions
contemplated hereby (including without limitation the LLC Merger), will (i)
conflict with or violate any provision of the Articles or Operating Agreement,
(ii) require on the part of S&N or any of the Members any filing with, or any
permit, authorization, consent or approval of, any court, arbitrational
tribunal, administrative agency or commission or other governmental or
regulatory authority or agency (a "Governmental Entity"),
-------------------
8
<PAGE>
(iii) conflict with, result in a breach of, constitute (with or without due
notice or lapse of time or both) a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify or cancel, or
require any notice, consent or waiver under, any contract, agreement or
instrument to which S&N or any Member is a party or by which it is bound or to
which any of its assets or properties is subject, except to the extent any such
conflict, breach, default, acceleration, termination, modification or
cancellation, or the failure to give or obtain any such notice, consent or
waiver, would not have an S&N Material Adverse Effect, (iv) result in the
imposition of any Encumbrance upon any S&N membership interest or any assets or
properties of S&N or (v) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to S&N, any of the Members or any of their
respective assets or properties.
(b) Each of the Members and S&N has waived all notice, purchase, sale,
first offer or refusal and other rights under the Operating Agreement and the
Member's Agreement dated July 1, 1996 among S&N and the Members that would apply
to the transactions contemplated by this Agreement.
3.5 Subsidiaries. S&N does not own any equity interest in any
------------
corporation, partnership or other entity.
3.6 Financial Statements. S&N has provided to Cornerstone (a) the audited
--------------------
balance sheets and statements of income, and cash flows of S&N for each of the
two fiscal years in the period ended January 31, 1998 and (b) the unaudited
balance sheet and statements of income, and cash flows as of and for the interim
period ended June 30, 1998 (the "Most Recent S&N Balance Sheet Date"). Such
----------------------------------
financial statements (collectively, the "S&N Financial Statements") have been
------------------------
prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods covered
----
thereby, fairly present in all material respects the consolidated financial
condition, results of operations and cash flows of S&N as of the respective
dates thereof and for the periods referred to therein and are consistent with
the books and records of S&N; provided, however, that the S&N Financial
-------- -------
Statements referred to in clause (b) above are subject to normal recurring year-
end adjustments (which will not be material) and do not include footnotes.
3.7 Absence of Certain Changes. Since the Most Recent S&N Balance Sheet
--------------------------
Date, (a) there has occurred no event or development which has had, or could
reasonably be foreseen to have in the future, an S&N Material Adverse Effect,
and (b) S&N has not taken any of the actions set forth in paragraphs (i) through
(xiv) of Section 5.2(a), except for such actions which are specifically
contemplated or permitted hereunder.
3.8 Undisclosed Liabilities. S&N has no liability, except for (a)
-----------------------
liabilities shown on the balance sheet referred to in clause (b) of Section 3.6
(the "Most Recent
-----------
9
<PAGE>
S&N Balance Sheet"), (b) liabilities which have arisen since the Most Recent
- -----------------
S&N Balance Sheet Date in the ordinary course of business consistent with past
custom and practice ("Ordinary Course of Business") and (c) contractual and
---------------------------
other liabilities incurred in the Ordinary Course of Business which are not
required by GAAP to be reflected on a balance sheet.
3.9 Tax Matters.
-----------
(a) S&N has filed on a timely basis all Tax Returns (as defined below)
that it was required to file and all such Tax Returns were correct and complete
in all material respects. S&N has paid, or will pay, on a timely basis all
Taxes (as defined below) due on or before the Closing Date, whether or not shown
to be due on any such Tax Returns. The unpaid Taxes of S&N for tax periods
through the Most Recent S&N Balance Sheet Date do not exceed the accruals and
reserves (excluding reserves for deferred Taxes) for Taxes set forth on the Most
Recent S&N Balance Sheet. All Taxes attributable to the period from and after
the Most Recent S&N Balance Sheet Date and continuing through the Closing Date
are attributable to the conduct by S&N of its operations in the ordinary course
of business. S&N has no actual or potential liability for any Tax obligation of
any taxpayer other than S&N. All Taxes that S&N 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. For purposes of
this Agreement, "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, severance, stamp, occupation, windfall
profits, real property, personal property, sales, use, transfer, withholding,
employment, unemployment insurance, social security, business license, business
organization, environmental, payroll 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. For purposes of this Agreement, "Tax Returns" means
-----------
all reports, returns, declarations, statements, forms or other information
required to be supplied to a taxing authority in connection with Taxes.
(b) S&N has delivered to Cornerstone correct and complete copies of
all U.S. federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by S&N since June 28, 1996, the date
on which S&N was organized. No U.S. federal income Tax Returns of S&N have been
audited by the Internal Revenue Service. No U.S. federal income Tax Returns of
any predecessor to the business or operations of S&N that remain open under
applicable statutes of limitation (whether an individual or entity) have been
audited by the Internal Revenue Service and the U.S. Federal Income Tax Returns
for years ended on or prior to December 31, 1993 are closed by the applicable
statute of limitations, in
10
<PAGE>
respect of such business or operations (the Members acknowledging that Fred E.
and Moira E. Kamgar conducted such business and operations prior to June 28,
1996) . No examination or audit of any Tax Returns of S&N by any Governmental
Entity is currently in progress or, to the knowledge of any Member, threatened
or contemplated. S&N has not waived any statute of limitations with respect to
taxes or agreed to an extension of time with respect to an assessment of or
deficiency in Taxes.
(c) S&N is not a party to any Tax allocation or sharing agreement or
Tax indemnity agreement. S&N has never filed Tax Returns on a combined,
consolidated or unitary basis with any other business entity in any jurisdiction
or has otherwise been liable, by contract or otherwise, for any Taxes of any
other business entity.
(d) S&N is not a party to any tax litigation nor is it the subject of
any tax audit. S&N has no reason to suspect any tax litigation attributable to
periods ended before or including the Closing Date. Classifications,
definitions, valuation and principles used in the accounts of S&N are in
accordance with classifications, definitions, valuations and principles used in
the Tax Returns of S&N. S&N is not and has never been a party to any
transaction or agreement which is in conflict with the tax rules on transfer
pricing in any relevant jurisdiction.
(e) For all periods since inception, S&N has been a limited liability
company taxed as a partnership for federal income tax purposes.
(f) None of the assets of S&N is "tax-exempt use property" within the
meaning of Section 168(h) of the Code. None of the assets of S&N directly or
indirectly secures any debt the interest on which is tax-exempt under Section
103(a) of the Code.
(g) S&N has not participated in or cooperated with an international
boycott within the meaning of Section 999 of the Code nor has S&N had operations
which are or may hereafter become reportable under Section 999 of the Code.
(h) None of the Members are persons other than United States persons
within the meaning of the Code.
3.10 Assets. S&N owns or leases all tangible assets necessary for the
------
conduct of its business as currently conducted and as currently proposed to be
conducted. Such tangible assets are free from material defects, have been
maintained in accordance with normal industry practice, are in good operating
condition and repair (subject to normal wear and tear) and are suitable for the
purposes for which they are used. No asset of S&N (tangible or intangible) is
subject to any Encumbrance, except (i) liens for current taxes not yet due and
payable, and (ii) such imperfections
11
<PAGE>
of title, liens and easements as do not and will not materially detract from or
interfere with the use or disposition of the property subject thereto or
otherwise materially impair business operations involving such properties.
3.11 Owned Real Property. Section 3.11 of the S&N Disclosure Schedule
-------------------
lists all real property that S&N owns. With respect to each parcel of such real
property:
(a) the identified owner has good and clear record and marketable
title to such parcel, insurable by a recognized national title insurance company
at standard rates, free and clear of any Encumbrance, easement, covenant or
other restriction, except for recorded easements, covenants and other
restrictions which do not materially impair the uses, occupancy or value of such
parcel for its current use.
(b) there are no (i) pending or, to the knowledge of any Member,
threatened condemnation proceedings relating to such parcel, (ii) pending or, to
the knowledge of any Member, threatened litigation or administrative actions
relating to such parcel, or (iii) other matters affecting materially and
adversely the use, occupancy or value thereof;
(c) the legal description for such parcel contained in the deed
thereof describes such parcel fully and adequately; the buildings and
improvements may be used as of right under applicable zoning and land use laws
for the current uses, and such buildings and improvements are located within the
boundary lines of the described parcels of land, are not in violation of current
setback requirements, zoning laws and ordinances and do not encroach on any
easement which may burden the land; the land does not serve any adjoining
property for any purpose inconsistent with the use of the land; and such parcel
is not located within any flood plain or subject to any similar type restriction
for which any permits or licenses necessary to the use thereof have not been
obtained;
(d) there are no leases, subleases, licenses or agreements, written or
oral, granting to any party or parties (other than S&N and those tenants under
leases disclosed in Section 3.11 of the S&N Disclosure Schedule) the right of
use or occupancy of any portion of such parcel;
(e) there are no outstanding options or rights of first refusal to
purchase such parcel, or any portion thereof or interest therein;
(f) such parcel abuts on and has direct vehicular access to a public
road or access to a public road via a permanent, irrevocable, appurtenant
easement benefiting such parcel;
12
<PAGE>
(g) S&N has not received notice of, and to the knowledge of any
Member, there is no proposed or pending proceeding to change or redefine the
zoning classification of all or any portion of the parcels; and
(h) each parcel is an independent unit which does not rely on any
facilities (other than the facilities of public utility and water companies)
located on any other property (i) to fulfill any zoning, building code, or other
municipal or governmental requirement, (ii) for structural support or the
furnishing of any essential building systems or utilities, including, but not
limited to electric, plumbing, mechanical, heating, ventilating, and air
conditioning systems, or (iii) to fulfill the requirements of any lease. No
building or other improvement not included in the parcels relies on any part of
the parcels to fulfill any zoning, building code, or other municipal or
governmental requirement or for structural support or the furnishing of any
essential building systems or utilities. Each of the parcels is assessed by
local property assessors as a tax parcel or parcels separate from all other tax
parcels.
3.12 Real Property Leases. Section 3.12 of the S&N Disclosure Schedule
--------------------
lists, as of the date hereof, all real property leased or subleased to or by S&N
and lists the term of such lease, any extension and expansion options, and the
rent payable thereunder. S&N has delivered to Cornerstone correct and complete
copies of the leases and subleases (as amended to date) listed in Section 3.12
of the S&N Disclosure Schedule. With respect to each lease and sublease
required to be listed in Section 3.12 of the S&N Disclosure Schedule ("S&N
---
Leases"):
- ------
(a) the lease or sublease is legal, valid, binding, enforceable and in
full force and effect;
(b) the lease or sublease will continue to be legal, valid, binding,
enforceable and in full force and effect immediately following the Closing in
accordance with the terms thereof as in effect immediately prior to the Closing;
(c) neither S&N nor, to the knowledge of any Member, any other party
to the lease or sublease is in material breach or default, and no event has
occurred which, with notice or lapse of time, would constitute a material breach
or default by S&N or, to the knowledge of any Member, any other party thereto;
and
(d) S&N has not assigned, transferred, conveyed, mortgaged, deeded in
trust or encumbered any interest in the leasehold or subleasehold.
3.13 Inventory. All inventory of S&N, whether or not reflected on the Most
---------
Recent S&N Balance Sheet, consists of a quality and quantity usable and saleable
in the Ordinary Course of Business, except for obsolete items and items of
below-standard quality, all of which have been written-off or written-down to
net realizable value on the Most Recent S&N Balance Sheet. All inventories not
written-off have
13
<PAGE>
been priced at the lower of cost or market on a first-in, first-out basis. The
quantities of inventory are not excessive in the present circumstances of S&N.
Since the Most Recent S&N Balance Sheet Date, there has been no material change
in the accounting policies or accounting procedures applicable to the inventory
of S&N.
3.14 Intellectual Property.
---------------------
(a) S&N owns or has the right to use all material items of
Intellectual Property (as defined below) used in the operation of its respective
business or necessary for the operation of its businesses as currently conducted
or as currently proposed to be conducted. Each material item of Intellectual
Property owned by or used in the operation of the business of S&N will be owned
or available for use by S&N on identical terms and conditions immediately
following the Closing. S&N has taken all reasonable measures to protect the
proprietary nature of each material item of Intellectual Property, and to
maintain in confidence all material trade secrets and confidential information,
that it owns or uses. To the knowledge of any Member, no other person or entity
has any rights to any of the Intellectual Property owned by S&N and no other
person or entity is infringing, violating or misappropriating any material item
of Intellectual Property that S&N owns or uses. For purposes of this Agreement,
"Intellectual Property" means all (i) patents, patent applications, patent
---------------------
disclosures, (ii) all related continuation, continuation-in-part, divisional,
reissue, reexamination, utility, model, certificate of invention and design
patents (and the patent applications, registrations and applications for
registrations related thereto), (iii) trademarks, service marks, trade dress,
logos, trade names and corporate names and registrations and applications for
registration thereof, (iv) copyrights and registrations and applications for
registration thereof, (v) computer software, data and documentation, (vi) trade
secrets and confidential business information, whether patentable or
unpatentable and whether or not reduced to practice, know-how, manufacturing and
production processes and techniques, research and development information,
copyrightable works, financial, marketing and business data, pricing and cost
information, business and marketing plans and customer and supplier lists and
information, (vii) other proprietary rights relating to any of the foregoing and
(viii) copies and tangible embodiments thereof; provided however, that the
Members are making no representations hereunder as to any "off-the-shelf"
software programs.
(b) None of the activities or business currently conducted by S&N, or
conducted by S&N at any time within the six years prior to the date of this
Agreement infringes or violates, or constitutes a misappropriation of, any
Intellectual Property rights of any other person or entity. S&N has not
received any complaint, claim or notice alleging any such infringement,
violation or misappropriation which would have a S&N Material Adverse Effect.
(c) Section 3.14 of the S&N Disclosure Schedule lists each issued
patent, registered trademark or service mark which has been issued to S&N with
14
<PAGE>
respect to any of its Intellectual Property, identifies each pending patent
application or application for trademark or service mark registration which S&N
has made with respect to any of its Intellectual Property, and identifies each
license or other agreement pursuant to which S&N has granted any rights to, or
has received any rights from, any third party with respect to any of its
Intellectual Property.
3.15 Contracts. Section 3.15 of the S&N Disclosure Schedule lists, as of
---------
the date of this Agreement, the following agreements to which S&N is a party
("S&N Material Contracts"):
- ------------------------
(a) any agreement (or group of related agreements) for the lease of
personal property from or to third parties providing for payments in excess of
$100,000 per annum;
(b) any agreement (or group of related agreements) for the purchase or
sale of commodities, supplies, products or other personal property or for the
furnishing or receipt of services (i) which calls for performance over a period
of more than one year, (ii) which involves more than the sum of $150,000, or
(iii) in which S&N agreed to purchase a minimum quantity of goods or services or
has agreed to purchase goods or services exclusively from a certain party;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed (or may create, incur, assume, or
guarantee) indebtedness (including capitalized lease obligations) involving more
than $150,000 or under which it has imposed (or may impose) an Encumbrance on
any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality, non-solicitation or
noncompetition, except for any agreement concerning confidentiality which was
entered into in connection with the proposed sale of S&N;
(e) any agreement involving any of the Members or their affiliates
("Affiliates"), as defined in Rule 12b-2 under the Securities Exchange Act of
- ------------
1934, as amended (the "Exchange Act");
------------
(f) any agreement the termination of which would have an S&N Material
Adverse Effect;
(g) any agreement which requires S&N to indemnify any other party
thereto; and
(h) any other agreement (or group of related agreements) either
involving more than $150,000 or not entered into in the Ordinary Course of
Business.
15
<PAGE>
S&N has delivered to Cornerstone a correct and complete copy of each S&N
Material Contract. With respect to each S&N Material Contract listed: (i) the
S&N Material Contract is legal, valid, binding and enforceable and in full force
and effect; (ii) the S&N Material Contract will continue to be legal, valid,
binding and enforceable and in full force and effect immediately following the
Closing in accordance with the terms thereof as in effect prior to the Closing;
and (iii) neither S&N nor, to the knowledge of any Member, any other party, is
in material breach or violation of, or material default under, any such S&N
Material Contract, and no event or action has occurred, is pending or, to the
knowledge of any Member, is threatened, which, after the giving of notice, with
lapse of time, or otherwise, would constitute a material breach or default by
S&N or, to the knowledge of any Member, any other party under such S&N Material
Contract. S&N is not a party to any oral contract, agreement or other
arrangement which, if reduced to written form, would be required to be listed in
Section 3.15 of the S&N Disclosure Schedule under the terms of this Section
3.15.
3.16 Accounts Receivable. All accounts receivable of S&N are valid
-------------------
receivables subject to no setoffs or counterclaims.
3.17 Powers of Attorney. There are no outstanding powers of attorney
------------------
executed on behalf of S&N.
3.18 Insurance. Section 3.18 of the S&N Disclosure Schedule sets forth
---------
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 S&N
is a party or otherwise a named insured or the beneficiary. With respect to
each such insurance policy: (i) such policy is enforceable and in full force and
effect; (ii) such policy will continue to be enforceable and in full force and
effect immediately following the Closing in accordance with the terms thereof as
in effect prior to the Closing; (iii) S&N is not in material breach or default
(including with respect to the payment of premiums or the giving of notices)
under such policy, and no event has occurred which, with notice or the lapse of
time, would constitute such a material breach or default or permit termination,
modification or acceleration, under such policy; and (iv) S&N has not received
any notice from the insurer disclaiming coverage or reserving rights with
respect to a particular claim or such policy in general.
3.19 Litigation. There is no action, suit, proceeding or claim before any
----------
Governmental Entity or arbitrator pending, or, to the knowledge of any Member,
threatened against S&N or any of its officers or directors (in their capacities
as such) that, individually or in the aggregate, could have an S&N Material
Adverse Effect. There is no judgment, injunction, decree or order against S&N
that could have an S&N Material Adverse Effect.
16
<PAGE>
3.20 Employees.
---------
(a) Section 3.20 of the S&N Disclosure Schedule contains a list of all
employees of S&N whose annual rate of compensation exceeds $40,000 per year,
along with the position and the annual rate of compensation of each such person.
To the knowledge of any Member, no such employee has any plans to terminate
employment with S&N.
(b) S&N is not a party to or bound by any collective bargaining
agreement, nor has any of them experienced any strikes, grievances, claims of
unfair labor practices or other collective bargaining disputes. No Member has
any knowledge of any organizational effort made or threatened, either currently
or within the past two years, by or on behalf of any labor union with respect to
employees of S&N.
3.21 Employee Benefits.
-----------------
(a) Section 3.21(a) of the S&N Disclosure Schedule contains a complete
and accurate list of all Employee Benefit Plans (as defined below) maintained,
or contributed to, by S&N or any ERISA Affiliate (as defined below) ("S&N
---
Employee Benefit Plans"). For purposes of this Agreement, "Employee Benefit
- ---------------------- ----------------
Plan" means any "employee pension benefit plan" (as defined in Section 3(2) of
- ----
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), any
-----
"employee welfare benefit plan" (as defined in Section 3(1) of ERISA), and any
other written or oral plan, agreement or arrangement involving direct or
indirect compensation, including without limitation insurance coverage,
severance benefits, disability benefits, deferred compensation, bonuses, stock
options, stock purchase, phantom stock, stock appreciation or other forms of
incentive compensation or post-retirement compensation. For purposes of this
Agreement, "ERISA Affiliate" means any entity which is or at any applicable time
---------------
was a member of (i) a controlled group of corporations (as defined in Section
414(b) of the Code), (ii) a group of trades or businesses under common control
(as defined in Section 414(c) of the Code), or (iii) an affiliated service group
(as defined under Section 414(m) of the Code or the regulations under Section
414(o) of the Code), any of which includes S&N. Complete and accurate copies of
(i) all S&N Employee Benefit Plans which have been reduced to writing, (ii)
written summaries of all unwritten S&N Employee Benefit Plans, (iii) all related
trust agreements, insurance contracts and summary plan descriptions, and (iv)
all annual reports filed on IRS Form 5500, 5500C or 5500R for the last five plan
years for each S&N Employee Benefit Plan, have been delivered to Cornerstone.
Each S&N Employee Benefit Plan has been administered in accordance with its
terms, except where the failure to so administer would not have a S&N Material
Adverse Effect. S&N and its ERISA Affiliates have satisfied their respective
obligations with respect to the S&N Employee Benefit Plans and have made all
required contributions thereto, except where the failure to satisfy such
obligations or to make such
17
<PAGE>
contributions would not have a S&N Material Adverse Effect. S&N and all S&N
Employee Benefit Plans are in compliance in all respects with the currently
applicable provisions of ERISA and the Code and the regulations thereunder,
except where the failure to so comply would not have a S&N Material Adverse
Effect.
(b) There are no investigations by any Governmental Entity,
termination proceedings or other claims (except claims for benefits payable in
the normal operation of the S&N Employee Benefit Plans and proceedings with
respect to qualified domestic relations orders), suits or proceedings pending
or, to the Members' knowledge threatened, against or involving any S&N Employee
Benefit Plan or asserting any rights or claims to benefits under any S&N
Employee Benefit Plan that could give rise to any material liability.
(c) All the S&N Employee Benefit Plans that are intended to be
qualified under Section 401(a) of the Code are either standardized prototype
plans or have received determination letters from the Internal Revenue Service
to the effect that such S&N Employee Benefit Plans are qualified and the plans
and the trusts related thereto are exempt from federal income taxes under
Sections 401(a) and 501(a), respectively, of the Code, no such determination
letter has been revoked and revocation has not been threatened, and no such S&N
Employee Benefit Plan has been amended or operated since the date of its most
recent determination letter or application therefor in any respect, and no act
or omission has occurred, that would adversely affect its qualification or
materially increase its cost.
(d) Neither S&N nor any ERISA Affiliate has ever maintained an
Employee Benefit Plan subject to Section 412 of the Code or Title IV of ERISA.
(e) At no time has S&N or any ERISA Affiliate been obligated to
contribute to any "multiemployer plan" (as defined in Section 4001(a)(3) of
ERISA).
(f) There are no unfunded obligations under any S&N Employee Benefit
Plan providing benefits after termination of employment to any employee of S&N
(or to any beneficiary of any such employee), including but not limited to
retiree health coverage and deferred compensation, but excluding continuation of
health coverage required to be continued under Section 4980B of the Code or
other applicable law and insurance conversion privileges under state law.
(g) No act or omission has occurred and no condition exists with
respect to any S&N Employee Benefit Plan that would subject S&N or any ERISA
Affiliate to (i) any fine, penalty, tax or liability of any kind imposed under
ERISA or the Code or (ii) any contractual indemnification or contribution
obligation protecting any fiduciary, insurer or service provider with respect to
any S&N Employee Benefit Plan which (with respect to either clause (i) or clause
(ii)) would have an S&N Material Adverse Effect.
18
<PAGE>
(h) No S&N Employee Benefit Plan is funded by, associated with, or
related to a "voluntary employee's beneficiary association" within the meaning
of Section 501(c)(9) of the Code.
(i) Each S&N Employee Benefit Plan is amendable and terminable
unilaterally by S&N at any time without liability to S&N as a result thereof and
no S&N Employee Benefit Plan, plan documentation or agreement, summary plan
description or other written communication distributed generally to employees by
its terms prohibits S&N from amending or terminating any such S&N Employee
Benefit Plan.
(j) Section 3.21(j) of the S&N Disclosure Schedule discloses each: (i)
agreement with any equityholder, manager or other key employee of S&N (A) the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving S&N of the nature of any of the
transactions contemplated by this Agreement, (B) providing any term of
employment or compensation guarantee or (C) providing severance benefits or
other benefits after the termination of employment of such manager or key
employee; (ii) agreement, plan or arrangement under which any person may receive
payments from S&N that may be subject to the tax imposed by Section 4999 of the
Code or included in the determination of such person's "parachute payment" under
Section 280G of the Code; and (iii) agreement or plan binding S&N, including
without limitation any membership interest option plan, membership interest
appreciation right plan, restricted membership interest plan, membership
interest purchase plan, severance benefit plan, or any S&N Employee Benefit
Plan, any of the benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement.
(k) Section 3.21(k) of the S&N Disclosure Schedule sets forth the
policies of S&N with respect to accrued vacation, accrued sick time and earned
time-off.
3.22 Environmental Matters.
---------------------
(a) S&N has complied in all material respects with all applicable
Environmental Laws (as defined below). There is no pending or, to the knowledge
of any Member, 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 S&N, the outcome of which would have a S&N Material Adverse
Effect. 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
19
<PAGE>
and safety, including without limitation any statute, regulation or order
pertaining to (i) treatment, storage, disposal, generation and transportation of
industrial, toxic or hazardous materials or 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 materials or 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 life and wetlands, including without limitation all
endangered and threatened species; (vi) storage tanks, vessels, abandoned or
discarded barrels, and other closed receptacles; (vii) health and safety of
employees and other persons; and (viii) manufacture, processing, use,
distribution, treatment, storage, disposal, transportation or handling of
pollutants, contaminants, toxic or hazardous materials or substances or oil or
petroleum products or solid or hazardous waste. As used above, the terms
"release" and "environment" shall have the meaning set forth in the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA").
--------
(b) There have been no releases of any Materials of Environmental
Concern (as defined below) into the environment at any parcel of real property
or any facility formerly or currently owned, operated or controlled by S&N that
would have a S&N Material Adverse Effect. With respect to any such releases of
Materials of Environmental Concern, S&N has given all required notices to
Governmental Entities (copies of which have been provided to Cornerstone). No
Member is aware of any releases of Materials of Environmental Concern at parcels
of real property or facilities other than those owned, operated or controlled by
S&N that would have a S&N Material Adverse Effect. For purposes of this
Agreement, "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
Resource Conservation and Recovery Act), toxic materials, oil or petroleum and
petroleum products, or any other material subject to regulation under any
Environmental Law.
(c) Set forth in Section 3.22(c) of the S&N Disclosure Schedule is a
list of all environmental reports, investigations and audits relating to
premises currently or previously owned or operated by S&N (whether conducted by
or on behalf of S&N or a third party, and whether done at the initiative of S&N
or directed by a Governmental Entity or other third party) which S&N has
possession of or access to. Complete and accurate copies of each such report,
or the results of each such investigation or audit, have been provided to
Cornerstone.
3.23 Legal Compliance. S&N, and the conduct and operations of its
----------------
business, have been and are currently in compliance with each law (including
rules and regulations thereunder) of any federal, state, local or foreign
government, or any Governmental Entity, which is applicable to S&N or its
business, except for any
20
<PAGE>
violation of or default under a law above which would not have an S&N Material
Adverse Effect.
3.24 Permits. Section 3.24 of the S&N Disclosure Schedule sets forth a
-------
list of all permits, licenses, registrations, certificates, orders or approvals
from any Governmental Entity (including without limitation those issued or
required under Environmental Laws and those relating to the occupancy or use of
owned or leased real property) ("Permits") issued to or held by S&N. Such
-------
listed Permits are the only Permits that are required for S&N to conduct its
business, except for those the absence of which would not have an S&N Material
Adverse Effect. Each such Permit is in full force and effect and, to the
knowledge of any Member, 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. Each such Permit will continue in full force and
effect immediately following the Closing.
3.25 Certain Business Relationships With Affiliates. No Member or
----------------------------------------------
Affiliate of S&N (i) owns any property or right, tangible or intangible, which
is used in the business of S&N, (ii) has any claim or cause of action against
S&N, or (iii) owes any money to, or is owed money by, S&N (except for normal
salary and benefits) (the agreements, arrangements and relationships described
in this sentence are hereinafter referred to as "Related Party Transactions").
--------------------------
Section 3.25 of the S&N Disclosure Schedule describes any such Related Party
Transactions which are reflected in the S&N Financial Statements.
3.26 Brokers' Fees. S&N has no liability or obligation to pay any fees or
-------------
commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement, other than the fees and expenses of Barrington
Associates described in Section 3.26 of the S&N Disclosure Schedule.
3.27 Books and Records; Bank Accounts.
--------------------------------
(a) The minute books and other similar records of S&N contain true and
complete records of all actions taken at any meetings of S&N's Members, Managers
or any committee thereof and of all written consents executed in lieu of the
holding of any such meeting. The books and records of S&N accurately reflect in
all material respects the assets, liabilities, business, financial condition and
results of operations of S&N and have been maintained in accordance with good
business and bookkeeping practices. Fred E. Kamgar currently serves as, and has
at all times since the formation of S&N served as, the sole manager of S&N.
(b) Section 3.27 of the S&N Disclosure Schedule lists all bank
accounts and safe deposits of S&N, and all authorized signatories thereto.
21
<PAGE>
3.28 Product Warranty. No product manufactured or sold by S&N is subject
-----------------
to any guaranty, warranty, right of return or other indemnity other than S&N's
standard terms and conditions of sale, which are set forth in Section 3.28 of
the S&N Disclosure Schedule.
3.29 New Delaware LLC. The Delaware limited liability company into which
----------------
S&N will be merged in the LLC Merger will be formed solely for the purpose of
engaging in the LLC Merger, will have engaged in no other business activities,
and will conduct its operations only as contemplated by this Agreement, and on
the Closing Date such limited liability company shall be duly organized, validly
existing and in good standing under the laws of the State of Delaware, and duly
qualified to transact business and in good standing in California and in each
jurisdiction in which S&N is currently qualified to transact business.
3.30 Tax Consequences of the LLC Merger. No gain or loss for U.S. federal
----------------------------------
income tax purposes will be recognized by S&N as a result of the LLC Merger.
3.31 Investment Representations.
--------------------------
(a) Each Member is acquiring the NewCo/S&N Shares for his or her own
account for investment only, and not with a view to, or for sale in connection
with, any distribution of the NewCo/S&N Shares in violation of the Securities
Act or any rule or regulation under the Securities Act.
(b) Each Member has had adequate opportunity to obtain from
representatives of Cornerstone such information about Cornerstone as is
necessary to evaluate the merits and risks of the transactions contemplated by
this Agreement; provided, however, that this representation shall not affect
Cornerstone's and NewCo's representations, warranties and covenants contained in
this Agreement or otherwise.
(c) Each Member has sufficient expertise in business, financial and
investment matters to be able to evaluate the risks involved in the acquisition
of the NewCo/S&N Shares and to make an informed investment decision with respect
to such acquisition.
(d) Each Member understands that the NewCo/S&N Shares have not been
registered under the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act; and that the NewCo/S&N Shares
cannot be sold, transferred or otherwise disposed of unless they are
subsequently registered under the Securities Act or an exemption from
registration is then available.
22
<PAGE>
(e) Each Member understands that a legend substantially in the
following form will be placed on each certificate representing the NewCo/S&N
Shares:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold,
transferred or otherwise disposed of in the absence of an effective
registration statement under such Act or an opinion of counsel satisfactory
to the corporation to the effect that such registration is not required.
In addition, the shares represented by this certificate were issued in a
transaction to which Rule 145 of the Securities Act of 1933, as amended,
applies and may only be transferred in accordance with the provisions of
such rule"
3.32 Disclosure. No representation or warranty by any Member contained in
----------
this Agreement, and no statement contained in the S&N Disclosure Schedule or any
other document, certificate or other instrument delivered to or to be delivered
by or on behalf of S&N or any Member pursuant to and specifically referenced in
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.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CORNERSTONE
Cornerstone and NewCo, jointly and severally, represent and warrant to the
Members that the statements contained in this Article IV are true and correct,
except as set forth in the Cornerstone Disclosure Schedule delivered by
Cornerstone to the Members upon the execution of this Agreement (the
"Cornerstone Disclosure Schedule"). The Cornerstone Disclosure Schedule shall
- --------------------------------
be arranged in paragraphs corresponding to the numbered and lettered paragraphs
contained in this Article IV, and the disclosures in any paragraph of the
Cornerstone Disclosure Schedule shall qualify other paragraphs in this Article
IV only to the extent it is clear from a reading of the disclosure that such
disclosure is applicable to such other paragraphs.
4.1 Organization.
------------
(a) Cornerstone is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Cornerstone is duly
qualified to conduct business and is in good standing under the laws of each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties requires such qualification, except where the failure to be so
qualified or in
23
<PAGE>
good standing would not have a material adverse effect on the assets, business,
financial condition, results of operations or future prospects of Cornerstone
and the Cornerstone Subsidiaries (as defined below), taken as a whole, or on the
ability of the Parties to consummate the transactions contemplated by this
Agreement (a "Cornerstone Material Adverse Effect"). Cornerstone has all
-----------------------------------
requisite corporate power and authority to carry on the businesses in which it
is engaged and to own and use the properties owned and used by it. Cornerstone
has furnished to the Members true and complete copies of the respective
Certificate of Incorporation and By-laws of each of Cornerstone and NewCo, each
as amended and as in effect on the date hereof. Cornerstone is not in default
under or in violation of any provision of its Certificate of Incorporation or
By-laws.
(b) NewCo is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
(c) The Transitory Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
4.2 Capitalization.
--------------
(a) As of the date of this Agreement, the authorized capital stock of
Cornerstone consists of (a) 40,000,000 shares of Common Stock, par value $.001
per share, of which 24,107,127 shares are issued and outstanding as of the date
of this Agreement, and (b) 67,750 shares of Preferred Stock, $.01 par value per
share, of which (i) 35,000 shares have been designated as Series A-1 Convertible
Preferred Stock, none of which shares are issued and outstanding as of the date
of this Agreement, (ii) 20,000 shares have been designated as Series A-2
Convertible Preferred Stock, none of which shares are issued and outstanding as
of the date of this Agreement, (iii) 1,500 shares have been designated as Series
A-3 Convertible Preferred Stock, none of which shares are issued and outstanding
as of the date of this Agreement, (iv) 9,000 shares have been designated as
Series B Convertible Preferred Stock, none of which shares are issued and
outstanding as of the date of this Agreement, and 750 of which are reserved for
issuance upon conversion of Series C Preferred Stock, and (v) 2,250 shares of
Series C Convertible Preferred Stock, of which 750 shares are issued and
outstanding as of the date of this Agreement. The outstanding shares of Series
C Convertible Preferred Stock are convertible, after September 7, 1998, into an
aggregate of 750 shares of Series B Convertible Preferred Stock, which are
convertible into an aggregate of 164,833 shares of Common Stock. As of the date
of this Agreement, (u) an aggregate of 1,222,192 shares of Common Stock are
reserved for issuance upon the exercise of options under Cornerstone's 1995
Stock Option Plan (the "Plan") outstanding as of the date of this Agreement, (v)
an aggregate of 241,342 shares of Common Stock are reserved for issuance upon
exercise of options which have not yet been granted under the Plan, (w) an
aggregate of 280,000 shares of Common Stock are reserved for issuance upon the
exercise of other
24
<PAGE>
options outstanding as of the date of this Agreement, (x) an aggregate of
315,000 shares are reserved for issuance upon exercise of warrants outstanding
as of the date of this Agreement, and (y) an aggregate of 4,000,000 shares are
reserved for issuance upon exercise of options which have not yet been granted
under Cornerstone's 1998 Stock Incentive Plan, 1998 Director Stock Option Plan
and 1998 Employee Stock Purchase Plan. All of the issued and outstanding shares
of capital stock of Cornerstone are duly authorized, validly issued, fully paid,
nonassessable and free of all preemptive rights.
Section 4.2(a)(I) of the Cornerstone Disclosure Schedule sets forth a
correct and complete list of the following information as of the date of this
Agreement: (I) each Cornerstone stockholder, indicating in each case the number
and class of shares owned by such stockholder, and the number of shares owned by
such stockholder on an as converted basis, (II) each Cornerstone option holder,
warrant holder or holder of other equity interests in Cornerstone, indicating in
each case the number and class of shares of Cornerstone stock issuable to such
holder, and the number of shares issuable to such holder on an as converted
basis, if appropriate, and (III) the number and percentage of the total shares
of Cornerstone Common Stock owned by each of the foregoing persons assuming
exercise of all outstanding options and warrants, and on an as converted basis.
Section 4.2(a)(II) of the Cornerstone Disclosure Schedule sets forth for
each Cornerstone Subsidiary (as defined in Section 4.5 below) a correct and
complete list of the following information as of the date of this Agreement:
(I) each stockholder (or, in the case of any Cornerstone Subsidiary which is not
a corporation, each equity owner) of such Cornerstone Subsidiary, indicating in
each case the number and class of shares (or other interests, as applicable)
owned by such holder, and the number of shares (or other interests, as
applicable) owned by such stockholder on an as converted basis, (II) each
Cornerstone Subsidiary option holder, warrant holder or holder of other equity
interests in such Cornerstone Subsidiary, indicating in each case the number and
class of shares of such Cornerstone Subsidiary's stock issuable to such holder,
and the number of shares issuable to such holder, on an as converted basis, if
appropriate, and (III) the percentage of the total shares of such Cornerstone
Subsidiary's Common Stock (or other equity interests) owned by each of the
foregoing persons assuming exercise of all options and warrants, and on an as
converted basis. Taking into account and as of immediately following the
consummation of the Closing Transactions, the information included in Section
4.2(a)(II) of the Cornerstone Disclosure Schedule shall be complete and accurate
in all material respects.
(b) As of the date of this Agreement, the authorized capital stock of
NewCo consists of (a) 40,000,000 shares of Common Stock, par value $.001 per
share, of which 1,000 shares are issued and outstanding as of the date of this
Agreement and owned by Cornerstone, and (b) 67,750 shares of Preferred Stock,
$.01 par value
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<PAGE>
per share, of which (i) 35,000 shares have been designated as Series A-1
Convertible Preferred Stock, none of which are issued or outstanding as of the
date of this Agreement, (ii) 20,000 shares have been designated as Series A-2
Convertible Preferred Stock, none of which are issued or outstanding as of the
date of this Agreement, (iii) 1,500 shares have been designated as Series A-3
Convertible Preferred Stock, none of which are issued or outstanding as of the
date of this Agreement, (iv) 9,000 shares have been designated as Series B
Convertible Preferred Stock, none of which are issued or outstanding as of the
date of this Agreement, and (v) 2,250 shares of Series C Convertible Preferred
Stock, none of which are issued or outstanding as of the date of this Agreement.
All of the issued and outstanding shares of capital stock of NewCo are duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. All of the NewCo/S&N Shares will be, when issued in accordance with this
Agreement, duly authorized, validly issued, fully paid, nonassessable and free
of all preemptive rights.
Taking into account and as of immediately following the consummation of the
Closing Transactions, including without limitation, the issuance of the
NewCo/S&N Shares: the authorized capital stock of NewCo will consist of
40,000,000 shares of Common Stock, par value $.001 per share, of which
28,273,238 shares will be issued and outstanding as of such date, and (b) 67,750
shares of Preferred Stock, $.01 par value per share, of which (i) 35,000 shares
will have been designated as Series A-1 Convertible Preferred Stock, none of
which shares will be issued and outstanding as of such date, (ii) 20,000 shares
will have been designated as Series A-2 Convertible Preferred Stock, none of
which shares will be issued and outstanding as of such date, (iii) 1,500 shares
will have been designated as Series A-3 Convertible Preferred Stock, none of
which shares will be issued and outstanding as of such date, (iv) 9,000 shares
will have been designated as Series B Convertible Preferred Stock, none of which
shares will be issued and outstanding and 750 of which shall be reserved for
issuance upon conversion of Series C Convertible Preferred Stock as of such
date, and (v) 2,250 shares of Series C Convertible Preferred Stock, of which 750
shares will be issued and outstanding as of such date; the outstanding shares of
Series C Convertible Preferred Stock will be convertible, after September 7,
1998, into an aggregate of 750 shares of Series B Convertible Preferred Stock,
which shares will be convertible into an aggregate of 164,833 shares of Common
Stock; and (u) an aggregate of 1,259,315 shares of Common Stock will be reserved
for issuance upon the exercise of options under Cornerstone's 1995 Stock Option
Plan (the "Plan") outstanding as of such date, (v) an aggregate of 204,219
shares of Common Stock will be reserved for issuance upon exercise of options
which have not yet been granted under the Plan, (w) an aggregate of 280,000
shares of Common Stock will be reserved for issuance upon the exercise of other
options outstanding as of such date, (x) an aggregate of 315,000 shares will be
reserved for issuance upon exercise of warrants outstanding as of such date, and
(y) an aggregate of 4,000,000 shares will be reserved for issuance upon exercise
of options which have not yet been granted under Cornerstone's 1998 Stock
Incentive Plan, 1998 Director Stock Option Plan and 1998
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<PAGE>
Employee Stock Purchase Plan; except to the extent that the number of shares of
Common Stock which are issued and outstanding (or reserved for issuance) may
change based on exercises of outstanding warrants and options between the date
of this Agreement and the Closing Date. Taking into account and as of
immediately following the consummation of the Closing Transactions, all of the
issued and outstanding shares of capital stock of NewCo will be duly authorized,
validly issued, fully paid, nonassessable and free of all preemptive rights.
Section 4.2(b) of the Cornerstone Disclosure Schedule sets forth a correct
and complete list of the following information, taking into account and as of
immediately following the consummation of the Closing Transactions, including
the issuance of the NewCo/S&N Shares: (I) each NewCo stockholder, indicating in
each case the number and class of shares owned by such stockholder and the
number of shares owned by such stockholder on an as converted basis, (II) each
NewCo option holder, warrant holder or holder of other equity interests in
NewCo, indicating in each case the number and class of shares of NewCo stock
issuable to such holder and the number of shares issuable to such holder on an
as converted basis, if appropriate, and (III) the number and percentage of the
total shares of NewCo Common Stock owned by each of the foregoing persons
assuming exercise of all outstanding options and warrants, and on an as
converted basis; except to the extent that the number of shares of Common Stock
which are issued and outstanding (or reserved for issuance) may change based on
exercises of outstanding warrants and options between the date of this Agreement
and the Closing Date, Cornerstone acknowledging that the information contained
in clause (III) of this sentence shall not change between the date of this
Agreement and the Closing Date.
(c) The authorized capital stock of the Transitory Subsidiary
consists of 1,000 shares of Common Stock, par value $.001 per share, all of
which shares are issued and outstanding as of the date of this Agreement and
owned by NewCo.
4.3 Authorization of Transaction.
----------------------------
(a) Cornerstone has all requisite corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder.
The execution and delivery of this Agreement by Cornerstone and the consummation
by Cornerstone of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part of Cornerstone.
This Agreement has been duly and validly executed and delivered by Cornerstone
and constitutes a valid and binding obligation of Cornerstone, enforceable
against it in accordance with its terms.
(b) NewCo has all requisite corporate power and authority to execute
and deliver this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement by NewCo and the consummation by NewCo
of the
27
<PAGE>
transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action on the part of NewCo. This Agreement has been
duly and validly executed and delivered by NewCo and constitutes a valid and
binding obligation of NewCo, enforceable against it in accordance with its
terms.
(c) The Transitory Subsidiary has all requisite corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement by the Transitory
Subsidiary and the consummation by the Transitory Subsidiary of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of the Transitory Subsidiary. This Agreement has
been duly and validly executed and delivered by the Transitory Subsidiary and
constitutes a valid and binding obligation of the Transitory Subsidiary,
enforceable against it in accordance with its terms.
4.4 Noncontravention. Subject to (i) compliance with the applicable
----------------
requirements of the Securities Act and any applicable state securities laws and
the Hart-Scott-Rodino Act and (ii) the filing of the Agreement of Merger as
required by the Delaware General Corporation Law:
(a) neither the execution and delivery of this Agreement by
Cornerstone, nor the consummation by Cornerstone of the transactions
contemplated hereby, will (i) conflict with or violate any provision of the
Certificate of Incorporation or By-laws of Cornerstone, (ii) require on the part
of Cornerstone any filing with, or any permit, authorization, consent or
approval of, any Governmental Entity, (iii) conflict with, result in breach of,
constitute (with or without due notice or lapse of time or both) a default
under, result in the acceleration of, create in any party any right to
accelerate, terminate, modify or cancel, or require any notice, consent or
waiver under, any contract, agreement or instrument to which Cornerstone or any
Cornerstone Subsidiary is a party or by which it is bound or to which any of its
respective assets or properties is subject, except to the extent any such
conflict, breach, default, acceleration, termination, modification or
cancellation, or the failure to give or obtain any such notice, consent or
waiver, would not have a Cornerstone Material Adverse Effect, (iv) result in the
imposition of any Encumbrance upon any assets or properties of Cornerstone or
any Cornerstone Subsidiary or (v) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Cornerstone or any Cornerstone
Subsidiary or any of their respective assets or properties;
(b) neither the execution and delivery of this Agreement by NewCo, nor
the consummation by NewCo of the transactions contemplated hereby, will (i)
conflict with or violate any provision of the Certificate of Incorporation or
By-laws of NewCo, (ii) require on the part of NewCo any filing with, or any
permit, authorization, consent or approval of, any Governmental Entity, (iii)
conflict with,
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<PAGE>
result in breach of, constitute (with or without due notice or lapse of time or
both) a default under, result in the acceleration of, create in any party any
right to accelerate, terminate, modify or cancel, or require any notice, consent
or waiver under, any contract, agreement or instrument to which NewCo is a party
or by which it is bound or to which any of its assets or properties is subject,
(iv) result in the imposition of any Encumbrance upon any assets or properties
of NewCo or (v) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to NewCo or any of its assets or properties; and
(c) neither the execution and delivery of this Agreement by the
Transitory Subsidiary, nor the consummation by the Transitory Subsidiary of the
transactions contemplated hereby, will (i) conflict with or violate any
provision of the Certificate of Incorporation or By-laws of the Transitory
Subsidiary, (ii) require on the part of the Transitory Subsidiary any filing
with, or any permit, authorization, consent or approval of, any Governmental
Entity, (iii) conflict with, result in breach of, constitute (with or without
due notice or lapse of time or both) a default under, result in the acceleration
of, create in any party any right to accelerate, terminate, modify or cancel, or
require any notice, consent or waiver under, any contract, agreement or
instrument to which the Transitory Subsidiary is a party or by which it is bound
or to which any of its assets or properties is subject, (iv) result in the
imposition of any Encumbrance upon any assets or properties of the Transitory
Subsidiary or (v) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Transitory Subsidiary or any of its assets or
properties.
4.5 Cornerstone Subsidiaries.
------------------------
(a) Section 4.5 of the Cornerstone Disclosure Schedule sets forth: (i)
the name of each corporation, partnership, joint venture or other entity in
which Cornerstone has, directly or indirectly, an equity interest representing
50% or more of the capital stock thereof or other equity interests therein
(individually, a "Cornerstone Subsidiary" and, collectively, the "Cornerstone
----------- ---------- -----------
Subsidiaries"); and (ii) the jurisdiction of organization of each Cornerstone
- ------------
Subsidiary.
(b) Each Cornerstone Subsidiary is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization. Each Cornerstone Subsidiary is duly qualified to conduct business
and is in 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 in good standing
would not have a Cornerstone Material Adverse Effect. Each Cornerstone
Subsidiary has all requisite corporate, partnership or other applicable power
and authority to carry on the businesses in which it is engaged and to own and
use the properties owned and used by it. All of the issued and outstanding
equity interests of each Cornerstone Subsidiary owned (directly or indirectly)
by Cornerstone are, to the extent applicable to the type of
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<PAGE>
organization of each of such entities, duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights. All equity interests of each
Cornerstone Subsidiary that are owned (directly or indirectly) by Cornerstone
are owned free and clear of any Encumbrances. Cornerstone does not control
directly or indirectly or have any direct or indirect equity participation in
any corporation, partnership, limited liability company, joint venture, trust or
other business association which is not a Cornerstone Subsidiary.
4.6 Financial Statements. Cornerstone has provided to S&N (a) the audited
--------------------
consolidated balance sheets and statements of income, stockholders' equity and
cash flows of Cornerstone for each of the two fiscal years in the period ended
January 31, 1998 and (b) the unaudited consolidated balance sheet and statements
of income, changes in stockholders' equity and cash flows as of and for the
interim period ended June 30, 1998 (the "Most Recent Cornerstone Balance Sheet
-------------------------------------
Date"). Such financial statements (collectively, the "Cornerstone Financial
- ---- ---------------------
Statements") have been prepared in accordance with GAAP applied on a consistent
- ----------
basis throughout the periods covered thereby, fairly present in all material
respects the consolidated financial condition, results of operations and cash
flows of Cornerstone as of the respective dates thereof and for the periods
referred to therein and are consistent with the books and records of
Cornerstone; provided, however, that the Cornerstone Financial Statements
-------- -------
referred to in clause (b) above are subject to normal recurring year-end
adjustments (which will not be material) and do not include footnotes.
4.7 Absence of Certain Changes. Since the Most Recent Cornerstone Balance
--------------------------
Sheet Date, there has occurred no event or development which has had, or could
reasonably be foreseen to have in the future, a Cornerstone Material Adverse
Effect.
4.8 Undisclosed Liabilities. Cornerstone has no liabilities, except for
-----------------------
(a) liabilities shown on the balance sheet referred to in clause (b) of Section
4.6 (the "Most Recent Cornerstone Balance Sheet"), (b) liabilities which have
-------------------------------------
arisen since the Most Recent Cornerstone Balance Sheet Date in the Ordinary
Course of Business and (c) contractual and other liabilities incurred in the
Ordinary Course of Business which are not required by GAAP to be reflected on a
balance sheet.
4.9 Tax Matters.
-----------
(a) Cornerstone and each Cornerstone Subsidiary has filed on a timely
basis all Tax Returns that it was required to file and all such Tax Returns were
correct and complete in all material respects. Cornerstone and each of the
Cornerstone Subsidiaries has paid, or will pay, on a timely basis all Taxes due
on or before the Closing Date, whether or not shown to be due on any such Tax
Returns. The unpaid Taxes of Cornerstone on a consolidated basis which, for
purposes of this Section 4.9, takes into account each Cornerstone Subsidiary,
for tax periods through
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<PAGE>
the Most Recent Cornerstone Balance Sheet Date do not exceed the accruals and
reserves (excluding reserves for deferred Taxes) for Taxes set forth on the Most
Recent Cornerstone Balance Sheet. All Taxes attributable to the period from and
after the Most Recent Cornerstone Balance Sheet Date and continuing through the
Closing Date are attributable to the conduct by Cornerstone of its operations on
a consolidated basis in the ordinary course of business. Cornerstone has no
actual or potential liability for any Tax obligation of any taxpayer (including
without limitation any affiliated group of corporations or other entities that
included Cornerstone during a prior period) other than Cornerstone and the
Cornerstone Subsidiaries. All Taxes that Cornerstone or any Cornerstone
Subsidiary 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.
(b) Cornerstone has delivered to S&N correct and complete copies of
all U.S. federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by Cornerstone since June 8, 1995,
the date of its organization. No U.S. federal income Tax Return of Cornerstone
has been audited by the Internal Revenue Service and no U.S. federal income tax
return of any Cornerstone Subsidiary has been so audited. No examination or
audit of any Tax Returns of Cornerstone or any Cornerstone Subsidiary by any
Governmental Entity is currently in progress or, to the knowledge of
Cornerstone, threatened or contemplated. Neither Cornerstone nor any
Cornerstone Subsidiary has waived any statute of limitations with respect to
taxes or agreed to an extension of time with respect to an assessment of or
deficiency in Taxes.
(c) Cornerstone is not, nor is any Cornerstone Subsidiary, a
"consenting corporation" within the meaning of Section 341(f) of the Code and
none of the assets of Cornerstone or any Cornerstone Subsidiary are subject to
an election under Section 341(f) of the Code. Neither Cornerstone, nor any
Cornerstone Subsidiary, has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
(d) Cornerstone is not a party to any Tax allocation or sharing
agreement or Tax indemnity agreement nor has any Cornerstone Subsidiary been a
party to such an agreement. Except for filings of a group of which only
Cornerstone and the Cornerstone Subsidiaries are members, Cornerstone has never
filed Tax Returns on a combined, consolidated or unitary basis with any other
business entity (other than a Cornerstone Subsidiary) in any jurisdiction or has
otherwise been liable, by contract or otherwise, for any Taxes of any other
business entity.
(e) Cornerstone is not and has never been, nor has any Cornerstone
Subsidiary been (at any time at which it was a Cornerstone Subsidiary), a
member of an "affiliated group" of corporations (within the meaning of Section
1504 of the Code)
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<PAGE>
(other than a group of which only Cornerstone and the Cornerstone Subsidiaries
are members). Cornerstone has not made an election under Treasury Reg. Section
1.1502-20(g). Cornerstone is not required to make a basis reduction pursuant to
Treasury Reg. Section 1.1502-20(b) or Treasury Reg. Section 1.337(d)-2(b).
(f) Cornerstone is not, and no Cornerstone Subsidiary is, a party to
any tax litigation nor is any of them the subject of any tax audit. Neither
Cornerstone nor any Cornerstone Subsidiary has any reason to suspect any tax
litigation attributable to periods ended before or including the Closing Date.
Classifications, definitions, valuation and principles used in the accounts of
Cornerstone are in accordance with classifications, definitions, valuations and
principles used in the Tax Returns of Cornerstone or the respective Cornerstone
Subsidiary. Neither Cornerstone nor any Cornerstone Subsidiary is or has been a
party to any transaction or agreement which is in conflict with the tax rules on
transfer pricing in any relevant jurisdiction.
4.10 Assets. Cornerstone and/or a Cornerstone Subsidiary owns or leases
------
all tangible assets necessary for the conduct of Cornerstone's and the
Cornerstone Subsidiaries' businesses as currently conducted and as currently
proposed to be conducted. Such tangible assets are free from material defects,
have been maintained in accordance with normal industry practice, are in good
operating condition and repair (subject to normal wear and tear) and are
suitable for the purposes for which they are used. No asset of Cornerstone or
any Cornerstone Subsidiary (tangible or intangible) is subject to any
Encumbrance, except (i) liens for current taxes not yet due and payable, and
(ii) such imperfections of title, liens and easements as do not and will not
materially detract from or interfere with the use or disposition of the property
subject thereto or otherwise materially impair business operations involving
such properties.
4.11 Owned Real Property. Cornerstone and/or the Cornerstone Subsidiaries
-------------------
own, lease, sublease or otherwise have satisfactory occupancy arrangements with
respect to all real property necessary for the conduct of their respective
businesses as currently conducted. With respect to each parcel of such real
property which is owned by Cornerstone or any Cornerstone Subsidiary, the owner
has good and clear record and marketable title to such parcel, insurable by a
recognized national title insurance company at standard rates, free and clear of
any Encumbrance, easement, covenant or other restriction, except for recorded
easements, covenants and other restrictions which would not have a Cornerstone
Material Adverse Effect.
4.12 Real Property Leases. Neither Cornerstone nor any Cornerstone
--------------------
Subsidiary, nor, to the knowledge of Cornerstone, any other party to any
Cornerstone Lease (as defined below) is in material breach or default, and no
event has occurred which, with notice or lapse of time, would constitute a
material breach or default by Cornerstone, any Cornerstone Subsidiary or, to the
knowledge of Cornerstone, any
32
<PAGE>
other party thereto, under any Cornerstone Lease. "Cornerstone Lease" means any
-----------------
lease or sublease of real property which is leased or subleased by Cornerstone
or any Cornerstone Subsidiary.
4.13 Inventory. All inventory of Cornerstone and the Cornerstone
---------
Subsidiaries, whether or not reflected on the Most Recent Cornerstone Balance
Sheet, consists of a quality and quantity usable and saleable in the Ordinary
Course of Business, except for obsolete items and items of below-standard
quality, all of which have been written-off or written-down to net realizable
value on the Most Recent Cornerstone Balance Sheet. All inventories not
written-off have been priced at the lower of cost or market on a first-in,
first-out basis. The quantities of inventory are not excessive in the present
circumstances of Cornerstone and the Cornerstone Subsidiaries. Since the Most
Recent Cornerstone Balance Sheet Date, there has been no material change in the
accounting policies or accounting procedures applicable to the inventory of
Cornerstone or the Cornerstone Subsidiaries.
4.14 Intellectual Property.
---------------------
(a) Cornerstone and/or a Cornerstone Subsidiary owns or has the right
to use all material items of Intellectual Property used in the operation of
their respective businesses or necessary for the operation of such businesses as
currently conducted or as currently proposed to be conducted. Each material
item of Intellectual Property owned by or used in the operation of the business
of Cornerstone and/or the Cornerstone Subsidiaries will be owned or available
for use by them on identical terms and conditions immediately following the
Closing. Cornerstone and the Cornerstone Subsidiaries have taken all reasonable
measures to protect the proprietary nature of each material item of Intellectual
Property, and to maintain in confidence all material trade secrets and
confidential information, that it owns or uses. To the knowledge of
Cornerstone, no other person or entity has any rights to any of the Intellectual
Property owned by Cornerstone and/or the Cornerstone Subsidiaries and no other
person or entity is infringing, violating or misappropriating any material item
of Intellectual Property that Cornerstone and/or the Cornerstone Subsidiaries
owns or uses.
(b) None of the activities or business currently conducted by
Cornerstone or any Cornerstone Subsidiary, or conducted by Cornerstone or any
Cornerstone Subsidiary at any time within the six years prior to the date of
this Agreement infringes or violates, or constitutes a misappropriation of, any
Intellectual Property rights of any other person or entity. Neither Cornerstone
nor any Cornerstone Subsidiary has received any complaint, claim or notice
alleging any such infringement, violation or misappropriation which would have a
Cornerstone Material Adverse Effect.
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<PAGE>
(c) Neither Cornerstone nor NewCo is making any representations
hereunder as to any "off-the-shelf" software programs.
4.15 Contracts. With respect to each Cornerstone Material Contract (as
---------
defined below): (i) the Cornerstone Material Contract is legal, valid, binding
and enforceable and in full force and effect; (ii) the Cornerstone Material
Contract will continue to be legal, valid, binding and enforceable and in full
force and effect immediately following the Closing in accordance with the terms
thereof as in effect prior to the Closing; and (iii) neither Cornerstone, nor
any Cornerstone Subsidiary, nor, to the knowledge of Cornerstone, any other
party, is in material breach or violation of, or material default under, any
such Cornerstone Material Contract, and no event or action has occurred, is
pending or, to the knowledge of Cornerstone, is threatened, which, after the
giving of notice, with lapse of time, or otherwise, would constitute a material
breach or default by Cornerstone or any Cornerstone Subsidiary, or, to the
knowledge of Cornerstone, any other party under such Cornerstone Material
Contract. As used herein, "Cornerstone Material Contract" means any of the
-----------------------------
following agreements to which Cornerstone, NewCo or any Cornerstone Subsidiary
is a party:
(a) any agreement (or group of related agreements) for the lease of
personal property from or to third parties providing for payments in excess of
$150,000 per annum;
(b) any agreement (or group of related agreements) for the purchase or
sale of commodities, supplies, products or other personal property or for the
furnishing or receipt of services (i) which calls for performance over a period
of more than one year, (ii) which involves more than the sum of $200,000, or
(iii) in which Cornerstone or any Cornerstone Subsidiary agreed to purchase a
minimum quantity of goods or services or has agreed to purchase goods or
services exclusively from a certain party;
(c) any agreement (or group of related agreements) under which
Cornerstone or any Cornerstone Subsidiary has created, incurred, assumed, or
guaranteed (or may create, incur, assume, or guarantee) indebtedness (including
capitalized lease obligations) involving more than $200,000 or under which it
has imposed (or may impose) an Encumbrance on any of its assets, tangible or
intangible;
(d) any agreement concerning confidentiality, non-solicitation or
noncompetition;
(e) any agreement involving any of the stockholders of Cornerstone or
their Affiliates;
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<PAGE>
(f) any agreement the termination of which would have a Cornerstone
Material Adverse Effect;
(g) any agreement which requires Cornerstone or any Cornerstone
Subsidiary to indemnify any other party thereto; and
(h) any other agreement (or group of related agreements) either
involving more than $200,000 or not entered into in the Ordinary Course of
Business.
Section 4.15 of the Cornerstone Disclosure Schedule sets forth a complete list
of all Cornerstone Material Contracts to which Cornerstone or NewCo is a party
(but does not list any Cornerstone Material Contract to which any Cornerstone
Subsidiary is a party).
4.16 Accounts Receivable. All accounts receivable of Cornerstone and the
-------------------
Cornerstone Subsidiaries are valid receivables subject to no setoffs or
counterclaims.
4.17 Insurance. Cornerstone and/or the Cornerstone Subsidiaries have
---------
obtained insurance policies (including fire, theft, casualty, general liability,
workers compensation, business interruption, environmental, product liability
and automobile insurance policies and bond and surety arrangements) in scope and
amount customary and reasonable for the businesses in which they are engaged.
With respect to each such insurance policy: (i) such policy is enforceable and
in full force and effect; (ii) such policy will continue to be enforceable and
in full force and effect immediately following the Closing in accordance with
the terms thereof as in effect prior to the Closing; (iii) neither Cornerstone
nor any Cornerstone Subsidiary is in material breach or default (including with
respect to the payment of premiums or the giving of notices) under such policy,
and no event has occurred which, with notice or the lapse of time, would
constitute such a material breach or default or permit termination, modification
or acceleration, under such policy; and (iv) neither Cornerstone nor any
Cornerstone Subsidiary has received any notice from the insurer disclaiming
coverage or reserving rights with respect to a particular claim or such policy
in general.
4.18 Litigation. There is no action, suit, proceeding or claim before any
----------
Governmental Entity or arbitrator pending, or, to the knowledge of Cornerstone,
threatened against Cornerstone or any Cornerstone Subsidiary, nor any of their
respective officers or directors (in their capacities as such) that,
individually or in the aggregate, could have a Cornerstone Material Adverse
Effect. There is no judgment, injunction, decree or order against Cornerstone
or any Cornerstone Subsidiary that could have a Cornerstone Material Adverse
Effect.
35
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4.19 Employee Benefits.
-----------------
(a) All Employee Benefit Plans maintained, or contributed to, by
Cornerstone or any Cornerstone ERISA Affiliate (as defined below) (collectively,
the "Cornerstone Employee Benefit Plans") have been administered in accordance
----------------------------------
with their respective terms, except where the failure to so administer such
plans would not have a Cornerstone Material Adverse Effect. "Cornerstone ERISA
-----------------
Affiliate" shall have the same meaning as ERISA Affiliate (as defined in Section
- ---------
3.21(a)) except that "Cornerstone" shall be substituted for "S&N." Cornerstone
and the Cornerstone ERISA Affiliates have satisfied their respective obligations
with respect to the Cornerstone Employee Benefit Plans and have made all
required contributions thereto, except where the failure to satisfy such
obligations or to contribute to the Cornerstone Employee Benefit Plans would not
have a Cornerstone Material Adverse Effect. Cornerstone and all Cornerstone
Employee Benefit Plans are in compliance with the currently applicable
provisions of ERISA and the Code and the regulations thereunder, except where
the failure to so comply would not have a Cornerstone Material Adverse Effect.
(b) There are no investigations by any Governmental Entity,
termination proceedings or other claims (except claims for benefits payable in
the normal operation of the Cornerstone Employee Benefit Plans and proceedings
with respect to qualified domestic relations orders), suits or proceedings
pending or, to Cornerstone's knowledge, threatened against or involving any
Cornerstone Employee Benefit Plan or asserting any rights or claims to benefits
under any Cornerstone Employee Benefit Plan that could give rise to any material
liability.
(c) All the Cornerstone Employee Benefit Plans that are intended to be
qualified under Section 401(a) of the Code are either standardized prototype
plans or have received determination letters from the Internal Revenue Service
to the effect that such Cornerstone Employee Benefit Plans are qualified and the
plans and the trusts related thereto are exempt from federal income taxes under
Sections 401(a) and 501(a), respectively, of the Code, no such determination
letter has been revoked and revocation has not been threatened, and no such
Cornerstone Employee Benefit Plan has been amended or operated since the date of
its most recent determination letter or application therefor in any respect, and
no act or omission has occurred, that would adversely affect its qualification
or materially increase its cost.
(d) Neither Cornerstone nor any Cornerstone ERISA Affiliate has ever
maintained an Employee Benefit Plan subject to Section 412 of the Code or Title
IV of ERISA.
(e) At no time has Cornerstone or any Cornerstone ERISA Affiliate been
obligated to contribute to any "multiemployer plan" (as defined in Section
4001(a)(3) of ERISA).
36
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(f) There are no material unfunded obligations under any Cornerstone
Employee Benefit Plan providing benefits after termination of employment to any
employee of Cornerstone (or to any beneficiary of any such employee), including
but not limited to retiree health coverage and deferred compensation, but
excluding continuation of health coverage required to be continued under Section
4980B of the Code or other applicable law and insurance conversion privileges
under state law.
(g) No act or omission has occurred and no condition exists with
respect to any Cornerstone Employee Benefit Plan that would subject Cornerstone
or any Cornerstone ERISA Affiliate to (i) any fine, penalty, tax or liability or
any kind imposed under ERISA or the Code or (ii) any contractual indemnification
or contribution obligation protecting any fiduciary, insurer or service provider
with respect to any Cornerstone Employee Benefit Plan which (with respect to
either clause (i) or clause (ii)) would have a Cornerstone Material Adverse
Effect.
4.20 Environmental Matters.
---------------------
(a) Cornerstone and each Cornerstone Subsidiary have complied in all
material respects with all applicable Environmental Laws. There is no pending
or, to the knowledge of Cornerstone, 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 Cornerstone or any Cornerstone Subsidiary, the
outcome of which would have a Cornerstone Material Adverse Effect.
(b) There have been no releases 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 Cornerstone that would
have a Cornerstone Material Adverse Effect. With respect to any such releases
of Materials of Environmental Concern, Cornerstone has given all required
notices to Governmental Entities (copies of which have been provided to
Cornerstone). Cornerstone is not aware of any releases of Materials of
Environmental Concern at parcels of real property or facilities other than those
owned, operated or controlled by Cornerstone that would have a Cornerstone
Material Adverse Effect.
4.21 Legal Compliance. Cornerstone and each Cornerstone Subsidiary, and
----------------
the conduct and operations of their businesses, have been and are currently in
compliance with each law (including rules and regulations thereunder) of any
federal, state, local or foreign government, or any Governmental Entity, which
is applicable to Cornerstone or such Cornerstone Subsidiary or its business,
except for any violation of or default under a law which would not have a
Cornerstone Material Adverse Effect.
37
<PAGE>
4.22 Permits. Cornerstone or the Cornerstone Subsidiaries have all Permits
-------
that are required for Cornerstone and the Cornerstone Subsidiaries to conduct
their respective businesses, except for those the absence of which would not
have a Cornerstone Material Adverse Effect. Each such Permit is in full force
and effect and, to the knowledge of Cornerstone, 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. Each such Permit will continue in
full force and effect immediately following the Closing.
4.23 Certain Business Relationships With Affiliates. No stockholder or
----------------------------------------------
Affiliate of Cornerstone (other than a Cornerstone Subsidiary) (i) owns any
property or right, tangible or intangible, which is used in the business of
Cornerstone or any Cornerstone Subsidiary, (ii) has any material claim or cause
of action against Cornerstone or any Cornerstone Subsidiary, or (iii) except as
noted in the Cornerstone Financial Statements, owes any money to, or is owed
money by, Cornerstone or any Cornerstone Subsidiary (except for normal salary
and benefits).
4.24 Books and Records. The minute books and other similar records of
-----------------
Cornerstone contain true and complete records of all actions taken at any
meetings of the stockholders and Board of Directors of Cornerstone, or any
committee thereof and of all written consents executed in lieu of the holding of
any such meeting. The books and records of Cornerstone, and the books and
records of each Cornerstone Subsidiary in respect of all periods since February
1, 1996, (x) accurately reflect in all material respects the assets,
liabilities, business, financial condition and results of operations of
Cornerstone and each of the Cornerstone Subsidiaries, and (y) have been
maintained in accordance with good business and bookkeeping practices.
4.25 Accounting Matters. To the knowledge of Cornerstone, after consulting
------------------
with Cornerstone's independent auditors, neither Cornerstone nor any of its
Affiliates has through the date of this Agreement taken or agreed to take any
action that would prevent NewCo from accounting for the business combinations to
be effected at the Closing as a "pooling of interests" in conformity with GAAP.
4.26 Interim Operations. Each of NewCo and the Transitory Subsidiary was
------------------
formed solely for the purpose of engaging in the transactions contemplated by
this Agreement, has engaged in no other business activities and has conducted
its operations only as contemplated by this Agreement.
4.27 Tax Consequences of the Merger. For U.S. federal income tax purposes,
------------------------------
no gain or loss will be recognized by Cornerstone, any Cornerstone stockholder,
NewCo or the Transitory Subsidiary as a result of the Merger, and solely for
purposes of the Members satisfying the control requirement of Section 351 of the
Code (as a result of the Merger, the S&N Interest Contribution and any related
transfers), the stockholders of Cornerstone will be treated as transferors (as
described
38
<PAGE>
in Section 351) of their stock to NewCo in exchange for NewCo stock to
the extent they would have been transferors had they transferred their stock
directly to NewCo, provided, however, that no representation is made as to
whether the requirements of Section 351 of the Code are otherwise satisfied.
4.28 Initial Public Offering. Attached hereto as Exhibit D is a draft of
----------------------- ---------
the Form S-1 Registration Statement of NewCo which is to be filed by NewCo with
the Securities and Exchange Commission (the "SEC") as contemplated by Section
---
7.5 below (the "Draft Form S-1"). The Draft Form S-1, with such changes thereto
--------------
as Cornerstone may in its sole discretion determine, to be filed with the SEC
pursuant to and in accordance with Section 7.5 (the "Filed Form S-1"), will not
--------------
contain any untrue statement of material fact nor will it omit to state any
material fact necessary in order to make the statements therein not misleading;
provided however, that no claim may be brought against NewCo or Cornerstone
based on (a) any portion of the Filed Form S-1 that is modified, amended or
changed in response to comments on the Filed Form S-1 or any amendment thereto
made by the SEC or the National Association of Securities Dealers, Inc. or (b)
information contained therein which was provided by or based on information
provided by S&N or the Members.
4.29 Filing of Form S-1. Cornerstone and NewCo, after conferring with
------------------
their underwriters, have no reason to believe that the Registration Statement on
Form S-1 described in Section 7.5 below will not be filed with the Securities
and Exchange Commission promptly following the Closing.
4.30 Disclosure. No representation or warranty by Cornerstone or NewCo
----------
contained in this Agreement, and no statement contained in the Cornerstone
Disclosure Schedule, any document, certificate or other instrument delivered to
or to be delivered by or on behalf of Cornerstone, any Cornerstone Subsidiary or
NewCo pursuant to and specifically referenced in 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.
ARTICLE V
PRE-CLOSING COVENANTS
5.1 Reasonable Best Efforts; Notice and Consents; Hart-Scott-Rodino Act.
-------------------------------------------------------------------
(a) Each of the Parties shall each use its best efforts, to the extent
commercially reasonable ("Reasonable Best Efforts") (i) to take, or cause to be
-----------------------
taken, all appropriate action, and do, or cause to be done, all things necessary
and proper under applicable law to consummate and make effective the
transactions
39
<PAGE>
contemplated hereby as promptly as practicable, (ii) to obtain from any
Governmental Entity or any other third party any consents, licenses, permits,
waivers, approvals, authorizations, or orders required to be obtained or made by
the Parties in connection with the authorization, execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and (iii)
as promptly as practicable, to make all necessary filings, and thereafter make
any other required submissions, with respect to this Agreement required under
any applicable federal or state securities laws, the Hart-Scott-Rodino Act (the
Parties acknowledging that all filings under the Hart-Scott-Rodino Act have been
made prior to the date hereof, and termination of all required review and
waiting periods thereunder has occurred prior to the date hereof) and any
related governmental request thereunder, and any other applicable law. The
Parties shall cooperate with each other in connection with the making of all
such filings, including providing copies of all such documents to the non-filing
Parties and its advisors prior to filing and, if requested, to accept all
reasonable additions, deletions or changes suggested in connection therewith.
Each of the Parties shall use its Reasonable Best Efforts to furnish to the
other Parties all information required for any application or other filing to be
made pursuant to the rules and regulations of any applicable law in connection
with the transactions contemplated by this Agreement.
(b) Each of the Parties shall give any notices to third parties, and
use their Reasonable Best Efforts to obtain any third party consents related to
or required in connection with the transactions contemplated by this Agreement
that are (A) necessary to consummate the transactions contemplated hereby, (B)
disclosed or required to be disclosed in the S&N Disclosure Schedule or the
Cornerstone Disclosure Schedule or (C) required to prevent an S&N Material
Adverse Effect or a Cornerstone Material Adverse Effect from occurring prior to
or after the Closing.
5.2 Operation of Business.
---------------------
(a) Except as contemplated by this Agreement, during the period from
the date of this Agreement to the Closing, S&N shall conduct its operations in
the Ordinary Course of Business and in compliance with all applicable laws and
regulations and, to the extent consistent therewith, use all reasonable efforts
to preserve intact its current business organization, keep its physical assets
in good working condition, keep available the services of its current officers
and employees and preserve its relationships with customers, suppliers and
others having business dealings with it to the end that its goodwill and ongoing
business shall not be impaired in any material respect. Without limiting the
generality of the foregoing, prior to the Closing, S&N shall not, without the
written consent of Cornerstone:
(i) issue, sell, deliver or agree or commit to issue, sell or
deliver (whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) or authorize the
issuance, sale or
40
<PAGE>
delivery of, or redeem or repurchase, any membership interest or any rights,
warrants or options to acquire any membership interest;
(ii) create, incur or assume any debt not currently outstanding
(including obligations in respect of capital leases); assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person or entity; or make any loans,
advances or capital contributions to, or investments in, any other person or
entity;
(iii) enter into, adopt or amend any Employee Benefit Plan or
any employment or severance agreement or arrangement of the type described in
Section 3.21(j) or (except for normal increases in the Ordinary Course of
Business) increase in any manner the compensation or fringe benefits of, or
materially modify the employment terms of, its directors, officers or employees,
generally or individually, or pay any benefit not required by the terms in
effect on the date hereof of any existing Employee Benefit Plan;
(iv) acquire, sell, lease, encumber or dispose of any assets or
property (including without limitation any shares or other equity interests in
or securities of any corporation, partnership, association or other business
organization or division thereof), other than purchases and sales of assets in
the Ordinary Course of Business;
(v) amend its Articles or Organization or the Operating Agreement;
(vi) change in any material respect its accounting methods,
principles or practices, except insofar as may be required by a generally
applicable change in GAAP;
(vii) discharge or satisfy any Encumbrance or pay any obligation
or liability other than in the Ordinary Course of Business;
(viii) mortgage or pledge any of its property or assets or subject
any such assets to any Encumbrance;
(ix) enter into, amend, terminate, take or omit to take any action
that would constitute a violation of or default under, or waive any rights
under, any S&N Material Contract;
(x) make or commit to make any capital expenditure in excess of
$100,000 per item;
41
<PAGE>
(xi) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action would
result in (i) any of the representations and warranties of the Members set forth
in this Agreement becoming untrue or (ii) any of the conditions to the Closing
set forth in Article VI not being satisfied;
(xii) knowingly take any action that would jeopardize the
treatment of the transactions contemplated hereby as a "pooling of interests"
for accounting purposes;
(xiii) initiate, compromise or settle any material litigation or
arbitration proceeding; or
(xiv) agree in writing or otherwise to take any of the foregoing
actions.
(b) Except as contemplated by this Agreement, during the period from
the date of this Agreement to the Closing, Cornerstone and each Cornerstone
Subsidiary shall conduct its operations in the Ordinary Course of Business and
in compliance with all applicable laws and regulations and, to the extent
consistent therewith, use all reasonable efforts to preserve intact its current
business organization, keep its physical assets in good working condition, keep
available the services of its current officers and employees and preserve its
relationships with customers, suppliers and others having business dealings with
it to the end that its goodwill and ongoing business shall not be impaired in
any material respect. Without limiting the generality of the foregoing, prior to
the Closing, neither Cornerstone nor any Cornerstone Subsidiary shall, without
the written consent of S&N:
(i) issue, sell, deliver or agree or commit to issue, sell or
deliver or authorize the issuance, sale or delivery of, or redeem or repurchase,
any securities or any rights, warrants or options to acquire any such securities
(other than the issuance or granting of stock or options in the Ordinary Course
of Business);
(ii) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
(iii) acquire, sell, lease, encumber or dispose of any assets
or property (including without limitation any shares or other equity interests
in or securities of any corporation, partnership, association or other business
organization or division thereof), other than purchases and sales of assets in
the Ordinary Course of Business;
42
<PAGE>
(iv) amend its Certificate of Incorporation or the Certificate of
Incorporation of NewCo;
(v) change in any material respect its accounting methods,
principles or practices, except insofar as may be required by a generally
applicable change in GAAP;
(vi) enter into, amend, terminate, take or omit to take any action
that would constitute a violation of or default under, or waive any rights
under, any Cornerstone Material Contract;
(vii) take any action or fail to take any action permitted by
this Agreement with the knowledge that such action or failure to take action
would result in (i) any of the representations and warranties of Cornerstone set
forth in this Agreement becoming untrue or (ii) any of the conditions to the
Closing set forth in Article VI not being satisfied;
(viii) knowingly take any action that would jeopardize the
treatment of the transactions contemplated by this Agreement as a "pooling of
interests" for accounting purposes; or
(ix) agree in writing or otherwise to take any of the foregoing
actions.
5.3 Full Access. S&N shall permit representatives of Cornerstone to have
-----------
access (at all reasonable times, and in a manner so as not to interfere with the
normal business operations of S&N) to the premises, properties, financial and
accounting records, contracts, other records and documents, and personnel, of or
pertaining to S&N. Cornerstone shall permit representatives of S&N to have
access (at all reasonable times, and in a manner so as not to interfere with the
normal business operations of Cornerstone) to the premises, properties,
financial and accounting records, contracts, other records and documents, and
personnel, of or pertaining to Cornerstone. The Parties agree that the terms of
the confidentiality letter agreements dated June 11, 1998 and July 1, 1998
between Cornerstone and S&N will apply to the information obtained during such
investigations.
5.4 Exclusivity. S&N shall not, and S&N shall use its best efforts to
-----------
cause its Affiliates and each of its members, officers, directors, employees,
representatives and agents not to, directly or indirectly, (a) encourage,
solicit or facilitate any proposal relating to the acquisition (whether by
merger, consolidation, sale of material assets, sale of S&N membership interests
or other business combination) by any person or entity (other than Cornerstone)
of all or any substantial portion of S&N or its equity, business or assets, (b)
engage in any discussions or negotiations with any person or entity (other than
Cornerstone) regarding any such acquisition, or
43
<PAGE>
(c) provide any non-public information concerning S&N or its equity, business or
assets to any person or entity (other than Cornerstone). S&N agrees to notify in
writing any person or entity that has contacted or contacts S&N, any Member or
any Affiliate, officer, director, employee, representative or agent thereof
regarding any such acquisition that it has entered into a definitive acquisition
agreement with Cornerstone.
5.5 Net Worth. S&N and the Members agree that they shall cause the net
---------
worth of S&N (defined as the total assets of S&N less the total liabilities of
S&N, determined in accordance with GAAP and in a manner consistent with the
preparation of the S&N Financial Statements) as of the date of the Closing to be
not less than $2,323,883.
5.6 Pooling Accounting.
------------------
(a) From and after the date hereof and until the Closing, none of the
Parties shall knowingly take, and each Party shall use its Reasonable Best
Efforts to prevent its Affiliates from knowingly taking, any action, or
knowingly fail or failing to take any action, that is reasonably likely to
jeopardize the treatment of the transactions contemplated by this Agreement as a
pooling of interests for accounting purposes.
(b) Until the earlier of the Closing or the termination of this
Agreement, each Member agrees that he or she will not sell, transfer or
otherwise dispose of, or reduce his interest in or risk relating to, the S&N
membership interest presently owned by such Member.
5.7 Transaction Expenses. Cornerstone will be responsible for its own
--------------------
costs and expenses, including investment banking, legal and accounting fees,
incurred in connection with the transactions contemplated by this Agreement.
S&N will be responsible for the costs and expenses of S&N and the Members,
including investment banking, legal and accounting fees, incurred in connection
with the transactions contemplated by this Agreement; provided that all such
costs and expenses shall be taken into account in calculating the net worth of
S&N as of the Closing for purposes of Section 5.5.
5.8 Final Form S-1. NewCo's Registration Statement on Form S-1 (described
--------------
in Section 7.5 below), on the date (if any) on which it is declared effective,
and on the date (if any) on which the closing of the offering of NewCo shares
described therein occurs, will not contain any untrue statement of a material
fact nor will it omit to state any material fact necessary in order to make the
statements therein not misleading; provided, however, that no claim may be
brought against NewCo or Cornerstone based on any information contained therein
which was provided in writing by or based on information provided in writing by
S&N or the Members.
44
<PAGE>
ARTICLE VI
CONDITIONS TO CLOSING
6.1 Conditions to Obligations of Cornerstone and Affiliates. The
-------------------------------------------------------
obligation of each of Cornerstone, NewCo and the Transitory Subsidiary to
consummate the transactions contemplated by Articles I and II to occur at the
Closing (the "Closing Transactions") is subject to the satisfaction (or waiver
--------------------
by Cornerstone) of the following conditions:
(a) Governmental Approvals. The Parties shall have obtained all
----------------------
approvals, issuances, permits, consents and other authorizations from
Governmental Entities necessary for the consummation of the Closing
Transactions, and all applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated.
(b) Third Party Consents. NewCo shall have been furnished with
--------------------
evidence satisfactory to it of the consent or approval of those third parties
whose consent or approval shall be required in connection with the Closing
Transactions under any S&N Material Contract.
(c) Pending Proceedings and Orders. No action, suit or proceeding
------------------------------
shall be pending by or before any Governmental Entity wherein an unfavorable
judgment, order, decree, stipulation or injunction would (i) prevent
consummation of the Closing Transactions, (ii) cause the Closing Transactions to
be rescinded following consummation or (iii) affect adversely the right of NewCo
to own, operate or control any of the assets and operations of the Surviving
Corporation or S&N following the Closing Transactions, and no such judgment,
order, decree, stipulation or injunction shall be in effect.
(d) Representations and Warranties. The representations and
------------------------------
warranties of the Members set forth in the first sentence of Section 3.1, the
first sentence of Section 3.2(a), Section 3.2(b) and Section 3.3 and any
representations and warranties of S&N set forth in this Agreement that are
qualified as to materiality shall be true and correct, and the representations
and warranties of the Members set forth in this Agreement (other than those
referred to in the preceding clause) shall be true and correct in all material
respects, in each case as of the date of this Agreement and as of the Closing as
though made as of the Closing, except to the extent such representations and
warranties address matters as of a particular date (in which case such
representations and warranties shall be true and correct, or true and correct in
all material respects, as of such date).
45
<PAGE>
(e) Covenants. S&N and the Members shall have performed or complied
---------
with in all material respects the agreements and covenants required to be
performed or complied with by them under this Agreement as of or prior to the
Closing.
(f) Certificate. The Members shall have delivered to NewCo a
-----------
certificate (the "S&N Certificate") to the effect that each of the conditions
---------------
specified in clauses (a) through (e) of this Section 6.1 (insofar as it relates
to S&N or the Members) is satisfied in all respects.
(g) Executive Agreements. Each of Fred E. Kamgar and Robert M.
--------------------
Perkowitz shall have entered into an Executive Agreement with NewCo in the form
of Exhibit E attached hereto.
---------
(h) Amended and Restated Registration Agreement. The Members, NewCo
-------------------------------------------
and the requisite stockholders of NewCo necessary to effect the amendment and
restatement of Cornerstone's existing Registration Agreement (which stockholders
shall include, without limitation, Madison Dearborn Capital Partners, L.P.,
Chase Venture Capital Associates, L.P., Boston Capital Ventures II, Limited
Partnership and Boston Capital Ventures III, Limited Partnership), shall have
entered into an Amended and Restated Registration Agreement in the form of
Exhibit F attached hereto (the "Registration Agreement").
- ---------
(i) Letter Agreement. NewCo and the Members shall have entered into a
----------------
letter agreement in the form of Exhibit G attached hereto.
---------
(j) Amendment to Stockholders Agreement. The Stockholders Agreement
-----------------------------------
between NewCo and certain of its stockholders shall have been amended, which
amendment shall reflect that the Members shall have become parties thereto for
certain limited purposes, such amendment to be in the form of Exhibit H hereto
---------
(the "Amendment to Stockholders Agreement").
(k) Legal Opinion. NewCo shall have received from Vedder, Price,
-------------
Kaufman & Kammholz, counsel to S&N and the Members, an opinion substantially in
the form of Exhibit I attached hereto, addressed to NewCo and dated as of the
---------
Closing Date.
(l) Pooling Letters. NewCo shall have received a letter from Ernst &
---------------
Young LLP, addressed to S&N and NewCo, regarding its concurrence with NewCo's
management's conclusions as to the appropriateness of the pooling of interests
accounting under Accounting Principles Board Opinion No. 16 for the Closing
Transactions, as contemplated to be effected as of the date of the letter, it
being agreed that the Parties shall each provide reasonable cooperation to Ernst
& Young LLP to enable them to issue such a letter. Ernst & Young LLP shall have
received a
46
<PAGE>
letter from Arthur Andersen LLP, addressed to S&N, to the effect that Arthur
Andersen LLP knows of nothing that would prohibit S&N from qualifying as an
entity that may be a party to a business combination for which the pooling-of-
interests method of accounting would be available under Accounting Principles
Board Opinion No. 16, it being agreed that the Parties shall each provide
reasonable cooperation to Arthur Andersen LLP to enable them to issue such a
letter.
(m) Review of S&N Financial Statements. Arthur Andersen LLP shall
----------------------------------
have completed a review in accordance with Statement on Auditing Standards No.
71 of the unaudited balance sheet and statements of income and cash flows of S&N
as of and for the interim periods ended June 30, 1997 and the Most Recent S&N
Balance Sheet Date. Arthur Andersen LLP shall make available to Ernst & Young
LLP its work papers relating to such review.
(n) Closing Deliveries. Cornerstone and NewCo shall have received
------------------
such other certificates and their respective instruments (including without
limitation certificates of good standing of S&N and the Delaware limited
liability company into which it will be merged in their respective jurisdictions
of organization, and in any jurisdictions in which they are qualified, certified
organizational documents, certificates as to the incumbency of officers and the
adoption of authorizing resolutions) as it shall reasonably request in
connection with the Closing.
6.2 Conditions to Obligations of S&N and the Members. The obligation of
------------------------------------------------
the Members to consummate the Closing Transactions is subject to the
satisfaction (or waiver by the Members) of the following conditions:
(a) Governmental Approvals. The Parties shall have obtained all
----------------------
approvals, issuances, permits, consents and other authorizations from
Governmental Entities necessary for the consummation of the Closing
Transactions, and all applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated.
(b) Third Party Consents. The Members shall have been furnished with
--------------------
evidence satisfactory to them of the consent or approval of those third parties
whose consent or approval shall be required in connection with the Closing
Transactions under any Cornerstone Material Contract.
(c) Pending Proceedings and Orders. No action, suit or proceeding
------------------------------
shall be pending by or before any Governmental Entity wherein an unfavorable
judgment, order, decree, stipulation or injunction would (i) prevent
consummation of the Closing Transactions, (ii) cause the Closing Transactions to
be rescinded following consummation or (iii) affect adversely the right of NewCo
to own, operate or control any of the assets and operations of the Surviving
Corporation or S&N following the
47
<PAGE>
Closing Transactions, and no such judgment, order, decree, stipulation or
injunction shall be in effect.
(d) Representations and Warranties. The representations and
------------------------------
warranties of Cornerstone and NewCo set forth in the first sentence of Section
4.1 and Section 4.3 and any representations and warranties of Cornerstone and
NewCo set forth in this Agreement that are qualified as to materiality shall be
true and correct, and the representations and warranties of Cornerstone and
NewCo set forth in this Agreement (other than those referred to in the preceding
clause) shall be true and correct in all material respects, in each case as of
the date of this Agreement and as of the Closing as though made as of the
Closing, except to the extent such representations and warranties address
matters as of a particular date (in which case such representations and
warranties shall be true and correct, or true and correct in all material
respects, as of such date).
(e) Covenants. Cornerstone, NewCo and the Transitory Subsidiary shall
---------
have performed or complied with in all material respects the agreements and
covenants required to be performed or complied with by them under this Agreement
as of or prior to the Closing.
(f) Certificate. Cornerstone shall have delivered to the Members a
-----------
certificate (the "Cornerstone Certificate") to the effect that each of the
-----------------------
conditions specified in clauses (a) through (e) of this Section 6.2 (insofar as
it relates to Cornerstone, NewCo or the Transitory Subsidiary) is satisfied in
all respects.
(g) Executive Agreements. NewCo shall have entered into an Executive
--------------------
Agreement with each of Fred E. Kamgar and Robert M. Perkowitz in the form of
Exhibit E attached hereto.
- ---------
(h) Registration Agreement. NewCo and the requisite stockholders of
----------------------
NewCo necessary to effect the amendment and restatement of Cornerstone's
existing Registration Agreement (which stockholders shall include, without
limitation, Madison Dearborn Capital Partners, L.P., Chase Venture Capital
Associates, L.P., Boston Capital Ventures II, Limited Partnership and Boston
Capital Ventures III, Limited Partnership), shall have entered into the
Registration Agreement with each of the Members.
(i) Amendment to Stockholders Agreement. The Amendment to
-----------------------------------
Stockholders Agreement shall have been executed and delivered by all parties
thereto.
(j) Legal Opinion. The Members shall have received from Hale and Dorr
-------------
LLP, counsel to Cornerstone, an opinion substantially in the form of Exhibit J
---------
attached hereto, addressed to the Members and dated as of the Closing Date.
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(k) Pooling Letter. S&N shall have received a letter from Ernst &
--------------
Young LLP, addressed to S&N and NewCo, regarding its concurrence with NewCo's
management's conclusions as to the appropriateness of the pooling of interests
accounting under Accounting Principles Board Opinion No. 16 for the Closing
Transactions, as contemplated to be effected as of the date of the letter, it
being agreed that the Parties shall each provide reasonable cooperation to Ernst
& Young LLP to enable them to issue such a letter.
(l) No Material Adverse Change to Draft Form S-1. There shall be no
--------------------------------------------
material adverse change in the information contained in the Registration
Statement on Form S-1 as proposed to be filed by NewCo pursuant to and in
accordance with Section 7.5 below, as compared to the information contained in
the Draft Form S-1.
(m) Closing Deliveries. The Members shall have received such
------------------
other certificates and instruments (including without limitation certificates of
good standing of Cornerstone and NewCo in their jurisdictions of incorporation,
certified organizational documents, certificates as to the incumbency of
officers and the adoption of authorizing resolutions) as it shall reasonably
request in connection with the Closing.
ARTICLE VII
POST-CLOSING COVENANTS
7.1 Stock Options.
-------------
(a) As soon as practicable, but in no event later than five days after
the Closing, NewCo will grant incentive stock options to the S&N management
personnel covering the number of shares of NewCo common stock specified in
Exhibit K hereto. The exercise price for such options shall equal $17.00 per
- ---------
share. Such stock options shall provide for vesting over four years, and shall
have other terms consistent with NewCo's customary stock option terms.
(b) As soon as practicable, but in no event later than five days after
the Closing, NewCo will grant incentive stock options to Fred E. Kamgar and
Robert M. Perkowitz, with respect to an aggregate of 25,000 shares of NewCo
common stock, which options shall have an exercise price per share of $17.00.
The vesting period for such options shall be four years, and all such stock
options shall have other terms consistent with NewCo's customary stock option
terms for persons occupying comparable positions. NewCo shall grant to Messrs.
Kamgar and Perkowitz stock options under NewCo's stock option plans, in amounts
which are comparable to those granted by NewCo to persons occupying comparable
positions at other NewCo
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<PAGE>
direct or indirect operating subsidiaries, provided Messrs. Kamgar and Perkowitz
satisfy applicable eligibility requirements.
7.2 Stay Bonus Agreements. On the day following the Closing Date, NewCo
---------------------
and S&N shall enter into the Stay Bonus Agreements attached hereto as Exhibit L
---------
with the various members of S&N's management referenced on Exhibit L. Such
---------
agreements shall provide for aggregate payments in the respective amounts
specified in Exhibit L, with 50% of the amounts payable to each bonus recipient
---------
to be paid on December 31, 1998 and 50% bonus to be paid on December 31, 1999,
subject in each case to such person's continued employment with S&N on such
dates.
7.3 Board Observation Rights. NewCo shall permit one person jointly
------------------------
designated by the Members to attend meetings of the NewCo Board of Directors, as
an observer, for so long as the Members continue to own at least 50% of the
aggregate number of NewCo/S&N Shares issued to the Members pursuant to this
Agreement; provided that if NewCo consummates an initial public offering of its
common stock within one year after the Closing Date, and the Members continue to
own, on the second anniversary of the Closing Date, at least 50% of the
aggregate number of NewCo/S&N Shares issued to the Members pursuant to this
Agreement, such right shall terminate upon the second anniversary of the Closing
Date. The person designated by the Members to attend meetings of the NewCo
Board of Directors shall be required, as a condition to attending any meetings
of the NewCo Board of Directors, to sign such confidentiality agreement as may
be reasonably requested by NewCo and shall be entitled to review the minutes, if
any, of meetings of any committee of the Board of Directors provided that such
designated person is at the time serving as the observer pursuant to this
Section 7.3. NewCo will provide all notices and Board materials to such
observer, and pay the reasonable expenses of such observer, as if such observer
were a member of the Board of Directors. The Members' rights to designate an
observer under this Section 7.3, and NewCo's obligations to provide notices and
access hereunder to any observer designated by the Members, shall be suspended
during any period of time during which the Members are entitled to designate one
or more members of the Board of Directors of NewCo.
7.4 Agreements Regarding Disposition of NewCo Stock.
-----------------------------------------------
(a) Each Member agrees that he or she:
(i) will not sell, transfer, pledge, hypothecate or otherwise
dispose of, or reduce his or her interest in or risk relating to, any shares of
capital stock of NewCo until after such time as NewCo has published (within the
meaning of Accounting Series Release No. 135, as amended, of the Securities and
Exchange Commission) financial results covering at least 30 days of operations
of NewCo following the Closing; and
50
<PAGE>
(ii) will not offer, sell, pledge, hypothecate, transfer or
otherwise dispose of, or reduce his or her interest in or risk relating to, any
of the NewCo/S&N Shares unless at such time either: (i) such transaction is
permitted pursuant to the provisions of Rule 145 under the Securities Act; (ii)
the undersigned shall have furnished to NewCo an opinion of counsel, reasonably
satisfactory to NewCo, to the effect that such transaction is otherwise exempt
from the registration requirements of the Securities Act; or (iii) a
registration statement under the Securities Act covering the proposed offer,
sale, pledge, hypothecation, transfer or other disposition shall be effective
under the Securities Act.
(b) NewCo agrees not to consummate the initial public offering of its
common stock until after it has published the financial results referred to in
Section 7.4(a)(i).
7.5 Filing of Form S-1. Substantially simultaneously with the Closing of
------------------
the transactions contemplated hereby, NewCo shall file with the Securities and
Exchange Commission a Registration Statement on Form S-1 with respect to the
initial public offering of shares of NewCo Common Stock. The Members shall be
permitted to send one person as an observer to all of Cornerstone's drafting
sessions with respect to such Form S-1 which occur after the date of this
Agreement and prior to such filing, provided that such observer agrees to comply
with and be subject to the confidentiality letter agreements dated June 11, 1998
and July 1, 1998 between Cornerstone and S&N with respect to all information and
discussions at such drafting sessions.
7.6 Consummation of Initial Public Offering. NewCo shall use its
---------------------------------------
reasonable best efforts to consummate, on or before December 31, 1998, the
initial public offering of shares of NewCo Common Stock, at a price per share
not less than the lowest price in the filing range estimated by NewCo's lead
underwriters in connection with the Form S-1 to be filed pursuant to Section
7.5, the lead underwriters for such initial public offering to be the lead
underwriters designated in such Form S-1. NewCo will not consummate such
initial public offering prior to the first date on which NewCo has published,
within the meaning of applicable rules relating to pooling accounting, financial
results covering at least 30 days of post-merger combined operations. The
Members shall be offered the opportunity to register and sell up to $25,000,000
of their shares of NewCo Common Stock pursuant to such Form S-1, subject to and
in accordance with the provisions of the Registration Agreement.
51
<PAGE>
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification by the Members. The Members shall jointly and
------------------------------
severally indemnify NewCo in respect of, and hold it harmless against, any and
all debts, obligations and other liabilities (whether absolute, accrued,
contingent, fixed or otherwise, or whether known or unknown, or due or to become
due or otherwise), monetary damages, fines, fees, penalties, interest
obligations, deficiencies, losses and expenses (including without limitation
amounts paid in settlement, interest, court costs, costs of investigators, fees
and expenses of attorneys, accountants, financial advisors and other experts,
and other expenses of litigation) ("Damages") incurred or suffered by the S&N or
-------
NewCo or any Affiliate thereof resulting from, relating to or constituting any
misrepresentation, breach of warranty or failure to perform any covenant or
agreement of S&N or the Members contained in this Agreement or in the S&N
Certificate.
8.2 Indemnification by Cornerstone. NewCo and Cornerstone shall jointly
------------------------------
and severally indemnify the Members in respect of, and hold them harmless
against, any and all Damages incurred or suffered by the Members resulting from,
relating to or constituting any misrepresentation, breach of warranty or failure
to perform any covenant or agreement of Cornerstone, NewCo or the Transitory
Subsidiary contained in this Agreement or in the Cornerstone Certificate.
8.3 Indemnification Claims.
----------------------
(a) A Party seeking to assert rights to indemnification under this
Article VIII (the "Indemnified Party") shall give written notification to the
-----------------
party from which indemnification is sought (the "Indemnifying Party") of the
------------------
commencement of any action, suit or proceeding relating to a third party claim
for which indemnification pursuant to this Article VIII may be sought. Such
notification shall be given within 20 business days after receipt by the
Indemnified Party of notice of such action, suit or proceeding, and shall
describe (to the extent known by the Indemnified Party) the facts constituting
the basis for such action, suit or proceeding and the amount of the claimed
damages; provided, however, that no delay on the part of the Indemnified Party
in notifying the Indemnifying Party shall relieve the Indemnifying Party of any
liability or obligation hereunder except to the extent of any damage or
liability caused by or arising out of such failure. Within 20 days after
delivery of such notification, the Indemnifying Party may, upon written notice
thereof to the Indemnified Party, assume control of the defense of such action,
suit or proceeding with counsel reasonably satisfactory to the Indemnified
Party, provided the Indemnifying Party acknowledges in writing to the
Indemnified Party that any damages, fines, costs or other liabilities that may
be assessed against the Indemnified Party in connection with such action, suit
or proceeding constitute Damages for which the Indemnified Party shall be
indemnified pursuant to this Article VIII. If the Indemnifying Party does not
so assume control of such defense, the Indemnified Party shall control such
defense. The Party not controlling such defense (the "Non-Controlling Party")
---------------------
may participate therein at its own expense; provided that if the
52
<PAGE>
Indemnifying Party assumes control of such defense and the Indemnified Party
reasonably concludes that the Indemnifying Party and the Indemnified Party have
conflicting interests or different defenses available with respect to such
action, suit or proceeding, the reasonable fees and expenses of counsel to the
Indemnified Party shall be considered "Damages" for purposes of this Agreement.
The Party controlling such defense (the "Controlling Party") shall keep the Non-
-----------------
Controlling Party advised of the status of such action, suit or proceeding and
the defense thereof and shall consider in good faith recommendations made by the
Non-Controlling Party with respect thereto. The Non-Controlling Party shall
furnish the Controlling Party such information as it may have with respect to
such action, suit or proceeding (including copies of any summons, complaint or
other pleading which may have been served on such party and any written claim,
demand, invoice, billing or other document evidencing or asserting the same) and
shall otherwise cooperate with and assist the Controlling Party in the defense
of such action, suit or proceeding. The Indemnifying Party shall not agree to
any settlement of, or the entry of any judgment arising from, any such action,
suit or proceeding without the prior written consent of the Indemnified Party,
which shall not be unreasonably withheld or delayed. The Indemnified Party shall
not agree to any settlement of, or the entry of any judgment arising from, any
such action, suit or proceeding without the prior written consent of the
Indemnifying Party, which shall not be unreasonably withheld or delayed.
(b) In order to seek indemnification under this Article VIII, an
Indemnified Party shall give a written notification (a "Claim Notice") to the
------------
Indemnifying Party which contains (i) a description and the amount (the "Claimed
-------
Amount") of any Damages incurred or reasonably expected to be incurred by the
- ------
Indemnified Party, (ii) a statement that the Indemnified Party is entitled to
indemnification under this Article VIII for such Damages and a reasonable
explanation of the basis therefor, and (iii) a demand for payment in the amount
of such Damages.
(c) Within 20 days after delivery of a Claim Notice, the Indemnifying
Party shall deliver to the Indemnified Party a written response (the "Response")
--------
in which the Indemnifying Party shall: (i) agree that the Indemnified Party is
entitled to receive all of the Claimed Amount (in which case the Response shall
be accompanied by certificates, issued in the name of the Indemnified Party or
duly endorsed for transfer to the Indemnified Party, representing shares of
NewCo Common Stock having a value (as determined below) equal to the Claimed
Amount), (ii) agree that the Indemnified Party is entitled to receive part, but
not all, of the Claimed Amount (the "Agreed Amount") (in which case the Response
-------------
shall be accompanied by certificates, issued in the name of the Indemnified
Party or duly endorsed for transfer to the Indemnified Party, representing
shares of NewCo Common Stock having a value equal to the Agreed Amount) or (iii)
dispute that the Indemnified Party is entitled to receive any of the Claimed
Amount. If the Indemnifying Party in the Response contests the payment of all
or part of the Claimed Amount, the
53
<PAGE>
Indemnifying Party and the Indemnified Party shall follow the procedures set
forth in Section 8.3(d) for the resolution of such dispute (a "Dispute"). For
-------
purposes of this Article VIII, shares of NewCo Common Stock shall be valued at
$17.00 per share.
(d) During the 60-day period following the delivery of a Response that
reflects a Dispute, the Indemnifying Party and the Indemnified Party shall use
good faith efforts to resolve the Dispute. If the Dispute is not resolved
within such 60-day period, the Indemnifying Party and the Indemnified Party
shall submit the Dispute to a mutually acceptable alternative dispute resolution
procedure (which shall be binding upon the parties), including without
limitation one administered by the American Arbitration Association or the
Center for Public Resources (the "ADR Procedure"). The Indemnifying Party and
-------------
the Indemnified Party shall, in consultation with the chosen dispute resolution
service (the "ADR Service"), promptly agree upon a format and timetable for the
-----------
ADR Procedure, agree upon the rules applicable to the ADR Procedure, and
promptly undertake the ADR Procedure. Neither the Indemnifying Party nor the
Indemnified Party may commence litigation or seek other remedies with respect to
the Dispute except to the extent necessary or appropriate to enforce the
determination reached in the ADR Procedure. The fees and expenses of any ADR
Service used by the Indemnifying Party and the Indemnified Party shall be borne
by the non-prevailing party in the Dispute, as determined by the ADR Service.
(e) Notwithstanding the other provisions of this Section 8.3, if a
third party asserts (other than by means of a lawsuit) that NewCo or S&N is
liable to it for a monetary or other obligation which may constitute or result
in Damages for which NewCo may be entitled to indemnification pursuant to this
Article VIII, and NewCo or S&N reasonably determines that a timely settlement of
such obligation will minimize the amount of the associated Damages or that it
has other valid business reasons to fulfill such obligation, then (i) NewCo or
S&N shall be entitled to satisfy such obligation, with prior notice to, but
without prior consent from, the Indemnifying Party Members, (ii) NewCo may
subsequently make a claim for indemnification pursuant to this Article VIII in
accordance with the provisions of this Section 8.3, and (iii) NewCo shall be
reimbursed, in accordance with the provisions of this Section 8.3, for any such
Damages for which it is entitled to indemnification pursuant to this Article
VIII (subject to the right of the Indemnifying Party to dispute, in the manner
set forth in Section 8.3, the entitlement of NewCo to indemnification or the
amount for which it is entitled to indemnification).
8.4 Survival of Representations and Warranties. All representations and
------------------------------------------
warranties contained in this Agreement, the S&N Certificate or the Cornerstone
Certificate shall survive the Closing and any investigation at any time made by
or on behalf of an Indemnified Party and shall expire on the earlier to occur of
(i) the date one year following the Closing Date and (ii) the date on which
NewCo's audit for its fiscal year ended January 30, 1999 is completed. If an
Indemnified Party delivers to an Indemnifying Party, before expiration of a
representation or warranty, either a
54
<PAGE>
Claim Notice based upon a breach of such representation or warranty, or a notice
that, as a result a legal proceeding instituted by or written claim made by a
third party, the Indemnified Party reasonably expects to incur Damages as a
result of a breach of such representation or warranty (an "Expected Claim
--------------
Notice"), then such representation or warranty shall survive until, but only for
- ------
purposes of, the resolution of the matter covered by such notice. If the legal
proceeding or written claim with respect to which an Expected Claim Notice has
been given is definitively withdrawn or resolved in favor of the Indemnified
Party, the Indemnified Party shall promptly so notify the Indemnifying Party.
8.5 Limitations.
-----------
(a) Notwithstanding anything to the contrary herein, (i) the aggregate
liability of the Members for Damages under this Article VIII shall not exceed
$7,082,388, (ii) the aggregate liability of Cornerstone for Damages under this
Article VIII shall not exceed $7,082,388 and (iii) Cornerstone shall be liable
under this Article VIII for only that portion of the aggregate Damages which
exceeds $500,000. For purposes solely of this Article VIII, (x) all
representations and warranties of the Members in Article III (other than Section
3.15 and 3.32) shall be construed as if the term "material" and any reference to
"S&N Material Adverse Effect" (and variations thereof) were omitted from such
representations and warranties, and (y) all representations and warranties of
Cornerstone in Article IV (other than Section 4.15 and 4.29) shall be construed
as if the term "material" and any reference to "Cornerstone Material Adverse
Effect" (and variations thereof) were omitted from such representations and
warranties.
(b) Except with respect to claims based on fraud, after the Closing,
the rights of an Indemnified Party under this Article VIII shall be the
exclusive remedy of an Indemnified Party with respect to claims resulting from
or relating to any misrepresentation, breach of warranty or failure to perform
any covenant or agreement contained in this Agreement.
(c) No Member shall have any right of contribution against S&N with
respect to any breach by a Member of any of its representations, warranties,
covenants or agreements.
ARTICLE IX
TERMINATION
9.1 Termination of Agreement. Either Cornerstone or S&N may terminate
------------------------
this Agreement prior to the Closing as provided below:
55
<PAGE>
(a) the Cornerstone and S&N may terminate this Agreement by mutual
written consent; or
(b) Cornerstone may terminate this Agreement by giving written notice
to S&N in the event S&N or any Member is in breach of any representation,
warranty or covenant contained in this Agreement, and such breach, individually
or in combination with any other such breach, (i) would cause the conditions set
forth in clauses (d) or (e) of Section 6.1 not to be satisfied and (ii) is not
cured within 15 days following delivery by Cornerstone to S&N of written notice
of such breach;
(c) S&N may terminate this Agreement by giving written notice to
Cornerstone in the event Cornerstone, NewCo or the Transitory Subsidiary is in
breach of any representation, warranty or covenant contained in this Agreement,
and such breach, individually or in combination with any other such breach, (i)
would cause the conditions set forth in clauses (d) or (e) of Section 6.2 not to
be satisfied and (ii) is not cured within 15 days following delivery by S&N to
Cornerstone of written notice of such breach;
(d) Cornerstone may terminate this Agreement by giving written notice
to S&N if the Closing shall not have occurred on or before August 27, 1998 by
reason of the failure of any condition precedent under Section 6.1 hereof
(unless the failure results primarily from a breach by Cornerstone, NewCo or the
Transitory Subsidiary of any representation, warranty or covenant contained in
this Agreement); or
(e) S&N may terminate this Agreement by giving written notice to
Cornerstone if the Closing shall not have occurred on or before August 27, 1998
by reason of the failure of any condition precedent under Section 6.2 hereof
(unless the failure results primarily from a breach by S&N or any Member of any
representation, warranty or covenant contained in this Agreement).
9.2 Effect of Termination. If any Party terminates this Agreement
---------------------
pursuant to Section 9.1, all obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except for any
liability of S&N pursuant to Section 9.3 below, or any liability of any Party
for a willful breach of any representation or warranty or a breach of any
covenant set forth in this Agreement prior to such termination).
56
<PAGE>
ARTICLE X
OTHER AGREEMENTS
10.1 Press Releases and Announcements. No Party shall issue any press
--------------------------------
release or other public disclosure relating to the subject matter of this
Agreement without the prior written approval of the other Parties; provided,
--------
however, that Cornerstone or NewCo may make any public disclosure it believes in
- -------
good faith is required by law or regulation or stock market rules.
10.2 No Third Party Beneficiaries. This Agreement shall not confer any
----------------------------
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns.
10.3 Entire Agreement. This Agreement (including the documents referred
----------------
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, with respect to the subject matter hereof (including without
limitation the Letter of Intent dated July 13, 1998); provided that the
confidentiality letter agreements dated June 11, 1998 and July 1, 1998 between
Cornerstone and S&N shall remain in effect in accordance with their terms.
10.4 Succession and Assignment. This Agreement shall be binding upon and
-------------------------
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests or obligations hereunder without the prior written approval of
the other Parties.
10.5 Counterparts; Facsimile Signature. This Agreement may be executed in
---------------------------------
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This Agreement may
be executed by facsimile signature.
10.6 Headings. The section headings contained in this Agreement are
--------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.7 Notices. All notices, requests, demands, claims, and other
-------
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered four
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one business day after it is sent via a reputable
nationwide overnight courier service, in each case to the intended recipient as
set forth below:
57
<PAGE>
If to S&N or a Member: Copies to both of:
--------------------- -----------------
Fred E. and Moria E. Kamgar Vedder, Price, Kaufman &
106 Emerald Bay Kammholz
Laguna Beach, CA 92651 222 North LaSalle Street
Home Fax No. (714) 376-6776 Chicago, IL 60601-1003
Attn: Guy E. Snyder, Esq.
and and
Robert M. Perkowitz Jeffer, Mangels, Butler &
3817 Bonwood Drive Marmaro
Charlotte, NC 28211 2121 Avenue of the Stars
Home Fax No. (704) 366-8517 10th Floor
Los Angeles, Ca 90067
Attn: William F. Capps, Esq.
If to Cornerstone, NewCo or the
-------------------------------
Transitory Subsidiary: Copy to:
--------------------- -------
Cornerstone Brands, Hale and Dorr LLP
Inc. 60 State Street
415 Congress Street, Suite 600 Boston, MA 02109
Portland, ME 04101 Attn: Patrick J. Rondeau, Esq.
Attn: Chief Executive Officer
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the party for
whom it is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
10.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Delaware without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the application of laws of
any jurisdictions other than those of the State of Delaware.
10.9 Amendments and Waivers. This Agreement may be amended at any time
----------------------
prior to the Closing by written agreement of Cornerstone and all of the Members.
No waiver by any Party of any default, misrepresentation, or breach of
58
<PAGE>
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
10.10 Severability. Any term or provision of this Agreement that is
------------
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
10.11 Construction. The language used in this Agreement shall be deemed to
------------
be the language chosen by the Parties to express their mutual intent, and no
rule of strict construction shall be applied against any Party. Any reference to
any federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise.
10.12 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
---------------------------------------
identified in this Agreement are incorporated herein by reference and made a
part hereof.
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
THE INTERNATIONAL
CORNERSTONE GROUP, INC.
By: /s/ WILLIAM T. END
------------------
Title: Chief Executive Officer
CORNERSTONE BRANDS, INC.
By: /s/ WILLIAM T. END
------------------
Title: Chief Executive Officer
CORNERSTONE SN ACQUISITION CORP.
By: /s/ WILLIAM T. END
------------------
Title: President
SMITH & NOBLE LLC
By: /s/ FRED E. KAMGAR
------------------
Title: Manager
/s/ FRED E. KAMGAR
------------------
FRED E. KAMGAR
/s/ MOIRA E. KAMGAR
-------------------
MOIRA E. KAMGAR
/s/ ROBERT M. PERKOWITZ
-----------------------
ROBERT M. PERKOWITZ
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<PAGE>
The following attachments to the foregoing Agreement and Plan of Reorganization
dated August 25, 1998 (the "Agreement") by and among The International
Cornerstone Group, Inc., the Registrant, Cornerstone SN Acquisition Corp., Smith
& Noble LLC and the Members of Smith & Noble LLC have not been filed herewith,
in accordance with Item 601(b)(2) of Regulation S-K under the Securities Act of
1933, as amended, because such attachments do not contain information that is
material to an investment decision and that is not otherwise disclosed in the
Agreement or in the Registrant's Registration Statement on Form S-1, as amended:
Schedule 1.10 -- Assigned Agreements
Exhibit A -- Agreement of Merger
Exhibit B -- LLC Merger Documents
Exhibit C -- Contribution Documents
Exhibit D -- Draft Form S-1
Exhibit E -- Executive Agreement
Exhibit F -- Amended and Restated Registration Agreement
Exhibit G -- Letter Agreement
Exhibit H -- Amendment to Stockholders Agreement
Exhibit I -- Opinion of Vedder, Price, Kaufman & Kammholz
Exhibit J -- Opinion of Hale and Dorr LLP
Exhibit K -- Stock Options
Exhibit L -- Form of Stay Bonus Agreement and List of Stay Bonus Recipients
The Registrant agrees to furnish supplementally copies of the above attachments
to the Securities and Exchange Commission upon request.
61
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION OF
CORNERSTONE BRANDS, INC.
Cornerstone Brands, 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
amendments to the Certificate of Incorporation of the Corporation, as amended to
date (the "Certificate"), set forth in this Certificate of Amendment. The
stockholders of the Corporation duly approved, pursuant to Section 242 of the
DGCL, the amendments set forth in this Certificate of Amendment. The amendments
so approved by the Board of Directors and the stockholders of the Corporation
are:
1. ARTICLE IV of the Certificate is hereby deleted in its entirety and the
following ARTICLE IV is inserted in lieu thereof:
ARTICLE IV
The total number of shares of all classes of stock which the
Corporation has authority to issue is 155,000,000 shares, consisting of (i)
150,000,000 shares of Common Stock, $.001 par value per share ("Common
Stock"), and (ii) 5,000,000 shares of Preferred Stock, $.01 par value per
share ("Preferred Stock").
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
of each class of capital stock of the Corporation.
<PAGE>
A. COMMON STOCK
------------
1. General. The voting, dividend and liquidation rights of the
-------
holders of the Common Stock are subject to and qualified by the rights of
the holders of the Preferred Stock of any series as may be designated by
the Board of Directors upon any issuance of the Preferred Stock of any
series.
2. Voting. The holders of the Common Stock are entitled to one
------
vote for each share held at all meetings of stockholders (and written
actions in lieu of meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by
the affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote, irrespective of the provisions of Section
242(b)(2) of the General Corporation Law of Delaware.
3. Dividends. Dividends may be declared and paid on the Common
---------
Stock from funds lawfully available therefor as and when determined by the
Board of Directors and subject to any preferential dividend rights of any
then outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the
-----------
Corporation, whether voluntary or involuntary, holders of Common Stock will
be entitled to receive all assets of the Corporation available for
distribution to its stockholders, subject to any preferential rights of any
then outstanding Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in
the resolution or resolutions providing for the issue of such series
adopted by the Board of Directors of the Corporation as hereinafter
provided. Any shares of Preferred Stock which may be redeemed, purchased
or acquired by the Corporation may be reissued except as otherwise provided
by law. Different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purposes of voting by
classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and
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<PAGE>
in connection with the creation of any such series, by resolution or
resolutions providing for the issue of the shares thereof, to determine and
fix such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative participating, optional or other
special rights, and qualifications, limitations or restrictions thereof,
including without limitation thereof, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be stated and
expressed in such resolutions, all to the full extent now or hereafter
permitted by the General Corporation Law of Delaware. Without limiting the
generality of the foregoing, the resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or
rank equally or be junior to the Preferred Stock of any other series to the
extent permitted by law. Except as otherwise provided in this Certificate
of Incorporation, no vote of the holders of the Preferred Stock or Common
Stock shall be a prerequisite to the designation or issuance of any shares
of any series of the Preferred Stock authorized by and complying with the
conditions of this Certificate of Incorporation, the right to have such
vote being expressly waived by all present and future holders of the
capital stock of the Corporation.
2. ARTICLE V of the Certificate is hereby deleted in its entirety and the
following ARTICLE V is inserted in lieu thereof:
ARTICLE V
The Board of Directors is expressly authorized to adopt, amend or
repeal the By-Laws of the Corporation.
3. ARTICLE VI of the Certificate is hereby deleted in its entirety and the
following ARTICLE VI is inserted in lieu thereof:
ARTICLE VI
This Article is inserted for the management of the business and for
the conduct of the affairs of the Corporation.
1. Number of Directors. The number of directors of the Corporation
-------------------
shall not be less than three. The exact number of directors within the
limitation specified in the preceding sentence shall be fixed from time to
time pursuant to a resolution adopted by the Board of Directors.
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<PAGE>
2. Classes of Directors. The Board of Directors shall be and is
--------------------
divided into three classes: Class I, Class II and Class III. No one class
shall have more than one director more than any other class. If a fraction
is contained in the quotient arrived at by dividing the authorized number
of directors by three, then, if such fraction is one-third, the extra
director shall be a member of Class I, and if such fraction is two-thirds,
one of the extra directors shall be a member of Class I and one of the
extra directors shall be a member of Class II, unless otherwise provided
for from time to time by resolution adopted by the Board of Directors.
3. Election of Directors. Elections of Directors need not be by
---------------------
written ballot except as and to the extent provided in the By-Laws of the
Company.
4. Terms of Office. Each director shall serve for a term ending on
---------------
the date of the third annual meeting following the annual meeting at which
such director was elected; provided, that each initial director in Class I
--------
shall serve for a term ending on the date of the annual meeting next
following the end of the corporation's fiscal year ending January 30, 1999;
each initial director in Class II shall serve for a term ending on the date
of the annual meeting next following the end of the Corporation's fiscal
year ending January 29, 2000; and each initial director in Class III shall
serve for a term ending on the date of the annual meeting next following
the fiscal year ending February 3, 2001; and provided further, that the
--------
term of each director shall continue until the election and qualification
of his/her successor and shall be subject to his/her earlier death,
resignation or removal.
5. Allocation of Directors among Classes in the Event of Increases or
------------------------------------------------------------------
Decreases in the Number of Directors. In the event of any increase or
------------------------------------
decrease in the authorized number of directors, (i) each director then
serving as such shall nevertheless continue as a director of the class of
which he/she is a member until the expiration of his/her current term,
subject to his/her earlier death, resignation or removal, and (ii) the
newly created or eliminated directorships resulting from such increase or
decrease shall be apportioned by the Board of Directors among the three
classes of directors in accordance with the provisions of Section 2 above.
-4-
<PAGE>
6. Quorum; Action at Meeting. A majority of the total number of
-------------------------
directors then in office shall constitute a quorum at all meetings of the
Board of Directors. In the event one or more of the directors shall be
disqualified to vote at any meeting, then the required quorum shall be
reduced by one for each such director so disqualified; provided, however,
-------- -------
that in no case shall less than one-third of the number of directors fixed
pursuant to Section 1 above constitute a quorum. If at any meeting of the
Board of Directors there shall be less than such a quorum, a majority of
those present may adjourn the meeting from time to time. Every act or
decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the
Board of Directors unless a greater number is required by law, by the By-
Laws of the Corporation or by this Certificate of Incorporation.
7. Removal. If and for so long as the Board of Directors is
-------
classified pursuant to Section 141(d) of the General Corporation Law of
Delaware, stockholders may effect the removal of a director or the entire
Board of Directors only for cause, unless this Certificate of Incorporation
provides otherwise.
8. Vacancies. Unless and until filled by the stockholders, any
---------
vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may be filled by a vote of a
majority of the directors then in office, although less than a quorum, or
by a sole remaining director. A director elected to fill a vacancy shall
be elected to hold office until the next election of the class for which
such director shall have been chosen, subject to the election and
qualification of his/her successor and to his/her earlier death,
resignation or removal.
9. Stockholder Nominations and Introduction of Business, Etc. Advance
----------------------------------------------------------
notice of stockholder nominations for election of directors and other
business to be brought by stockholders before a meeting of stockholders
shall be given in the manner provided by the By-Laws of the Corporation.
10. Amendments. Notwithstanding any other provisions of law, this
----------
Certificate of Incorporation or the By-Laws of the Corporation, and
notwithstanding the fact that a lesser percentage may be specified by law,
the affirmative vote of the holders of at least seventy-five percent (75%)
of the votes which all of the stockholders would be entitled to cast at an
annual election of directors or class of directors shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
VI.
-5-
<PAGE>
4. ARTICLE VII of the Certificate is hereby deleted in its entirety and the
following ARTICLE VII is inserted in lieu thereof:
ARTICLE VII
Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for
breaches of fiduciary duty, no director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary
damages for any breach of fiduciary duty as a director, notwithstanding any
provision of law imposing such liability. No amendment to or repeal of
this provision shall apply to or have any effect on the liability or
alleged liability of any director of the Corporation for or with respect to
any acts or omissions of such director occurring prior to such amendment.
5. ARTICLE VIII of the Certificate is hereby deleted in its entirety and the
following ARTICLE VIII is inserted in lieu thereof:
ARTICLE VIII
1. Actions, Suits and Proceedings Other than by or in the Right of
---------------------------------------------------------------
the Corporation. The Corporation shall indemnify each 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 is or was, or has agreed to
become, a director or officer of the Corporation, or is or was serving, or
has agreed to serve, at the request of the Corporation, as a director,
officer or trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise (including any
employee benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or
omitted in such capacity, against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom, 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, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
-6-
<PAGE>
settlement, conviction or upon a plea of nolo contendere or its equivalent,
---------------
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful. Notwithstanding anything to the contrary in this
Article, except as set forth in Section 7 below, the Corporation shall not
indemnify an Indemnitee seeking indemnification in connection with a
proceeding (or part thereof) initiated by the Indemnitee unless the
initiation thereof was approved by the Board of Directors of the
Corporation. Notwithstanding anything to the contrary in this Article, the
Corporation shall not indemnify an Indemnitee to the extent such Indemnitee
is reimbursed from the proceeds of insurance, and in the event the
Corporation makes any indemnification payments to an Indemnitee and such
Indemnitee is subsequently reimbursed from the proceeds of insurance, such
Indemnitee shall promptly refund such indemnification payments to the
Corporation to the extent of such insurance reimbursement.
2. Actions or Suits by or in the Right of the Corporation. The
------------------------------------------------------
Corporation shall indemnify any Indemnitee 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 is or was, or has agreed to
become, a director or officer of the Corporation, or is or was serving, or
has agreed to serve, at the request of the Corporation, as a director,
officer or trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise (including any
employee benefit plan), or by reason of any action alleged to have been
taken or omitted in such capacity, against all expenses (including
attorneys' fees) and, to the extent permitted by law, amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom,
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, 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
Delaware shall determine upon application that, despite the adjudication of
such liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses
(including attorneys' fees) which the Court of Chancery of Delaware shall
deem proper.
-7-
<PAGE>
3. Indemnification for Expenses of Successful Party. Notwithstanding
------------------------------------------------
the other provisions of this Article, to the extent that an Indemnitee has
been successful, on the merits or otherwise, in defense of any action, suit
or proceeding referred to in Sections 1 and 2 of this Article, or in
defense of any claim, issue or matter therein, or on appeal from any such
action, suit or proceeding, he shall be indemnified against all expenses
(including attorneys' fees) actually and reasonably incurred by him or on
his behalf in connection therewith. Without limiting the foregoing, if any
action, suit or proceeding is disposed of, on the merits or otherwise
(including a disposition without prejudice), without (i) the disposition
being adverse to the Indemnitee, (ii) an adjudication that the Indemnitee
was liable to the Corporation, (iii) a plea of guilty or nolo contendere by
---------------
the Indemnitee, (iv) an adjudication that the Indemnitee did not act in
good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Corporation, and (v) with respect to any
criminal proceeding, an adjudication that the Indemnitee had reasonable
cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with
respect thereto.
4. Notification and Defense of Claim. As a condition precedent to
---------------------------------
his right to be indemnified, the Indemnitee must notify the Corporation in
writing as soon as practicable of any action, suit, proceeding or
investigation involving him for which indemnity will or could be sought.
With respect to any action, suit, proceeding or investigation of which the
Corporation is so notified, the Corporation will be entitled to participate
therein at its own expense and/or to assume the defense thereof at its own
expense, with legal counsel reasonably acceptable to the Indemnitee. After
notice from the Corporation to the Indemnitee of its election so to assume
such defense, the Corporation shall not be liable to the Indemnitee for any
legal or other expenses subsequently incurred by the Indemnitee in
connection with such claim, other than as provided below in this Section 4.
The Indemnitee shall have the right to employ his own counsel in connection
with such claim, but the fees and expenses of such counsel incurred after
notice from the Corporation of its assumption of the defense thereof shall
be at the expense of the Indemnitee unless (i) the employment of counsel by
the Indemnitee has been authorized by the Corporation, (ii) counsel to the
Indemnitee shall have reasonably concluded that there may be a conflict of
interest or position on any significant issue between the Corporation and
the Indemnitee in the conduct of the defense of such action or (iii) the
Corporation shall not in fact have employed counsel to assume the defense
of such action, in each of which cases the fees and expenses of counsel for
the Indemnitee
-8-
<PAGE>
shall be at the expense of the Corporation, except as otherwise expressly
provided by this Article. The Corporation shall not be entitled, without
the consent of the Indemnitee, to assume the defense of any claim brought
by or in the right of the Corporation or as to which counsel for the
Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.
5. Advance of Expenses. Subject to the provisions of Section 6
-------------------
below, in the event that the Corporation does not assume the defense
pursuant to Section 4 of this Article of any action, suit, proceeding or
investigation of which the Corporation receives notice under this Article,
any expenses (including attorneys' fees) incurred by an Indemnitee in
defending a civil or criminal action, suit, proceeding or investigation or
any appeal therefrom shall be paid by the Corporation in advance of the
final disposition of such matter; provided, however, that the payment of
-------- -------
such expenses incurred by an Indemnitee in advance of the final disposition
of such matter shall be made only upon receipt of an undertaking by or on
behalf of the Indemnitee to repay all amounts so advanced in the event that
it shall ultimately be determined that the Indemnitee is not entitled to be
indemnified by the Corporation as authorized in this Article. Such
undertaking shall be accepted without reference to the financial ability of
the Indemnitee to make such repayment.
6. Procedure for Indemnification. In order to obtain indemnification
-----------------------------
or advancement of expenses pursuant to Section 1, 2, 3 or 5 of this
Article, the Indemnitee shall submit to the Corporation a written request,
including in such request such documentation and information as is
reasonably available to the Indemnitee and is reasonably necessary to
determine whether and to what extent the Indemnitee is entitled to
indemnification or advancement of expenses. Any such indemnification or
advancement of expenses shall be made promptly, and in any event within 60
days after receipt by the Corporation of the written request of the
Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines within such 60-day period that the Indemnitee did
not meet the applicable standard of conduct set forth in Section 1 or 2, as
the case may be. Such determination shall be made in each instance by (a)
a majority vote of the directors of the Corporation consisting of persons
who are not at that time parties to the action, suit or proceeding in
question ("disinterested directors"), whether or not a quorum, (b) a
majority vote of a quorum of the outstanding shares of stock of all classes
entitled to vote for directors, voting as a single class, which quorum
shall consist of stockholders who are not at that time parties to
-9-
<PAGE>
the action, suit or proceeding in question, (c) independent legal counsel
(who may, to the extent permitted by law, be regular legal counsel to the
Corporation), or (d) a court of competent jurisdiction.
7. Remedies. The right to indemnification or advances as granted by
--------
this Article shall be enforceable by the Indemnitee in any court of
competent jurisdiction if the Corporation denies such request, in whole or
in part, or if no disposition thereof is made within the 60-day period
referred to above in Section 6. Unless otherwise required by law, the
burden of proving that the Indemnitee is not entitled to indemnification or
advancement of expenses under this Article shall be on the Corporation.
Neither the failure of the Corporation to have made a determination prior
to the commencement of such action that indemnification is proper in the
circumstances because the Indemnitee has met the applicable standard of
conduct, nor an actual determination by the Corporation pursuant to Section
6 that the Indemnitee has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the
Indemnitee has not met the applicable standard of conduct. The
Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
8. Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article or of the relevant provisions of the General Corporation Law of
Delaware or any other applicable laws shall affect or diminish in any way
the rights of any Indemnitee to indemnification under the provisions hereof
with respect to any action, suit, proceeding or investigation arising out
of or relating to any actions, transactions or facts occurring prior to the
final adoption of such amendment, termination or repeal.
9. Other Rights. The indemnification and advancement of expenses
------------
provided by this Article shall not be deemed exclusive of any other rights
to which an Indemnitee seeking indemnification or advancement of expenses
may be entitled under any law (common or statutory), agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in any other capacity while holding
office for the Corporation, and shall continue as to an Indemnitee who has
ceased to be a director or officer, and shall inure to the benefit of the
estate, heirs, executors and administrators of the Indemnitee. Nothing
contained in this Article shall be deemed to prohibit, and the Corporation
is specifically authorized to enter into, agreements with officers and
directors
-10-
<PAGE>
providing indemnification rights and procedures different from those set
forth in this Article. In addition, the Corporation may, to the extent
authorized from time to time by its Board of Directors, grant
indemnification rights to other employees or agents of the Corporation or
other persons serving the Corporation and such rights may be equivalent to,
or greater or less than, those set forth in this Article.
10. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for some or
a portion of the expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement actually and reasonably incurred by him or on
his behalf in connection with any action, suit, proceeding or investigation
and any appeal therefrom but not, however, for the total amount thereof,
the Corporation shall nevertheless indemnify the Indemnitee for the portion
of such expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement to which the Indemnitee is entitled.
11. Insurance. The Corporation may purchase and maintain insurance,
---------
at its expense, to protect itself and any director, officer, employee or
agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit plan)
against any expense, liability or loss incurred by him in any such
capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of Delaware.
12. Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the
surviving corporation, the surviving corporation shall assume the
obligations of the Corporation under this Article with respect to any
action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the date of such merger
or consolidation.
13. Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with any action, suit, proceeding or
investigation, whether civil, criminal or administrative, including an
action by or in the right of the Corporation, to the fullest extent
-11-
<PAGE>
permitted by any applicable portion of this Article that shall not have
been invalidated and to the fullest extent permitted by applicable law.
14. Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and
Section 145(i).
15. Subsequent Legislation. If the General Corporation Law of
----------------------
Delaware is amended after adoption of this Article to expand further the
indemnification permitted to Indemnitees, then the Corporation shall
indemnify such persons to the fullest extent permitted by the General
Corporation Law of Delaware, as so amended.
6. ARTICLE IX of the Certificate is hereby deleted in its entirety and the
following ARTICLE IX is inserted in lieu thereof:
ARTICLE IX
Any action required or permitted to be taken at any annual or special
meeting of stockholders of the Corporation may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting
forth the action so taken, is signed by the holders of all of the
outstanding shares of stock that would be entitled to vote thereon at a
meeting of stockholders. Notwithstanding any other provision of law, this
Certificate of Incorporation or the By-Laws of the Corporation, and
notwithstanding the fact that a lesser percentage may be specified by law,
the affirmative vote of the holders of at least seventy-five percent (75%)
of the votes which all of the stockholders would be entitled to cast at an
annual election of directors or class of directors shall be required to
amend or repeal, or to adopt any provision inconsistent with, this ARTICLE
IX.
7. ARTICLE X of the Certificate is hereby deleted in its entirety and the
following ARTICLE X is inserted in lieu thereof:
ARTICLE X
Section 203 of the General Corporation Law of Delaware, as it may be
amended from time to time, shall apply to the Corporation.
8. ARTICLE XI of the Certificate is hereby deleted in its entirety and the
following ARTICLE XI is inserted in lieu thereof:
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<PAGE>
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute and this Certificate of Incorporation, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
9. ARTICLE XII of the Certificate is hereby deleted in its entirety
IN WITNESS WHEREOF, Cornerstone Brands, Inc. has caused this Certificate of
Amendment to be executed as of this ___ day of ________, 1998.
CORNERSTONE BRANDS, INC.
By: _______________________________
Mark Fasold
Executive Vice President
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<PAGE>
EXHIBIT 3.3
RESTATED CERTIFICATE OF INCORPORATION
OF
CORNERSTONE BRANDS, INC.
Cornerstone Brands, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. The name of the Corporation is Cornerstone Brands, Inc. The name
under which the Corporation was originally incorporated was Cornerstone
Holdings, Inc.
2. The Corporation filed its original Certificate of Incorporation with
the Secretary of State of the State of Delaware on August 19, 1998 (the
"Certificate of Incorporation") and a Certificate of Amendment with the
Secretary of State of the State of Delaware on August 21, 1998.
3. At a meeting of the Board of Directors of the Corporation, a
resolution was adopted, pursuant to Section 245 of the General Corporation Law
of the State of Delaware, setting forth a Restated Certificate of Incorporation
of the Corporation (the "Restated Certificate of Incorporation"). The Restated
Certificate of Incorporation only restates and integrates and does not further
amend the provisions of the Corporation's Certificate of Incorporation, as
amended to date, and there is no discrepancy between the provisions of the
Certificate of Incorporation, as amended to date, and the provisions of the
Restated Certificate of Incorporation. The resolution setting forth the
Restated Certificate of Incorporation is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation, be and
hereby is restated in its entirety so that the same shall read as
follows:
ARTICLE I
The name of the Corporation is: Cornerstone Brands, 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
<PAGE>
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
The total number of shares of all classes of stock which the Corporation
has authority to issue is 155,000,000 shares, consisting of (i) 150,000,000
shares of Common Stock, $.001 par value per share ("Common Stock"), and (ii)
5,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred
Stock").
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions of each class of
capital stock of the Corporation.
A. COMMON STOCK
------------
1. General. The voting, dividend and liquidation rights of the holders
-------
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one vote for
------
each share held at all meetings of stockholders (and written actions in lieu of
meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
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<PAGE>
3. Dividends. Dividends may be declared and paid on the Common Stock
---------
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
-----------
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by the General Corporation Law of Delaware. Without
limiting the generality of the foregoing, the resolutions providing for issuance
of any series of Preferred Stock may provide that such series shall be superior
or rank equally or be junior to the Preferred Stock of any other series to the
extent permitted by law. Except as otherwise provided in this Certificate of
Incorporation, no vote of the holders of the Preferred Stock or Common Stock
shall be a prerequisite to the designation or issuance of any shares of any
series of the Preferred Stock authorized by and complying with the conditions of
this Certificate of Incorporation, the right to have such vote being expressly
waived by all present and future holders of the capital stock of the
Corporation.
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<PAGE>
ARTICLE V
The Board of Directors is expressly authorized to adopt, amend or repeal
the By-Laws of the Corporation.
ARTICLE VI
This Article is inserted for the management of the business and for the
conduct of the affairs of the Corporation.
1. Number of Directors. The number of directors of the Corporation shall
-------------------
not be less than three. The exact number of directors within the limitation
specified in the preceding sentence shall be fixed from time to time pursuant to
a resolution adopted by the Board of Directors.
2. Classes of Directors. The Board of Directors shall be and is divided
--------------------
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class. If a fraction is contained in
the quotient arrived at by dividing the authorized number of directors by three,
then, if such fraction is one-third, the extra director shall be a member of
Class I, and if such fraction is two-thirds, one of the extra directors shall be
a member of Class I and one of the extra directors shall be a member of Class
II, unless otherwise provided for from time to time by resolution adopted by the
Board of Directors.
3. Election of Directors. Elections of Directors need not be by written
---------------------
ballot except as and to the extent provided in the By-Laws of the Company.
4. Terms of Office. Each director shall serve for a term ending on the
---------------
date of the third annual meeting following the annual meeting at which such
director was elected; provided, that each initial director in Class I shall
--------
serve for a term ending on the date of the annual meeting next following the end
of the corporation's fiscal year ending January 30, 1999; each initial director
in Class II shall serve for a term ending on the date of the annual meeting next
following the end of the Corporation's fiscal year ending January 29, 2000; and
each initial director in Class III shall serve for a term ending on the date of
the annual meeting next following the fiscal year ending February 3, 2001; and
provided further, that the term of each director shall continue until the
- --------
election and qualification of his/her successor and shall be subject to his/her
earlier death, resignation or removal.
5. Allocation of Directors among Classes in the Event of Increases or
------------------------------------------------------------------
Decreases in the Number of Directors. In the event of any increase or decrease
- ------------------------------------
in the authorized number of directors, (i) each director then serving as such
shall
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<PAGE>
nevertheless continue as a director of the class of which he/she is a member
until the expiration of his/her current term, subject to his/her earlier death,
resignation or removal, and (ii) the newly created or eliminated directorships
resulting from such increase or decrease shall be apportioned by the Board of
Directors among the three classes of directors in accordance with the provisions
of Section 2 above.
6. Quorum; Action at Meeting. A majority of the total number of
-------------------------
directors then in office shall constitute a quorum at all meetings of the Board
of Directors. In the event one or more of the directors shall be disqualified
to vote at any meeting, then the required quorum shall be reduced by one for
each such director so disqualified; provided, however, that in no case shall
-------- -------
less than one-third of the number of directors fixed pursuant to Section 1 above
constitute a quorum. If at any meeting of the Board of Directors there shall be
less than such a quorum, a majority of those present may adjourn the meeting
from time to time. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the Board of Directors unless a greater number is
required by law, by the By-Laws of the Corporation or by this Certificate of
Incorporation.
7. Removal. If and for so long as the Board of Directors is classified
-------
pursuant to Section 141(d) of the General Corporation Law of Delaware,
stockholders may effect the removal of a director or the entire Board of
Directors only for cause, unless this Certificate of Incorporation provides
otherwise.
8. Vacancies. Unless and until filled by the stockholders, any vacancy
---------
in the Board of Directors, however occurring, including a vacancy resulting from
an enlargement of the Board, may be filled by a vote of a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director. A director elected to fill a vacancy shall be elected to hold office
until the next election of the class for which such director shall have been
chosen, subject to the election and qualification of his/her successor and to
his/her earlier death, resignation or removal.
9. Stockholder Nominations and Introduction of Business, Etc. Advance
----------------------------------------------------------
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the By-Laws of the Corporation.
10. Amendments. Notwithstanding any other provisions of law, this
----------
Certificate of Incorporation or the By-Laws of the Corporation, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
votes which all of the stockholders would be entitled to cast at an annual
election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article VI.
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<PAGE>
ARTICLE VII
Except to the extent that the General Corporation Law of Delaware prohibits
the elimination or limitation of liability of directors for breaches of
fiduciary duty, no director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
ARTICLE VIII
1. Actions, Suits and Proceedings Other than by or in the Right of the
-------------------------------------------------------------------
Corporation. The Corporation shall indemnify each 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 is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, 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, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The 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 did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 7
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation. Notwithstanding anything to the contrary in this Article, the
Corporation shall not indemnify an Indemnitee to the extent such Indemnitee is
reimbursed from the proceeds of insurance, and in the event the Corporation
makes any indemnification payments to an Indemnitee and such Indemnitee is
subsequently
-6-
<PAGE>
reimbursed from the proceeds of insurance, such Indemnitee shall promptly refund
such indemnification payments to the Corporation to the extent of such insurance
reimbursement.
2. Actions or Suits by or in the Right of the Corporation. The
------------------------------------------------------
Corporation shall indemnify any Indemnitee 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 is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and, to the extent permitted by law,
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom, 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, 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 Delaware shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware shall deem proper.
3. Indemnification for Expenses of Successful Party. Notwithstanding the
------------------------------------------------
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the
---------------
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
4. Notification and Defense of Claim. As a condition precedent to his
---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as
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<PAGE>
practicable of any action, suit, proceeding or investigation involving him for
which indemnity will or could be sought. With respect to any action, suit,
proceeding or investigation of which the Corporation is so notified, the
Corporation will be entitled to participate therein at its own expense and/or to
assume the defense thereof at its own expense, with legal counsel reasonably
acceptable to the Indemnitee. After notice from the Corporation to the
Indemnitee of its election so to assume such defense, the Corporation shall not
be liable to the Indemnitee for any legal or other expenses subsequently
incurred by the Indemnitee in connection with such claim, other than as provided
below in this Section 4. The Indemnitee shall have the right to employ his own
counsel in connection with such claim, but the fees and expenses of such counsel
incurred after notice from the Corporation of its assumption of the defense
thereof shall be at the expense of the Indemnitee unless (i) the employment of
counsel by the Indemnitee has been authorized by the Corporation, (ii) counsel
to the Indemnitee shall have reasonably concluded that there may be a conflict
of interest or position on any significant issue between the Corporation and the
Indemnitee in the conduct of the defense of such action or (iii) the Corporation
shall not in fact have employed counsel to assume the defense of such action, in
each of which cases the fees and expenses of counsel for the Indemnitee shall be
at the expense of the Corporation, except as otherwise expressly provided by
this Article. The Corporation shall not be entitled, without the consent of the
Indemnitee, to assume the defense of any claim brought by or in the right of the
Corporation or as to which counsel for the Indemnitee shall have reasonably made
the conclusion provided for in clause (ii) above.
5. Advance of Expenses. Subject to the provisions of Section 6 below, in
-------------------
the event that the Corporation does not assume the defense pursuant to Section 4
of this Article of any action, suit, proceeding or investigation of which the
Corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an Indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the Corporation in advance of the final disposition of such matter; provided,
--------
however, that the payment of such expenses incurred by an Indemnitee in advance
- -------
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article.
Such undertaking shall be accepted without reference to the financial ability of
the Indemnitee to make such repayment.
6. Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such
-8-
<PAGE>
indemnification or advancement of expenses shall be made promptly, and in any
event within 60 days after receipt by the Corporation of the written request of
the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines within such 60-day period that the Indemnitee did not
meet the applicable standard of conduct set forth in Section 1 or 2, as the case
may be. Such determination shall be made in each instance by (a) a majority vote
of the directors of the Corporation consisting of persons who are not at that
time parties to the action, suit or proceeding in question ("disinterested
directors"), whether or not a quorum, (b) a majority vote of a quorum of the
outstanding shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum shall consist of stockholders who are not
at that time parties to the action, suit or proceeding in question, (c)
independent legal counsel (who may, to the extent permitted by law, be regular
legal counsel to the Corporation), or (d) a court of competent jurisdiction.
7. Remedies. The right to indemnification or advances as granted by this
--------
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise required by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation. Neither the failure of the
Corporation to have made a determination prior to the commencement of such
action that indemnification is proper in the circumstances because the
Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Corporation pursuant to Section 6 that the Indemnitee has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the Indemnitee has not met the applicable standard of
conduct. The Indemnitee's expenses (including attorneys' fees) incurred in
connection with successfully establishing his right to indemnification, in whole
or in part, in any such proceeding shall also be indemnified by the Corporation.
8. Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.
9. Other Rights. The indemnification and advancement of expenses
------------
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall
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<PAGE>
continue as to an Indemnitee who has ceased to be a director or officer, and
shall inure to the benefit of the estate, heirs, executors and administrators of
the Indemnitee. Nothing contained in this Article shall be deemed to prohibit,
and the Corporation is specifically authorized to enter into, agreements with
officers and directors providing indemnification rights and procedures different
from those set forth in this Article. In addition, the Corporation may, to the
extent authorized from time to time by its Board of Directors, grant
indemnification rights to other employees or agents of the Corporation or other
persons serving the Corporation and such rights may be equivalent to, or greater
or less than, those set forth in this Article.
10. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. Insurance. The Corporation may purchase and maintain insurance, at
---------
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of Delaware.
12. Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
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<PAGE>
14. Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
15. Subsequent Legislation. If the General Corporation Law of Delaware is
----------------------
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
ARTICLE IX
Any action required or permitted to be taken at any annual or special
meeting of stockholders of the Corporation may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, is signed by the holders of all of the outstanding shares
of stock that would be entitled to vote thereon at a meeting of stockholders.
Notwithstanding any other provision of law, this Certificate of Incorporation or
the By-Laws of the Corporation, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the votes which all of the stockholders
would be entitled to cast at an annual election of directors or class of
directors shall be required to amend or repeal, or to adopt any provision
inconsistent with, this ARTICLE IX.
ARTICLE X
Section 203 of the General Corporation Law of Delaware, as it may be
amended from time to time, shall apply to the Corporation.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute and this Certificate of Incorporation, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Restated Certificate of Incorporation to be signed by
its Executive Vice President this day of , 1998.
---- -----------
CORNERSTONE BRANDS, INC.
By:
_______________________________
Mark Fasold
Executive Vice President
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<PAGE>
BY-LAWS
OF
CORNERSTONE BRANDS, INC.
ARTICLE 1 - Stockholders
------------------------
1.1 Place of Meetings. All meetings of stockholders shall be held at such
-----------------
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors or the President or Chief Executive Officer or,
if not so designated, at the registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the election
--------------
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors or the President or Chief Executive Officer (which date shall not be a
legal holiday in the place where the meeting is to be held) at the time and
place to be fixed by the Board of Directors or the President or Chief Executive
Officer and stated in the notice of the meeting. If no annual meeting is held
in accordance with the foregoing provisions, the Board of Directors shall cause
the meeting to be held as soon thereafter as convenient. If no annual meeting
is held in accordance with the foregoing provisions, a special meeting may be
held in lieu of the annual meeting, and any action taken at that special meeting
shall have the same effect as if it had been taken at the annual meeting, and in
such case all references in these By-laws to the annual meeting of the
stockholders shall be deemed to refer to such special meeting.
1.3 Special Meetings. Special meetings of stockholders may be called at
----------------
any time by the President or Chief Executive Officer or by the Board of
Directors. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
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<PAGE>
1.5 Voting List. The officer who has charge of the stock ledger of the
-----------
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time of the meeting, and may be inspected by any
stockholder who is present.
1.6 Quorum. Except as otherwise provided by law, the Certificate of
------
Incorporation or these By-laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any
------------
other time and to any other place at which a meeting of stockholders may be held
under these By-laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for each
------------------
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to
vote at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for him by
written proxy executed by the stockholder or his authorized agent and delivered
to the Secretary of the corporation. No such proxy shall be voted or acted upon
after three years from the date of its execution, unless the proxy expressly
provides for a longer period.
1.9 Action at Meeting. When a quorum is present at any meeting, the
-----------------
holders of shares of stock representing a majority of the votes cast on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of shares of stock of
that class representing a
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<PAGE>
majority of the votes cast on a matter) shall decide any matter to be voted upon
by the stockholders at such meeting, except when a different vote is required by
express provision of law, the Certificate of Incorporation or these By-Laws.
When a quorum is present at any meeting, any election by stockholders shall be
determined by a plurality of the votes cast on the election.
1.10 Action without Meeting. Any action required or permitted to be taken
----------------------
at any annual or special meeting of stockholders of the corporation may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, is signed by the holders of all of
the outstanding shares of stock that would be entitled to vote thereon at a
meeting of stockholders.
1.11. Conduct of Meetings.
-------------------
(a) Rules, Regulations and Procedures. The Board of Directors of the
---------------------------------
corporation may adopt by resolution such rules, regulations and procedures for
the conduct of any meeting of stockholders of the corporation as it shall deem
appropriate. Except to the extent inconsistent with such rules, regulations and
procedures as adopted by the Board of Directors, the officer of the corporation
presiding at any meeting of stockholders shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts as, in
the judgment of such officer, are appropriate for the proper conduct of the
meeting. Such rules, regulations or procedures, whether adopted by the Board of
Directors or prescribed by the officer of the corporation presiding at the
meeting, may include, without limitation, the following: (i) the establishment
of an agenda or order of business for the meeting; (ii) rules and procedures for
maintaining order at the meeting and the safety of those present; (iii)
limitations on attendance at or participation in the meeting to stockholders of
record of the corporation, their duly authorized and constituted proxies or such
other persons as shall be determined; (iv) restrictions on entry to the meeting
after the time fixed for the commencement thereof; and (v) limitations on the
time allotted to questions or comments by participants. Unless and to the
extent determined by the Board of Directors or the officer of the corporation
presiding at the meeting, meetings of stockholders shall not be required to be
held in accordance with the rules of parliamentary procedure.
(b) Closing of Polls. The officer of the corporation presiding at any
----------------
meeting of stockholders shall announce at the meeting when the polls for each
matter to be voted upon at the meeting will be closed. If no announcement is
made, the polls shall be deemed to have closed upon the final adjournment of the
meeting. After the polls close, no ballots, proxies or votes or any revocations
or changes thereto may be accepted.
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1.12 Nomination of Directors.
-----------------------
(a) Except for (i) any directors entitled, in accordance with the
Certificate of Incorporation, to be elected by the holders of any class or
series of preferred stock or any other securities of the corporation entitled to
elect directors upon specified circumstances and (ii) any directors elected in
accordance with Section 2.8 hereof by the Board to fill a vacancy, only persons
who are nominated in accordance with the procedures set forth in this Section
1.12 shall be eligible for election as directors. Nomination for election to
the Board of Directors of the corporation at a meeting of stockholders may be
made (i) by or at the direction of the Board of Directors or (ii) by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting pursuant to timely notice thereof in writing to the Secretary in
accordance with the procedures set forth in this Section 1.12. To be timely, a
stockholder's notice must be delivered to, or mailed and received by, the
Secretary at the principal executive offices of the corporation as follows: (a)
in the case of an election of directors at an annual meeting of stockholders,
not less than 70 days nor more than 90 days prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is advanced by more than 20 days, or delayed by
more than 70 days, from such anniversary date, to be timely, a stockholder's
notice must be so delivered or received not earlier than the ninetieth day prior
to such annual meeting and not later than the close of business on the later of
the seventieth day prior to such annual meeting or the tenth day following the
day on which public announcement of the date of such annual meeting is first
made; or (b) in the case of an election of directors at a special meeting of
stockholders, not earlier than the ninetieth day prior to such special meeting
and not later than the close of business on the later of the seventieth day
prior to such special meeting or the tenth day following the day on which public
announcement of the date of such special meeting is first made; or (c) in the
case of the election of directors at the Company's annual meeting of
stockholders held in 1999, no sooner than March 1, 1999 and no later than March
21, 1999. The stockholder's notice to the Secretary shall set forth: (a) as to
each proposed nominee (i) the name, age, business address and, if known,
residence address of each such nominee, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of stock of the
corporation which are beneficially owned by such person, and (iv) any other
information concerning such person that must be disclosed as to nominees in
proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended (or any successor provision thereto); and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
corporation's books, of such stockholder and (ii) the class and number of shares
of the corporation which are beneficially owned by such stockholder; and (c) as
to the beneficial owner, if any, on whose behalf the nomination is made (i) the
name and address of such person and (ii) the class and number of shares of the
corporation which are beneficially owned by such person. In addition, to be
effective, the stockholder's notice must be accompanied by the written consent
of the
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<PAGE>
proposed nominee to serve as a director if elected. The corporation may require
any proposed nominee to furnish such other information as may reasonably be
required by the corporation to determine the eligibility of such proposed
nominee to serve as a director of the corporation.
(b) The officer of the corporation presiding at any meeting shall, if
the facts warrant, determine that a nomination was not properly made in
accordance with the provisions of this Section 1.12, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
(c) Nothing in the foregoing provision shall obligate the corporation
or the Board of Directors to include in any proxy statement or other stockholder
communication distributed on behalf of the corporation or the Board of Directors
information with respect to any nominee for directors submitted by a
stockholder.
1.13 Notice of Business at Annual Meetings.
-------------------------------------
(a) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (b) otherwise brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, (i) if such business relates to the election of
directors of the corporation, the procedures in Section 1.12 must be complied
with and (ii) if such business relates to any other matter, the stockholder must
have given timely notice thereof in writing to the Secretary in accordance with
the procedures set forth in this Section 1.13. To be timely, a stockholder's
notice must be delivered to, or mailed and received by, the Secretary at the
principal executive offices of the corporation (a) not less than 70 days nor
more than 90 days prior to the first anniversary of the preceding year's annual
meeting or (b) in the case of the Company's annual meeting of stockholders held
in 1999, no sooner than March 1, 1999 and no later than March 21, 1999;
provided, however, that in the event that the date of the annual meeting is
- -------- -------
advanced by more than 20 days, or delayed by more than 70 days, from such
anniversary date, to be timely, a stockholder's notice must be so delivered or
received not earlier than the ninetieth day prior to such annual meeting and not
later than the close of business on the later of the seventieth day prior to
such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. The stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting: (a) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and address, as
they appear on the corporation's books, of the stockholder proposing such
business, and
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<PAGE>
the name and address of the beneficial owner, if any, on whose behalf the
proposal is made, (c) the class and number of shares of the corporation which
are beneficially owned by the stockholder and beneficial owner, if any, and (d)
any material interest of the stockholder or such beneficial owner, if any, in
such business. Notwithstanding anything in these By-laws to the contrary, no
business shall be conducted at any annual meeting of stockholders except in
accordance with the procedures set forth in this Section 1.13 and except that
any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or
any successor provision) promulgated under the Securities Exchange Act of 1934,
as amended, and is to be included in the corporation's proxy statement for an
annual meeting of stockholders shall be deemed to comply with the requirements
of this Section 1.13.
(b) The officer of the corporation presiding at any meeting shall, if
the facts warrant, determine that business was not properly brought before the
meeting in accordance with the provisions of this Section 1.13, and if he should
so determine, he shall so declare to the meeting and such business shall not be
transacted.
ARTICLE 2 - Directors
----------------------
2.1 General Powers. The business and affairs of the corporation shall be
--------------
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2.2 Number of Directors. The number of directors of the corporation shall
-------------------
not be less than three. The exact number of directors within the limitation
specified in the preceding sentence shall be fixed from time to time pursuant to
a resolution adopted by the Board of Directors.
2.3 Classes of Directors. The Board of Directors shall be and is divided
--------------------
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class. If a fraction is contained in
the quotient arrived at by dividing the authorized number of directors by three,
then, if such fraction is one-third, the extra director shall be a member of
Class I, and if such fraction is two-thirds, one of the extra directors shall be
a member of Class I and one of the extra directors shall be a member of Class
II, unless otherwise provided for from time to time by resolution adopted by the
Board of Directors.
2.4 Terms of Office. Each director shall serve for a term ending on the
---------------
date of the third annual meeting following the annual meeting at which such
director was elected; provided, that each initial director in Class I shall
--------
serve for a term ending on
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<PAGE>
the date of the annual meeting next following the end of the corporation's
fiscal year ending January 30, 1999; each initial director in Class II shall
serve for a term ending on the date of the annual meeting next following the end
of the corporation's fiscal year ending January 29, 2000; and each initial
director in Class III shall serve for a term ending on the date of the annual
meeting next following the fiscal year ending February 3, 2001; and provided
--------
further, that the term of each director shall continue until the election and
qualification of his/her successor and shall be subject to his/her earlier
death, resignation or removal.
2.5 Allocation of Directors among Classes in the Event of Increases or
------------------------------------------------------------------
Decreases in the Number of Directors. In the event of any increase or decrease
- ------------------------------------
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he/she is a
member until the expiration of his/her current term, subject to his/her earlier
death, resignation or removal, and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors in accordance with
the provisions of this Article 2.
2.6 Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the President or
Chief Executive Officer or Secretary. 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.
2.7 Removal. If and for so long as the Board of Directors is classified
-------
pursuant to Section 141(d) of the General Corporation Law of Delaware,
stockholders may effect the removal of a director or the entire Board of
Directors only for cause, unless the Certificate of Incorporation provides
otherwise.
2.8 Vacancies. Unless and until filled by the stockholders, any vacancy
---------
in the Board of Directors, however occurring, including a vacancy resulting from
an enlargement of the Board, may be filled by a vote of a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director. A director elected to fill a vacancy shall be elected to hold office
until the next election of the class for which such director shall have been
chosen, subject to the election and qualification of his/her successor and to
his/her earlier death, resignation or removal.
2.9 Regular Meetings. Regular meetings of the Board of Directors may be
----------------
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
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<PAGE>
2.10 Special Meetings. Special meetings of the Board of Directors may be
----------------
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President or Chief Executive Officer,
two or more directors, or by one director in the event that there is only a
single director in office.
2.11 Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 48 hours in advance of the meeting, (ii) by sending a telegram or telex,
or delivering written notice by hand, to his last known business or home address
at least 48 hours in advance of the meeting, or (iii) by mailing written notice
to his last known business or home address at least 72 hours in advance of the
meeting. A notice or waiver of notice of a meeting of the Board of Directors
need not specify the purposes of the meeting.
2.12 Meetings by Telephone Conference Calls. Directors or any members of
--------------------------------------
any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
2.13 Quorum; Action at Meeting. A majority of the total number of
-------------------------
directors then in office shall constitute a quorum at all meetings of the Board
of Directors. In the event one or more of the directors shall be disqualified
to vote at any meeting, then the required quorum shall be reduced by one for
each such director so disqualified; provided, however, that in no case shall
-------- -------
less than one-third of the number of directors fixed pursuant to this Article 2
constitute a quorum. If at any meeting of the Board of Directors there shall be
less than such a quorum, a majority of those present may adjourn the meeting
from time to time. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the Board of Directors unless a greater number is
required by law, by the Certificate of Incorporation or by these By-Laws.
2.14 Action by Consent. Any action required or permitted to be taken at
-----------------
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all 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.
2.15 Committees. The Board of Directors may designate one or more
----------
committees, each committee to consist of one or more of the directors of the
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<PAGE>
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the corporation
and may authorize the seal of the corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports
as the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine, any committee may make rules for the conduct
of its business, but unless otherwise provided by the directors or in such
rules, its business shall be conducted as nearly as possible in the same manner
as is provided in these By-laws for the Board of Directors.
2.16 Compensation of Directors. Directors may be paid such compensation
-------------------------
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment
shall preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
ARTICLE 3 - Officers
--------------------
3.1 Enumeration. The officers of the corporation shall consist of a
-----------
President and/or Chief Executive Officer, a Secretary, a Treasurer and such
other officers with such other titles as the Board of Directors shall determine,
including a Chairman of the Board, a Vice-Chairman of the Board, and one or more
Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of
Directors may appoint such other officers as it may deem appropriate.
3.2 Election. The President and/or Chief Executive Officer, Treasurer and
--------
Secretary shall be elected annually by the Board of Directors at its first
meeting following the annual meeting of stockholders. Other officers may be
appointed by the Board of Directors at such meeting or at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or more
-------------
offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these By-laws, each officer shall hold office until his
successor is
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<PAGE>
elected and qualified, unless a different term is specified in the vote choosing
or appointing him, or until his earlier death, resignation or removal.
3.5 Resignation and Removal. Any officer may resign by delivering his
-----------------------
written resignation to the corporation at its principal office or to the
President, Chief Executive Officer or Secretary. 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 vote of a
majority of the entire number of directors then in office.
Except as the Board of Directors 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 resignation or removal, or any right to damages on
account of such removal, whether his 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 corporation.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring in
---------
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President or Chief
Executive Officer, Treasurer and Secretary. Each such successor shall hold
office for the unexpired term of his predecessor and until his successor is
elected and qualified, or until his earlier death, resignation or removal.
3.7 Chairman of the Board and Vice-Chairman of the Board. The Board of
----------------------------------------------------
Directors may appoint a Chairman of the Board and may designate the Chairman of
the Board as Chief Executive Officer. If the Board of Directors appoints a
Chairman of the Board, he shall perform such duties and possess such powers as
are assigned to him by the Board of Directors. If the Board of Directors
appoints a Vice-Chairman of the Board, he shall, in the absence or disability of
the Chairman of the Board, perform the duties and exercise the powers of the
Chairman of the Board and shall perform such other duties and possess such other
powers as may from time to time be vested in him by the Board of Directors.
3.8 President and Chief Executive Officer. The President or the Chief
-------------------------------------
Executive Officer shall, subject to the direction of the Board of Directors,
have general charge and supervision of the business of the corporation. Unless
otherwise provided by the Board of Directors, he shall preside at all meetings
of the stockholders and, if he is a director, at all meetings of the Board of
Directors. The President and/or the Chief Executive Officer shall perform such
other duties and shall have such other powers as the Board of Directors may from
time to time prescribe. If the offices of President and Chief Executive Officer
are held by the same
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<PAGE>
individual or if only one such office is filled, the terms of the first two
sentences of this Section 3.8 shall apply to the individual holding both such
offices or the one office which is filled. If the offices of President and Chief
Executive Officer are held by different individuals, the terms of the first two
sentences of this Section 3.8 shall apply only to the Chief Executive Officer.
3.9 Vice Presidents. Any Vice President shall perform such duties and
---------------
possess such powers as the Board of Directors or the President or Chief
Executive Officer may from time to time prescribe. In the event of the absence,
inability or refusal to act of the President or Chief Executive Officer, the
Vice President (or if there shall be more than one, the Vice Presidents in the
order determined by the Board of Directors) shall perform the duties of the
President or Chief Executive Officer and when so performing shall have all the
powers of and be subject to all the restrictions upon the President or Chief
Executive Officer. The Board of Directors may assign to any Vice President the
title of Executive Vice President, Senior Vice President or any other title
selected by the Board of Directors.
3.10 Secretary and Assistant Secretaries. The Secretary shall perform such
-----------------------------------
duties and shall have such powers as the Board of Directors or the President or
Chief Executive Officer may from time to time prescribe. In addition, the
Secretary shall perform such duties and have such powers as are incident to the
office of the secretary, including without limitation the duty and power to give
notices of all meetings of stockholders and special meetings of the Board of
Directors, to attend all meetings of stockholders and the Board of Directors and
keep a record of the proceedings, to maintain a stock ledger and prepare lists
of stockholders and their addresses as required, to be custodian of corporate
records and the corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or Chief Executive Officer or the
Secretary may from time to time prescribe. In the event of the absence,
inability or refusal to act of the Secretary, the Assistant Secretary, (or if
there shall be more than one, the Assistant Secretaries in the order determined
by the Board of Directors) shall perform the duties and exercise the powers of
the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such
----------------------------------
duties and shall have such powers as may from time to time be assigned to him by
the Board of Directors or the President or Chief Executive Officer. In
addition, the Treasurer shall perform such duties and have such powers as are
incident to the office of treasurer, including without limitation the duty and
power to keep and be
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<PAGE>
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these By-laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the President or Chief Executive Officer or the
Treasurer may from time to time prescribe. In the event of the absence,
inability or refusal to act of the Treasurer, the Assistant Treasurer, (or if
there shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors) shall perform the duties and exercise the powers of
the Treasurer.
3.12 Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE 4 - Capital Stock
-------------------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Transfers. Except as otherwise established by rules and regulations
---------
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-laws, the corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-laws.
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<PAGE>
4.3 Lost, Stolen or Destroyed Certificates. The corporation may issue a
--------------------------------------
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
4.4 Record Date. The Board of Directors may fix in advance a date as a
-----------
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 10 days after the date of adoption of a
record date for a written consent without a meeting, nor more than 60 days prior
to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is properly delivered to the corporation. The record date
for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5 - General Provisions
------------------------------
5.1 Fiscal Year. The fiscal year of the corporation shall be fixed from
-----------
time to time by resolution of the Board of Directors.
5.2 Corporate Seal. The corporate seal shall be in such form as shall be
--------------
approved by the Board of Directors.
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5.3 Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these By-laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
5.4 Voting of Securities. Except as the directors may otherwise
--------------------
designate, the President or Chief Executive Officer or Treasurer may waive
notice of, and act as, or appoint any person or persons to act as, proxy or
attorney-in-fact for this corporation (with or without power of substitution)
at, any meeting of stockholders or shareholders of any other corporation or
organization, the securities of which may be held by this corporation.
5.5 Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
5.6 Certificate of Incorporation. All references in these By-laws to the
----------------------------
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 Transactions with Interested Parties. No contract or transaction
------------------------------------
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum;
(2) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or
-14-
<PAGE>
(3) The contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
5.8 Severability. Any determination that any provision of these By-laws
------------
is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-laws.
5.9 Pronouns. All pronouns used in these By-laws shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
ARTICLE 6 - Amendments
----------------------
6.1 By the Board of Directors. These By-laws may be altered, amended or
-------------------------
repealed or new by-laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
6.2 By the Stockholders. These By-laws may also be altered, amended or
-------------------
repealed or new by-laws may be adopted by the affirmative vote of the holders of
a majority of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new by-laws shall have been stated in the
notice of such special meeting. Notwithstanding the preceding sentence, the
Certificate of Incorporation or these By-Laws, and notwithstanding the fact that
a lesser percentage may be specified by law, the affirmative vote of the holders
of at least seventy-five (75%) of the shares of the capital stock of the
corporation issued or outstanding and entitled to vote shall be required for the
stockholders to amend or repeal, or to adopt any provision inconsistent with
Section 1.3, Section 1.10, Section 1.11, Section 1.12, Section 1.13, Article 2
or Article 6 of these By-Laws.
-15-
<PAGE>
EXHIBIT 4.1
NUMBER SHARES
CB
TEMPORARY CERTIFICATE--EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN
READY FOR DELIVERY
CORNERSTONE BRANDS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 21922K 10 6
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE, OF
=========================== CORNERSTONE BRANDS, INC. ==========================
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate and the shares of Common Stock represented hereby are
received and held subject to the laws of the State of Delaware and to the
Certificate of Incorporation and the By-Laws of the Corporation, all as from
time to time amended, and the owner of this certificate by accepting the same
expressly assents thereto. This certificate is not valid unless countersigned by
the Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by the facsimile signatures of its duly authorized officers and a
facsimile of its corporate seal to be hereunto affixed.
Dated:
COUNTERSIGNED AND REGISTERED:
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
[SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE]
CHIEF FINANCIAL OFFICER AND TREASURER CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[SEAL OF CORNERSTONE BRANDS, INC. APPEARS HERE]
<PAGE>
CORNERSTONE BRANDS, INC.
The Corporation is authorized to issue more than one class or series of stock.
Upon written request, the Corporation will furnish without charge to each
stockholder a copy of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -as tenants in common UNIF GIFT MIN ACT-____________Custodian ____________
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_______________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
| |
- ----------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, ________________________________
_______________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: _______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM)
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.2
CORNERSTONE BRANDS, INC.
1998 STOCK INCENTIVE PLAN
-------------------------
1. Purpose
-------
The purpose of this 1998 Stock Incentive Plan (the "Plan") of Cornerstone
Brands, Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's stockholders.
Except where the context otherwise requires, the term "Company" shall include
any present or future subsidiary corporation, as defined in Section 424(f) of
the Internal Revenue Code of 1986, as amended, and any regulations promulgated
thereunder (the "Code"), and any other business venture (including without
limitation, joint venture or limited liability company) in which the Company has
a significant interest, as determined by the Board of Directors of the Company
(the "Board").
2. Eligibility
-----------
All of the Company's employees, officers, directors, consultants and
advisors (and any individuals who have accepted an offer for employment) are
eligible to be granted options, restricted stock awards, or other stock-based
awards (each, an "Award") under the Plan. Each person who has been granted an
Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
--------------------------
(a) Administration by Board of Directors. The Plan will be administered by
------------------------------------
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
<PAGE>
(b) Delegation to Executive Officers. To the extent permitted by
--------------------------------
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). All references in the
Plan to the "Board" shall mean the Board or a Committee of the Board or the
executive officer referred to in Section 3(b) to the extent that the Board's
powers or authority under the Plan have been delegated to such Committee or
executive officer.
4. Stock Available for Awards
--------------------------
(a) Number of Shares. Subject to adjustment under Section 8, Awards may be
----------------
made under the Plan for up to 3,200,000 shares of common stock, $.001 par value
per share, of the Company (the "Common Stock"). If any Award expires or is
terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not being issued,
the unused Common Stock covered by such Award shall again be available for the
grant of Awards under the Plan, subject, however, in the case of Incentive Stock
Options (as hereinafter defined), to any limitation required under the Code.
Shares issued under the Plan may consist in whole or in part of authorized but
unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 8, for
---------------------
Awards granted after the Common Stock is registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the maximum number of
shares of Common Stock with respect to which an Award may be granted to any
Participant under the Plan shall be 500,000 per calendar year. The per-
Participant limit described in this Section 4(b) shall be construed and applied
consistently with Section 162(m) of the Code.
5. Stock Options
-------------
(a) General. The Board may grant options to purchase Common Stock (each,
-------
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive
Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
-2-
<PAGE>
(b) Incentive Stock Options. An Option that the Board intends to be an
-----------------------
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
--------------
time each Option is granted and specify it in the applicable option agreement.
The exercise price per share of an Option shall be equal to at least the fair
market value of a share of the Common Stock on the date of grant, as determined
by the Board.
(d) Duration of Options. Each Option shall be exercisable at such times
-------------------
and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
(e) Exercise of Option. Options may be exercised by delivery to the
------------------
Company of a written notice of exercise signed by the proper person or by any
other form of notice (including electronic notice) approved by the Board
together with payment in full as specified in Section 5(f) for the number of
shares for which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
----------------------
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may, in its sole discretion, otherwise provide
in an option agreement, (i) delivery of an irrevocable and unconditional
undertaking by a creditworthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price or (ii) delivery by the Participant
to the Company of a copy of irrevocable and unconditional instructions to a
creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price;
(3) at such time as the Common Stock is registered under the Exchange
Act, delivery of shares of Common Stock owned by the Participant valued at their
fair market value as determined by (or in a manner approved by) the Board in
good faith ("Fair Market Value"), which Common Stock was owned by the
Participant at least six months prior to such delivery;
(4) to the extent permitted by the Board, in its sole discretion (i)
by delivery of a promissory note of the Participant to the Company on terms
determined
-3-
<PAGE>
by the Board, or (ii) by payment of such other lawful consideration as the Board
may determine; or
(5) any combination of the above permitted forms of payment.
6. Restricted Stock
----------------
(a) Grants. The Board may grant Awards entitling recipients to acquire
------
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
--------------------
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. Other Stock-Based Awards
------------------------
The Board shall have 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.
8. Adjustments for Changes in Common Stock and Certain Other Events
----------------------------------------------------------------
(a) Changes in Capitalization. In the event of any stock split, reverse
-------------------------
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the per-Participant limit set forth in Section 4(b), (iii) the number and
class of securities and exercise price per share subject to each outstanding
Option, (iv) the repurchase price per share
-4-
<PAGE>
subject to each outstanding Restricted Stock Award, and (v) the terms of each
other outstanding Award shall be appropriately adjusted by the Company (or
substituted Awards may be made, if applicable) to the extent the Board shall
determine, in good faith, that such an adjustment (or substitution) is necessary
and appropriate. If this Section 8(a) applies and Section 8(c) also applies to
any event, Section 8(c) shall be applicable to such event, and this Section 8(a)
shall not be applicable.
(b) Liquidation or Dissolution. In the event of a proposed liquidation or
--------------------------
dissolution of the Company, the Board shall upon written notice to the
Participants provide that all then unexercised Options will (i) become
exercisable in full as of a specified time at least 10 business days prior to
the effective date of such liquidation or dissolution and (ii) terminate
effective upon such liquidation or dissolution, except to the extent exercised
before such effective date. The Board may specify the effect of a liquidation
or dissolution on any Restricted Stock Award or other Award granted under the
Plan at the time of the grant of such Award.
(c) Acquisition and Change in Control Events
----------------------------------------
(1) Definitions
-----------
(a) An "Acquisition Event" shall mean:
(i) any merger or consolidation of the Company with or into
another entity as a result of which the Common Stock is
converted into or exchanged for the right to receive
cash, securities or other property; or
(ii) any exchange of shares of the Company for cash,
securities or other property pursuant to a statutory
share exchange transaction.
(b) A "Change in Control Event" shall mean:
(i) the acquisition by an individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) (a "Person") of beneficial ownership
of any capital stock of the Company if, after such
acquisition, such Person beneficially owns (within the
meaning of Rule 13d-3 promulgated under the Exchange
Act) 20% or more of either (x) the then-outstanding
shares of common stock of the
-5-
<PAGE>
Company (the "Outstanding Company Common Stock") or (y)
the combined voting power of the then-outstanding
securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company
Voting Securities"); provided, however, that for
-------- -------
purposes of this subsection (i), the following
acquisitions shall not constitute a Change in Control
Event: (A) any acquisition directly from the Company
(excluding an acquisition pursuant to the exercise,
conversion or exchange of any security exercisable for,
convertible into or exchangeable for common stock or
voting securities of the Company, unless the Person
exercising, converting or exchanging such security
acquired such security directly from the Company or an
underwriter or agent of the Company), (B) any
acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (C) any
acquisition by any corporation pursuant to a Business
Combination (as defined below) which complies with
clauses (x) and (y) of subsection (iii) of this
definition; or
(ii) such time as the Continuing Directors (as defined
below) do not constitute a majority of the Board (or,
if applicable, the Board of Directors of a successor
corporation to the Company), where the term "Continuing
Director" means at any date a member of the Board (x)
who was a member of the Board on the date of the
initial adoption of this Plan by the Board or (y) who
was nominated or elected subsequent to such date by at
least a majority of the directors who were Continuing
Directors at the time of such nomination or election or
whose election to the Board was recommended or endorsed
by at least a majority of the directors who were
Continuing Directors at the time of such nomination or
election; provided, however, that there shall be
-------- -------
excluded from this clause (y) any individual whose
initial assumption of office occurred as a result of an
actual or threatened election contest with respect to
the election or removal of directors or other actual or
threatened solicitation of proxies or consents, by or
on behalf of a person other than the Board; or
-6-
<PAGE>
(iii) the consummation of a merger, consolidation,
reorganization or statutory share exchange involving
the Company or a sale or other disposition of all or
substantially all of the assets of the Company (a
"Business Combination"), unless, immediately following
such Business Combination, each of the following two
conditions is satisfied: (x) all or substantially all
of the individuals and entities who were the beneficial
owners of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly
or indirectly, more than 50% of the then-outstanding
shares of common stock and the combined voting power of
the then-outstanding securities entitled to vote
generally in the election of directors, respectively,
of the resulting or acquiring corporation in such
Business Combination (which shall include, without
limitation, a corporation which as a result of such
transaction owns the Company or substantially all of
the Company's assets either directly or through one or
more subsidiaries) (such resulting or acquiring
corporation is referred to herein as the "Acquiring
Corporation") in substantially the same proportions as
their ownership of the Outstanding Company Common Stock
and Outstanding Company Voting Securities,
respectively, immediately prior to such Business
Combination and (y) no Person (excluding the Acquiring
Corporation or any employee benefit plan (or related
trust) maintained or sponsored by the Company or by the
Acquiring Corporation) beneficially owns, directly or
indirectly, 20% or more of the then-outstanding shares
of common stock of the Acquiring Corporation, or of the
combined voting power of the then-outstanding
securities of such corporation entitled to vote
generally in the election of directors (except to the
extent that such ownership existed prior to the
Business Combination).
-7-
<PAGE>
(c) "Cause" shall mean any (i) willful failure by the
Participant, which failure is not cured within 30 days
of written notice to the Participant from the Company,
to perform his or her material responsibilities to the
Company or (ii) willful misconduct by the Participant
which materially affects the business reputation of the
Company. The Participant shall be considered to have
been discharged for "Cause" if the Company determines,
within 30 days after the Participant's resignation,
that discharge for Cause was warranted.
(2) Effect on Options
-----------------
(a) Acquisition Event. Upon the occurrence of an
-----------------
Acquisition Event (regardless of whether such event
also constitutes a Change in Control Event), or the
execution by the Company of any agreement with respect
to an Acquisition Event (regardless of whether such
event will result in a Change in Control Event), the
Board shall provide that all outstanding Options shall
be assumed, or equivalent options shall be substituted,
by the Acquiring Corporation (or an affiliate thereof);
provided that if such Acquisition Event also
-------- ----
constitutes a Change in Control Event, except to the
extent specifically provided to the contrary in the
instrument evidencing any Option or any other agreement
between a Participant and the Company, such assumed or
substituted options shall become immediately
exercisable in full if during the vesting period of the
Option the Participant's employment with the Company or
the Acquiring Corporation is terminated without Cause
by the Company or the Acquiring Corporation. For
purposes hereof, an Option shall be considered to be
assumed if, following consummation of the Acquisition
Event, the Option confers the right to purchase, for
each share of Common Stock subject to the Option
immediately prior to the consummation of the
Acquisition Event, the consideration (whether cash,
securities or other property) received as a result of
the Acquisition Event by holders of Common Stock for
each share of Common Stock held immediately prior to
the consummation of the Acquisition Event (and if
holders were offered a choice of consideration, the
type of consideration chosen by the holders of a
majority of the outstanding shares of Common Stock);
provided, however, that if the consideration
-8-
<PAGE>
received as a result of the Acquisition Event is not
solely common stock of the Acquiring Corporation (or an
affiliate thereof), the Company may, with the consent
of the Acquiring Corporation, provide for the
consideration to be received upon the exercise of
Options to consist solely of common stock of the
Acquiring Corporation (or an affiliate thereof)
equivalent in fair market value to the per share
consideration received by holders of outstanding shares
of Common Stock as a result of the Acquisition Event.
Notwithstanding the foregoing, if the Acquiring
Corporation (or an affiliate thereof) does not agree to
assume, or substitute for, such Options, then the Board
shall, upon written notice to the Participants, provide
that all then unexercised Options will become
exercisable in full as of a specified time prior to the
Acquisition Event and will terminate immediately prior
to the consummation of such Acquisition Event, except
to the extent exercised by the Participants before the
consummation of such Acquisition Event; provided,
however, that in the event of an Acquisition Event
under the terms of which holders of Common Stock will
receive upon consummation thereof a cash payment for
each share of Common Stock surrendered pursuant to such
Acquisition Event (the "Acquisition Price"), then the
Board may instead provide that all outstanding Options
shall terminate upon consummation of such Acquisition
Event and that each Participant shall receive, in
exchange therefor, a cash payment equal to the amount
(if any) by which (A) the Acquisition Price multiplied
by the number of shares of Common Stock subject to such
outstanding Options (whether or not then exercisable),
exceeds (B) the aggregate exercise price of such
Options.
(b) Change in Control Event that is not an Acquisition
--------------------------------------------------
Event. Upon the occurrence of a Change in Control Event
------
that does not also constitute an Acquisition Event,
except to the extent specifically provided to the
contrary in the instrument evidencing any Option or any
other agreement between a Participant and the Company,
each such Option shall be immediately exercisable in
full if during the vesting period of the Option the
Participant's employment with the Company or the
Acquiring Corporation is
-9-
<PAGE>
terminated without Cause by the Company or the
Acquiring Corporation.
(3) Effect on Restricted Stock Awards
---------------------------------
(a) Acquisition Event that is not a Change in Control
-------------------------------------------------
Event. Upon the occurrence of an Acquisition Event that
------
is not a Change in Control Event, the repurchase and
other rights of the Company under each outstanding
Restricted Stock Award shall inure to the benefit of
the Company's successor and shall apply to the cash,
securities or other property which the Common Stock was
converted into or exchanged for pursuant to such
Acquisition Event in the same manner and to the same
extent as they applied to the Common Stock subject to
such Restricted Stock Award.
(b) Change in Control Event. Upon the occurrence of a
-----------------------
Change in Control Event (regardless of whether such
event also constitutes an Acquisition Event), except to
the extent specifically provided to the contrary in the
instrument evidencing any Restricted Stock Award or any
other agreement between a Participant and the Company,
each such Restricted Stock Award shall immediately
become free from all conditions or restrictions if
during the vesting period of the Restricted Stock Award
the Participant's employment with the Company or the
Acquiring Corporation is terminated without Cause by
the Company or the Acquiring Corporation.
(4) Effect on Other Awards
----------------------
(a) Acquisition Event that is not a Change in Control
-------------------------------------------------
Event. The Board shall specify the effect of an
------
Acquisition Event that is not a Change in Control Event
on any other Award granted under the Plan at the time
of the grant of such Award.
(b) Change in Control Event. Upon the occurrence of a
-----------------------
Change in Control Event (regardless of whether such
event also constitutes an Acquisition Event), except to
the extent specifically provided to the contrary in the
instrument evidencing any Award or any other agreement
between a Participant and the Company, each such Award
shall immediately become fully exercisable, realizable,
vested or
-10-
<PAGE>
free from conditions or restrictions if during the
vesting period of the Award the Participant's
employment with the Company or the Acquiring
Corporation is terminated without Cause by the Company
or the Acquiring Corporation.
9. General Provisions Applicable to Awards
---------------------------------------
(a) Transferability of Awards. Except as the Board may otherwise determine
-------------------------
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award shall be evidenced by a written instrument
-------------
in such form as the Board shall determine. Each Award may contain terms and
conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each Award
----------------
may be made alone or in addition or in relation to any other Award. The terms
of each Award need not be identical, and the Board need not treat Participants
uniformly.
(d) Termination of Status. The Board shall determine the effect on an
---------------------
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) Withholding. Each Participant shall pay to the Company, or make
-----------
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, Participants may satisfy such tax obligations in whole or
in part by delivery of shares of Common Stock, including shares retained from
the Award creating the tax obligation, valued at their Fair Market Value. The
Company may, to the extent permitted by law, deduct any such tax obligations
from any payment of any kind otherwise due to a Participant.
(f) Amendment of Award. The Board may amend, modify or terminate any
------------------
outstanding Award, including but not limited to, substituting therefor another
-11-
<PAGE>
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(h) Acceleration. The Board may at any time provide that any Options shall
------------
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of restrictions in full or in part or that any other Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
10. Miscellaneous
-------------
(a) No Right To Employment or Other Status. No person shall have any claim
--------------------------------------
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the record date and
the distribution date for such stock dividend shall be entitled to receive, on
the distribution date, the stock dividend with respect to the shares of Common
Stock
-12-
<PAGE>
acquired upon such Option exercise, notwithstanding the fact that such
shares were not outstanding as of the close of business on the record date for
such stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on
-------------------------------
the date on which it is adopted by the Board. No Awards shall be granted under
the Plan after the completion of ten years from the earlier of (i) the date on
which the Plan was adopted by the Board or (ii) the date the Plan was approved
by the Company's stockholders, but Awards previously granted may extend beyond
that date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time, provided that to the extent required by
Section 162(m), no Award granted to a Participant designated as subject to
Section 162(m) by the Board after the date of such amendment shall become
exercisable, realizable or vested, as applicable to such Award (to the extent
that such amendment to the Plan was required to grant such Award to a particular
Participant), unless and until such amendment shall have been approved by the
Company's stockholders as required by Section 162(m) (including the vote
required under Section 162(m)).
(e) Governing Law. The provisions of the Plan and all Awards made
-------------
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
Adopted by the Board of Directors of
the Company on August 21, 1998
Approved by the Stockholders of the
Company on __________ ___, 1998
-13-
<PAGE>
EXHIBIT 10.3
CORNERSTONE BRANDS, INC.
1998 DIRECTOR STOCK OPTION PLAN
(as amended through October 16, 1998)
1. Purpose.
-------
The purpose of this 1998 Director Stock Option Plan (the "Plan") of
Cornerstone Brands, Inc. (the "Company") is to encourage ownership in the
Company by non-employee directors (as defined below) of the Company whose
continued services are considered essential to the Company's future progress and
to provide them with a further incentive to remain as directors of the Company.
2. Administration.
--------------
The Board of Directors shall supervise and administer the Plan. All
questions concerning interpretation of the Plan or any options granted under it
shall be resolved by the Board of Directors and such resolution shall be final
and binding upon all persons having an interest in the Plan. The Board of
Directors may, to the full extent permitted by or consistent with applicable
laws or regulations, delegate any or all of its powers under the Plan to a
committee appointed by the Board of Directors, and if a committee is so
appointed, all references to the Board of Directors in the Plan shall mean and
relate to such committee.
3. Participation in the Plan.
-------------------------
Directors of the Company who are not employees of the Company or any
subsidiary of the Company ("non-employee directors") shall be eligible to
receive options under the Plan.
4. Stock Subject to the Plan.
-------------------------
(a) The maximum number of shares of the Company's Common Stock, par value
$.001 per share ("Common Stock"), which may be issued under the Plan shall be
200,000 shares, subject to adjustment as provided in Section 7.
(b) If any outstanding option under the Plan for any reason expires or is
terminated without having been exercised in full, the shares covered by the
unexercised portion of such option shall again become available for issuance
pursuant to the Plan.
<PAGE>
(c) All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
(d) Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
5. Terms, Conditions and Form of Options.
-------------------------------------
Each option granted under the Plan shall be evidenced by a written
agreement which shall comply with and be subject to the following terms and
conditions:
(a) Option Grant Dates. Options shall automatically be granted to all non-
------------------
employee directors as follows:
(i) each person who first becomes a non-employee director after the
closing date (the "Closing Date") of the Company's initial public offering of
Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, shall be granted an option to purchase
12,000 shares of Common Stock on the date of his or her initial election to
the Board of Directors; and
(ii) each non-employee director shall be granted an option to purchase
6,000 shares of Common Stock on the date of each Annual Meeting of
Stockholders of the Company following the Closing Date commencing with the
Annual Meeting of Stockholders held in 1999 (other than a director who was
initially elected to the Board of Directors at any such Annual Meeting or, if
previously, at any time after the prior year's Annual Meeting of Stockholders),
provided that he or she is serving as a director immediately following such
Annual Meeting, and further provided that he or she attended more than 75% of
the total number of meetings of the Board of Directors (excluding meetings held
by telephone conference on less than seven days notice) and any Committee of the
Board of Directors on which he or she served, in the preceding fiscal year.
Each date of grant of an option pursuant to this Section 5(a) is hereinafter
referred to as an "Option Grant Date."
(b) Option Exercise Price. The option exercise price per share for each
---------------------
option granted under the Plan shall equal (i) the last reported sales price per
share of the Company's Common Stock on the Nasdaq National Market (or if the
Common Stock is traded on a national securities exchange on the date of grant,
the reported closing sales price per share of the Company's Common Stock on such
exchange) on the date of grant (or if no such price is reported on such date
such price as reported on the nearest preceding day) or (ii) if the Common Stock
is not traded on the
-2-
<PAGE>
Nasdaq National Market or a national securities exchange, the fair market value
per share on the date of grant as most recently determined by the Board of
Directors.
(c) Transferability of Options. Except as the Board of Directors may
--------------------------
otherwise determine or provide in an option granted under the Plan, any option
granted under the Plan to an optionee shall not be transferable by the optionee
other than by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder, and shall be
exercisable during the optionee's lifetime only by the optionee or the
optionee's guardian or legal representative. References to an optionee, to the
extent relevant in the context, shall include references to authorized
transferees.
(d) Vesting Period. Each option granted under the Plan shall become
--------------
exercisable in three equal annual installments beginning on the first
anniversary of the Option Grant Date; provided, however, that the optionee is
serving as a director of the Company on such vesting date (it being understood
that a director whose term expires at an Annual Meeting of Stockholders and who
does not stand for re-election is deemed to be a director on (but not following)
the date of such Annual Meeting for the purposes of this Section 5 if he
continues to serve through the date of such Annual Meeting). Notwithstanding
the foregoing, all options granted pursuant to the Plan shall become immediately
exercisable upon the occurrence of the circumstances described in Section 7(d).
(e) Termination. Each option shall terminate, and may no longer be
-----------
exercised, on the earlier of (i) the date seven years after the Option Grant
Date of such option or (ii) 90 days after the day on which the optionee ceases
to serve as a director of the Company.
(f) Exercise of Option. Options may be exercised by delivery to the
------------------
Company of a written notice of exercise signed by the proper person or by any
other form of notice (including electronic notice) approved by the Board of
Directors together with payment in full as specified in Section 5(g) for the
number of shares for which the Option is exercised.
(g) Payment Upon Exercise. Common Stock purchased upon the exercise of an
---------------------
Option granted under the Plan shall be paid for as follows:
(i) in cash or by check, payable to the order of the Company;
(ii) except as the Board of Directors may, in its sole discretion,
otherwise provide in an option agreement, (A) delivery of an irrevocable and
unconditional undertaking by a creditworthy broker to deliver promptly to the
Company sufficient funds to pay the exercise price or (B) delivery by the
optionee to
-3-
<PAGE>
the Company of a copy of irrevocable and unconditional instructions to a
creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price;
(iii) at such time as the Common Stock is registered under the
Securities Exchange Act of 1934, as amended, delivery of shares of Common Stock
owned by the optionee valued at their fair market value as determined by (or in
a manner approved by) the Board of Directors in good faith ("Fair Market
Value"), which Common Stock was owned by the optionee at least six months prior
to such delivery;
(iv) to the extent permitted by the Board of Directors, in its sole
discretion (A) by delivery of a promissory note of the optionee to the Company
on terms determined by the Board of Directors, or (B) by payment of such other
lawful consideration as the Board of Directors may determine; or
(v) any combination of the above permitted forms of payment.
(h) Exercise by Representative Following Death of Director. An optionee,
------------------------------------------------------
by written notice to the Company, may designate one or more persons (and from
time to time change such designation), including his or her legal
representative, who, by reason of the optionee's death, shall acquire the right
to exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do so within
the term of the option as provided herein. Any exercise by a representative
shall be subject to the provisions of the Plan.
6. Limitation of Rights.
--------------------
(a) No Right to Continue as a Director. Neither the Plan, nor the granting
----------------------------------
of an option nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain the optionee as a director for any period of time.
(b) No Stockholders' Rights for Options. An optionee shall have no rights
-----------------------------------
as a stockholder with respect to the shares covered by his or her option until
the date of the issuance to him or her of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as provided in
Section 7) for which the record date is prior to the date such certificate is
issued.
(c) Compliance with Securities Laws. Each option shall be subject to the
-------------------------------
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or the disclosure of non-
public information or
-4-
<PAGE>
the satisfaction of any other condition is necessary as a condition of, or in
connection with, the issuance or purchase of shares thereunder, such option may
not be exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval, or satisfaction of such condition shall have
been effected or obtained on conditions acceptable to the Board of Directors.
Nothing herein shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification, or to satisfy such condition.
7. Adjustments for Changes in Common Stock and Certain Other Events.
----------------------------------------------------------------
(a) Changes in Capitalization. In the event of any stock split, reverse
-------------------------
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan
and (ii) the number and class of securities and exercise price per share subject
to each outstanding option shall be appropriately adjusted by the Company (or
substituted options may be made, if applicable) to the extent the Board of
Directors shall determine, in good faith, that such an adjustment (or
substitution) is necessary and appropriate. If this Section 7(a) applies and
Section 7(c) also applies to any event, Section 7(c) shall be applicable to such
event, and this Section 7(a) shall not be applicable.
(b) Liquidation or Dissolution. In the event of a proposed liquidation or
--------------------------
dissolution of the Company, the Board of Directors shall upon written notice to
the optionees provide that all then unexercised options will (i) become
exercisable in full as of a specified time at least 10 business days prior to
the effective date of such liquidation or dissolution and (ii) terminate
effective upon such liquidation or dissolution, except to the extent exercised
before such effective date.
(c) Acquisition Events.
------------------
(i) Definition. An "Acquisition Event" shall mean: (A) any merger or
----------
consolidation of the Company with or into another entity as a result of which
the Common Stock is converted into or exchanged for the right to receive cash,
securities or other property or (B) any exchange of shares of the Company for
cash, securities or other property pursuant to a statutory share exchange
transaction.
(ii) Consequences of an Acquisition Event on Options. Upon the
------------------------------------------------
occurrence of an Acquisition Event, or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board of Directors shall
provide that all outstanding options shall be assumed, or equivalent options
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof). Notwithstanding the foregoing, if the acquiring or
succeeding corporation (or an affiliate thereof) does not agree to assume, or
substitute for, such options, then the
-5-
<PAGE>
Board of Directors shall, upon written notice to the optionees, provide that all
then unexercised options will become exercisable in full as of a specified time
(the "Acceleration Time") prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the optionees before the consummation of such Acquisition
Event; provided, however, that in the event of an Acquisition Event under the
terms of which holders of Common Stock will receive upon consummation thereof a
cash payment for each share of Common Stock surrendered pursuant to such
Acquisition Event (the "Acquisition Price"), then the Board of Directors may
instead provide that all outstanding options shall terminate upon consummation
of such Acquisition Event and that each optionee shall receive, in exchange
therefor, a cash payment equal to the amount (if any) by which (A) the
Acquisition Price multiplied by the number of shares of Common Stock subject to
such outstanding options (whether or not then exercisable), exceeds (B) the
aggregate exercise price of such options.
(d) Change in Control Events.
------------------------
(i) Definition. A "Change in Control Event" shall mean:
----------
(A) the acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership of any
capital stock of the Company if, after such acquisition, such Person
beneficially owns (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) 20% or more of either (x) the then-outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (y) the
combined voting power of the then-outstanding securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection (i), the
-------- -------
following acquisitions shall not constitute a Change in Control Event: (A) any
acquisition directly from the Company (excluding an acquisition pursuant to the
exercise, conversion or exchange of any security exercisable for, convertible
into or exchangeable for common stock or voting securities of the Company,
unless the Person exercising, converting or exchanging such security acquired
such security directly from the Company or an underwriter or agent of the
Company), (B) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company, or (C) any acquisition by any corporation pursuant to a Business
Combination (as defined below) which complies with clauses (x) and (y) of
subsection (iii) of this definition; or
(B) such time as the Continuing Directors (as defined below) do not
constitute a majority of the Board of Directors (or, if applicable, the Board of
Directors of a successor corporation to the Company), where the term "Continuing
Director" means at any date a member of the Board of Directors (x) who
-6-
<PAGE>
was a member of the Board of Directors on the date of the initial adoption of
this Plan by the Board of Directors or (y) who was nominated or elected
subsequent to such date by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Board of Directors was recommended or endorsed by at least a
majority of the directors who were Continuing Directors at the time of such
nomination or election; provided, however, that there shall be excluded from
-------- --------
this clause (y) any individual whose initial assumption of office occurred as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents, by or on behalf of a person other than the Board of Directors; or
(C) the consummation of a merger, consolidation, reorganization or
statutory share exchange involving the Company or a sale or other disposition of
all or substantially all of the assets of the Company (a "Business
Combination"), unless, immediately following such Business Combination, each of
the following two conditions is satisfied: (x) all or substantially all of the
individuals and entities who were the beneficial owners of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
50% of the then-outstanding shares of common stock and the combined voting power
of the then-outstanding securities entitled to vote generally in the election of
directors, respectively, of the resulting or acquiring corporation in such
Business Combination (which shall include, without limitation, a corporation
which as a result of such transaction owns the Company or substantially all of
the Company's assets either directly or through one or more subsidiaries) (such
resulting or acquiring corporation is referred to herein as the "Acquiring
Corporation") in substantially the same proportions as their ownership of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
respectively, immediately prior to such Business Combination and (y) no Person
(excluding the Acquiring Corporation or any employee benefit plan (or related
trust) maintained or sponsored by the Company or by the Acquiring Corporation)
beneficially owns, directly or indirectly, 20% or more of the then-outstanding
shares of common stock of the Acquiring Corporation, or of the combined voting
power of the then-outstanding securities of such corporation entitled to vote
generally in the election of directors (except to the extent that such ownership
existed prior to the Business Combination).
(ii) Effect of Change in Control Event.
---------------------------------
Upon the occurrence of a Change in Control Event, each Option
shall be immediately exercisable in full.
(iii) The terms and effect of this Section 7(d) shall be in addition
to, and not in replacement of, the terms and effect of Section 7(c).
-7-
<PAGE>
8. Termination and Amendment of the Plan.
-------------------------------------
Subject to the requirements of applicable law, the Board of Directors may
suspend or terminate the Plan or amend it in any respect whatsoever.
9. Notice.
------
Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Treasurer of the Company and shall become
effective when it is received.
10. Governing Law.
-------------
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the internal laws of the State of Delaware (without regard
to any applicable conflicts of laws or principles).
Adopted by the Board of Directors on
August 21, 1998; Amended on October 15, 1998
Approved by the stockholders as adopted and as
amended as of October 16, 1998
-8-
<PAGE>
Exhibit 10.16
CORNERSTONE BRANDS, INC.
AMENDED AND RESTATED
--------------------
REGISTRATION AGREEMENT
----------------------
THIS AMENDED AND RESTATED REGISTRATION AGREEMENT is made as of August 25,
1998, by and among Cornerstone Brands, Inc. (the "Company"), a Delaware
corporation, and The Cornerstone Brands Group, Inc., a Delaware corporation
formerly known as The International Cornerstone Group, Inc. ("Oldco"), Madison
Dearborn Capital Partners, L.P., a Delaware limited partnership ("MDCP"), Chase
Venture Capital Associates, L.P., a California Limited Partnership ("CVCA"), and
the Persons listed on Schedule A (hereinafter collectively referred to as the
----------
"Other Stockholders").
WHEREAS, the Registration Agreement was originally entered into among the
Company, MDCP and certain of the Other Stockholders on September 13, 1995;
WHEREAS, such Registration Agreement was subsequently amended on
November 15, 1995, January 31, 1996, July 28, 1997, August 13, 1997 and June 18,
1998 (as amended, the "Original Agreement");
WHEREAS, on the date hereof, the Company and Oldco consummated a merger
pursuant to an Agreement and Plan of Merger, as a result of which merger the
former stockholders of Oldco received shares of stock of the Company;
WHEREAS, Oldco assigned to the Company, and the Company assumed, Oldco's
obligations under the Original Agreement; and
WHEREAS, the parties to the Original Agreement desire to further amend the
Original Agreement and to reflect such assignment and assumption, and to restate
and integrate into a single instrument the terms of the Original Agreement and
the amendments thereto, including the amendments set forth herein;
NOW THEREFORE, the parties hereby amend and restate the Original Agreement
to read in its entirety as follows:
1. Demand Registrations.
---------------------
(a) Request for Registration.
-------------------------
(i) At any time after June 30, 1999, or such earlier time as the
Company has completed a public offering of its equity securities registered
under the Securities Act of 1933, as amended (the "Securities Act"), the holders
of at least 51% of the Investor Registrable Securities (the "Initiating
Holders") may request registration under the Securities Act of all or any
portion of their Registrable
<PAGE>
Securities on Form S-1 or any similar long-form registration ("Long-Form
Registrations"), and the holders of at least 25% of the Investor Registrable
Securities may request registration under the Securities Act of all or any
portion of their Registrable Securities on Form S-2 or S-3 or any similar short-
form registration ("Short-Form Registrations"), if available. All registrations
requested pursuant to this paragraph 1(a)(i) and paragraph 1(a)(ii) below are
referred to herein as "Demand Registrations." Each request for a Demand
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range for such
offering. Within ten days after receipt of any such request, the Company shall
give written notice of such requested registration to all other holders of
Registrable Securities and, subject to paragraph 1(d) below, shall include in
such registration all Registrable Securities with respect to which the Company
has received written requests for inclusion therein within 15 days after the
receipt of the Company's notice.
(ii) At any time after June 30, 1999, if the Company has not, at such
time of the request, completed a public offering of its equity securities
registered under the Securities Act, the holders of at least 51% of the S&N
Registrable Securities may request a Long-Form Registration under the Securities
Act of all or any portion of the S&N Registrable Securities. The registration
requested pursuant to this paragraph 1(a)(ii) is referred to herein as the "S&N
Demand Registration." A request for the S&N Demand Registration shall specify
the approximate number of S&N Registrable Securities requested to be registered
and the anticipated per share price range for such offering if reasonably
determinable by the holders requesting the S&N Demand Registration. Within ten
days after receipt of any such request, the Company shall give written notice of
such requested registration to all other holders of Registrable Securities and,
subject to paragraph 1(d) below, shall include in such registration all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 15 days after the receipt of the Company's
notice.
(b) Long-Form Registrations.
------------------------
(i) The holders of Investor Registrable Securities shall be entitled
to request four Long-Form Registrations pursuant to Section 1(a)(i) (of which
one such Long-Form Registration shall be exercisable at the request of the
holders of a majority of the Chemical Registrable Securities; provided that the
Common Stock is then publicly traded on any national securities exchange or
quoted on the NASDAQ System), and the Company shall pay all Registration
Expenses in connection therewith; provided that the gross proceeds payable to
the holders requesting such registration from any such offering shall equal at
least $10,000,000 or the holders requesting such registration shall have
requested registration of at least one-third of their Registrable Securities.
A registration shall not count as one of the four permitted Long-Form
Registrations until it has become effective, and no registration
2
<PAGE>
shall count as one of the four permitted Long-Form Registrations unless the
holders of Investor Registrable Securities are able to register and sell at
least 80% of the Registrable Securities included in such registration; provided
that in any event the Company shall pay all Registration Expenses in connection
with any registration initiated pursuant to Section 1(a)(i) as a Long-Form
Registration whether or not it has become effective and whether or not such
registration has counted as one of the permitted Long-Form Registrations. All
Long-Form Registrations initiated pursuant to Section 1(a)(i) shall be
underwritten registrations.
(ii) The holders of S&N Registrable Securities shall be entitled to
request one Long-Form Registration pursuant to Section 1(a)(ii) and the Company
shall pay all Registration Expenses in connection therewith. A registration
shall not count as the Long-Form Registration pursuant to Section 1(a)(ii) and
this Section 1(b)(ii) until it has become effective, and unless the holders of
S&N Registrable Securities are able to register and sell at least 80% of the S&N
Registrable Securities included in such registration; provided that in any event
the Company shall pay all Registration Expenses in connection with any
registration initiated pursuant to Section 1(a)(ii) as a Long-Form Registration
whether or not it has become effective and whether or not such registration has
counted as the Long-Form Registration. A Long-Form Registration initiated
pursuant to Section 1(a)(ii) shall be an underwritten registration.
(c) Short-Form Registrations. In addition to the Long-Form
-------------------------
Registrations provided pursuant to paragraph 1(b), the holders of Investor
Registrable Securities and the holders of S&N Registrable Securities shall be
entitled to request an unlimited number of Short-Form Registrations in which the
Company shall pay all Registration Expenses; provided that the gross proceeds
from any such offering shall equal at least $1,000,000. Demand Registrations
shall be Short-Form Registrations whenever the Company is permitted to use any
applicable short form. After the Company has become subject to the reporting
requirements of the Securities Exchange Act, the Company shall use reasonable
efforts to make Short-Form Registrations available for the sale of Registrable
Securities. Notwithstanding any other provision hereof, the holders of
Registrable Securities shall not be entitled to request more than two Short-Form
Registrations in any twelve-month period.
(d) Priority on Demand Registrations. The Company shall not include
---------------------------------
in any Demand Registration any securities which are not Registrable Securities
without the prior written consent of the holders of at least 66-2/3% of the
Investor Registrable Securities. If a Demand Registration is an underwritten
offering and the managing underwriters advise the Company in writing that in
their opinion the number of Registrable Securities and, if permitted hereunder,
other securities requested to be included in such offering exceeds the number of
Registrable Securities and other securities, if any, which can be sold in an
orderly manner in such offering within a price range acceptable to the holders
of a majority of the Registrable Securities included in such registration, the
Company shall include in such registration, prior to the inclusion of any
securities which are not Registrable Securities, the number of Registrable
3
<PAGE>
Securities requested to be included which in the opinion of such underwriters
can be sold in an orderly manner within the price range of such offering, pro
rata among the respective holders thereof on the basis of the amount of
Registrable Securities owned by each such holder; provided, however, that if the
Demand Registration has been requested for the purpose of conducting the initial
public offering of the Company's equity securities registered under the
Securities Act, the Company shall include in such registration (A) first, such
number of Registrable Securities requested to be included in such registration
which are held by the S&N Holders, up to that number of Registrable Securities
which results in gross proceeds payable to the S&N Holders of $30,000,000,
(B) second, the Registrable Securities (other than the Registrable Securities
held by the S&N Holders) requested to be included in such registration, pro rata
among the holders of such Registrable Securities on the basis of the number of
shares owned by each such holder, and (C) third, other securities requested to
be included in such registration.
(e) Restrictions on Demand Registrations. The Company shall not be
-------------------------------------
obligated to effect any Demand Registration within 180 days after the effective
date of a previous Demand Registration or Piggyback Registration.
(f) Selection of Underwriters.
--------------------------
(i) The holders of a majority of the Registrable Securities included
in any Demand Registration, other than the S&N Demand Registration, shall have
the right to select the investment banker(s) and managers(s) to administer the
offering, subject to the Company's approval, which shall not be unreasonably
withheld.
(ii) The holders of a majority of the S&N Registrable Securities
included in the S&N Demand Registration shall have the right to select the
investment banker(s) and manager(s) to administer the offering, provided,
however, that such investment banker(s) and manager(s) are among the firms
listed on Schedule B hereto (a "Pre-approved Underwriter"). In the event that
----------
after contacting each of the firms listed on Schedule B hereto the services of a
----------
Pre-approved Underwriter are not secured by the S&N Holders initiating the S&N
Demand Registration pursuant to Section 1(a)(ii) within 120 days of the Company
receiving the request from such S&N Holders, then at the end of such 120-day
period such S&N Holders may select any investment banker(s) and manager(s) to
administer the offering, subject to the Company's approval, which shall not be
unreasonably withheld.
4
<PAGE>
(g) Other Registration Rights. Except as provided in this Agreement,
--------------------------
the Company shall not grant to any Persons the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities, without the prior written
consent of the holders of at least 66-2/3% of the Registrable Securities;
provided that the Company may grant rights to other Persons to participate in
Piggyback Registrations so long as such rights are subordinate to the rights of
the holders of Registrable Securities with respect to such Piggyback
Registrations as provided in paragraphs 2(c) and 2(d) hereof.
(h) Registration of Merger Shares. At any time after one year from
------------------------------
the date the Company has completed a public offering of its Common Stock
registered under the Securities Act, the holders of a majority of the Merger
Shares owned of record by the Weeks Stockholders may request that the Company
file with the Securities and Exchange Commission (the "SEC") a single
registration statement on Form S-2 or S-3 (the "Weeks Stockholder Registration
Statement") covering the resale to the public by the Weeks Stockholders of such
number of Merger Shares (if any) as is equal to (i) the aggregate number of
Merger Shares owned of record by the Weeks Stockholders (including Merger Shares
to be included in the Weeks Stockholder Registration Statement) less (ii) 5% of
the total number of outstanding shares of Common Stock; provided that, at the
time of such request, the MDCP, CVCA and their respective permitted transferees,
if any, beneficially own in the aggregate less than 60% of the aggregate number
of shares of Investor Registrable Securities held by MDCP and CVCA at the time
of the issuance of the Merger Shares (as such number may be adjusted from time
to time with respect to any subdivision or combination of the Common Stock
affecting the Stockholder Shares but not taking into account any adjustment
pursuant to Section 6J of the Company's Certificate of Incorporation in the
number of shares of Conversion Stock (as defined therein)). The Merger Shares
to be included in the Weeks Stockholder Registration Statement shall be
allocated pro rata among the Weeks Stockholders based on the number of Merger
Shares owned at such time by each Weeks Stockholder. Notwithstanding any
conflicting provision in this Registration Agreement, (i) the Weeks Stockholder
Registration Statement shall be considered a "Demand Registration" and not a
"Piggyback Registration" (as defined below) and the Company shall not include in
the Weeks Stockholder Registration Statement shares held by any Person other
than the Weeks Stockholders, without the written consent of the Weeks
Stockholders and (ii) the Company shall not be required to include in the Weeks
Stockholder Registration Statement any Merger Shares held by a Weeks Stockholder
who is not then an "affiliate" of the Company within the meaning of Rule 144
under the Securities Act (unless such Merger Shares are also deemed to be owned,
for purposes of Rule 144, by a Weeks Stockholder who is an affiliate of the
Company), and shall not be required to file the Weeks Stockholder Registration
Statement if none of the Weeks Stockholders are affiliates of the Company within
the meaning of such Rule 144. A registration shall not be considered a Weeks
Stockholder Registration Statement until it has become effective, and no
registration statement shall be counted as a Weeks Stockholder Registration
Statement if the Company causes such
5
<PAGE>
registration statement to be withdrawn or suspended and, as a result of which,
the Weeks Stockholders are unable to sell at least 80% of the Merger Shares
requested to be included in such registration statement; provided, however, that
the Company shall be responsible for all registration expenses incurred in
connection with any registration statement initiated as a Weeks Stockholder
Registration Statement whether or not it become effective and whether or not
such registration statement is counted as a Weeks Stockholder Registration
Statement. The Weeks Stockholder Registration Statement shall be an underwritten
registration. Sections 4, 5 and 6 of this Registration Agreement shall apply to
any Weeks Stockholder Registration Statement as if such registration statement
were a Demand Registration.
2. Piggyback Registrations.
------------------------
(a) Right to Piggyback. Whenever the Company proposes to register any
-------------------
of its securities under the Securities Act, other than pursuant to a Demand
Registration (a "Primary Registration") and the registration form to be used may
be used for the registration of Registrable Securities (a "Piggyback
Registration"), the Company shall give prompt written notice to all holders of
Registrable Securities of its intention to effect a Primary Registration and
shall include in such registration all Registrable Securities with respect to
which the Company has received written requests for inclusion therein within
15 days after the receipt of the Company's notice.
(b) Piggyback Expenses. The Registration Expenses of the holders of
-------------------
Registrable Securities shall be paid by the Company in all Piggyback
Registrations.
(c) Priority on Primary Registrations.
----------------------------------
(i) If a Piggyback Registration is an underwritten Primary
Registration on behalf of the Company, and the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in an
orderly manner in such offering within a price range acceptable to the Company,
subject to clauses (ii) and (iii) below, the Company shall include in such
registration (A) first, the securities the Company proposes to sell, (B) second,
the Registrable Securities requested to be included in such registration, pro
rata among the holders of such Registrable Securities on the basis of the number
of shares owned by each such holder, and (C) third, other securities requested
to be included in such registration.
(ii) Notwithstanding Section 2(c)(i), if in connection with a Primary
Registration which is the initial public offering of the Company's equity
securities registered under the Securities Act (the "IPO") the managing
underwriters of the IPO advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can
6
<PAGE>
be sold in an orderly manner in such offering within a price range acceptable to
the Company, the Company shall include in such registration (A) first, the
securities the Company proposes to sell and such number of Registrable
Securities requested to be included in such registration which are held by the
S&N Holders, up to that number of Registrable Securities which results in gross
proceeds payable to the S&N Holders of $25,000,000, (B) second, the Registrable
Securities (other than the Registrable Securities held by the S&N Holders)
requested to be included in such registration, pro rata among the holders of
such Registrable Securities on the basis of the number of shares owned by each
such holder, and (C) third, other securities requested to be included in such
registration; provided, however, that in the event that the managing
underwriters of the IPO reduce the total number of shares to be included by the
Company and the S&N Holders in the registration and, as a result of such
reduction the number of shares to be included by the S&N Holders is less than
the maximum number of Registrable Securities permitted by clause (A) above, then
(x) the number of shares to be sold in the IPO by the Company and by the
S&N Holders will be reduced proportionately (based upon the original amount
proposed to be sold by the Company and the S&N Holders) and (y) no Registrable
Securities (other than Registrable Securities held by the S&N Holders) or other
securities shall be included in the IPO.
(iii) Notwithstanding Section 2(c)(i), if (A) there occurs an
S&N Demand Registration pursuant to Section 1(a)(ii) which resulted in gross
proceeds payable to the S&N Holders of less than $30,000,000 (the "S&N Demand
Priority Amount"), or (B) there occurs a Primary Registration which is the
Company's IPO, as contemplated by Section 2(c)(ii) above, which results in gross
proceeds payable to the S&N Holders of less than $25,000,000 (the "S&N IPO
Priority Amount"), then the Company shall include in subsequent Piggyback
Registrations which are Primary Registrations (1) first, the securities the
Company proposes to sell, and such number of Registrable Securities requested to
be included in such registration by the S&N Holders, up to that number of
Registrable Securities which results in gross proceeds payable to the
S&N Holders, when added to the aggregate gross proceeds previously paid to the
S&N Holders under the S&N Demand Registration, any Primary Registration and all
other Piggyback Registrations, equal to (I) the S&N Demand Priority Amount, if
the event described in clause (A) above has occurred, or (II) the S&N IPO
Priority Amount, if the event described in clause (B) above has occurred,
(2) second, the Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities on the
basis of the number of shares owned by each such holder and (3) third, other
securities requested to be included in such registration.
(d) Priority on Secondary Registrations. If a Piggyback Registration
-----------------------------------
is an underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration
7
<PAGE>
exceeds the number which can be sold in an orderly manner in such offering
within the price range of the offering, the Company shall include in such
registration, (i) first, the securities requested to be included therein by the
holders requesting such registration and the Registrable Securities requested to
be included in such registration, pro rata among the holders of such securities
on the basis of the number of securities owned by each such holder, and
(ii) second, other securities requested to be included in such registration.
(e) Selection of Underwriters. If any Piggyback Registration is an
--------------------------
underwritten offering, the selection of investment banker(s) and manager(s) for
the offering must be approved by the holders of a majority of the Registrable
Securities included in such Piggyback Registration. Such approval shall not be
unreasonably withheld.
(f) Other Registrations. If the Company has previously filed a
--------------------
registration statement with respect to Registrable Securities pursuant to
paragraph 1 or pursuant to this paragraph 2, and if such previous registration
has not been withdrawn or abandoned, the Company shall not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act (except on Form S-8 or any successor form), whether on its
own behalf or at the request of any holder or holders of such securities, until
a period of at least 90 days has elapsed from the effective date of such
previous registration.
3. Holdback Agreements.
--------------------
(a) Each holder of Registrable Securities shall not effect any public
sale or distribution (including sales pursuant to Rule 144) of equity securities
of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and the 180-day
period (in the case of the Company's initial public offering) or the 90-day
period (in the case of any other offering described below) beginning on the
effective date of any underwritten Demand Registration, any underwritten
Piggyback Registration in which Registrable Securities are included or any
underwritten Primary Registration (except as part of such underwritten
registration), unless the underwriters managing the registered public offering
otherwise agree; provided that this obligation shall not be applicable to the
holders of Registrable Securities unless each executive officer and director of
the Company enters into an agreement upon substantially the same terms. The
Company shall cause each executive officer and director of the Company to enter
into such an agreement.
(b) The Company (i) shall not effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
180-day period (in
8
<PAGE>
the case of any underwritten Demand Registration or any underwritten Piggyback
Registration that constitutes the Company's initial public offering of
securities) or the 90-day period (in the case of any other underwritten Demand
Registration or underwritten Piggyback Registration) beginning on the effective
date of any underwritten Demand Registration or any underwritten Piggyback
Registration (except as part of such underwritten registration or pursuant to
registrations on Form S-4 or S-8 or any successor forms), unless the
underwriters managing the registered public offering otherwise agree, and
(ii) shall use reasonable efforts to cause each holder of at least 3% (on a
fully-diluted basis) of its Common Stock, or any securities convertible into or
exchangeable or exercisable for Common Stock, purchased from the Company at any
time after the date of this Agreement (other than in a registered public
offering) to agree not to effect any public sale or distribution (including
sales pursuant to Rule 144) of any such securities during such period (except as
part of such underwritten registration, if otherwise permitted), unless the
underwriters managing the registered public offering otherwise agree.
4. Registration Procedures. Whenever the holders of Registrable
------------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company shall use reasonable efforts, and in the case of
the S&N Demand Registration, reasonable best efforts, to effect the registration
and the sale of such Registrable Securities in accordance with the intended
method of disposition thereof, and pursuant thereto the Company shall as
expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use
reasonable efforts, and with respect to the S&N Demand Registration, reasonable
best efforts, to cause such registration statement to become effective (provided
that before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company shall furnish to the counsel selected by the
holders of a majority of the Registrable Securities covered by such registration
statement copies of all such documents proposed to be filed, which documents
shall be subject to the review and comment of such counsel);
(b) notify each holder of Registrable Securities of the effectiveness
of each registration statement filed hereunder and prepare and file with the
Securities and Exchange Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of not less
than 180 days and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;
9
<PAGE>
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use reasonable efforts (and with respect to S&N Registrable
Securities, use reasonable best efforts) to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company shall not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto 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 contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the NASD automated quotation
system and, if listed on the NASD automated quotation system, use reasonable
efforts, and with respect to the S&N Demand Registration, reasonable best
efforts, to secure designation of all such Registrable Securities covered by
such registration statement as a NASDAQ "national market system security" within
the meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or,
failing that, to secure NASDAQ authorization for such Registrable 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 Registrable
Securities with the NASD;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
10
<PAGE>
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including effecting a stock split or a combination of
shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(j) otherwise use reasonable efforts, and with respect to the S&N
Demand Registration, reasonable best efforts, to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and make
available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months beginning with
the first day of the Company's first full calendar quarter after the effective
date of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) permit any holder of Registrable Securities which holder, in its
sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
registration or comparable statement and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included; and
(l) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company shall use reasonable efforts, and with respect to the
S&N Demand Registration, reasonable best efforts, promptly to obtain the
withdrawal of such order.
5. Registration Expenses.
----------------------
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, fees and disbursements
of custodians, and fees and disbursements of counsel for the Company and all
independent certified public accountants, underwriters (excluding discounts and
commissions) and other
11
<PAGE>
Persons retained by the Company (all such expenses being herein called
"Registration Expenses"), shall be borne as provided in this Agreement, except
that the Company shall, in any event, pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit or
quarterly review, the expense of any liability insurance and the expenses and
fees for listing the securities to be registered on each securities exchange on
which similar securities issued by the Company are then listed or on the NASD
automated quotation system.
(b) In connection with each Demand Registration, other than the
S&N Demand Registration, and each Piggyback Registration, the Company shall
reimburse the holders of Registrable Securities included in such registration
for the reasonable fees and disbursements of one counsel chosen by the holders
of a majority of the Registrable Securities included in such registration and
for the reasonable fees and disbursements of each additional counsel retained by
any holder of Registrable Securities for the purpose of rendering a legal
opinion on behalf of such holder in connection with any underwritten Demand
Registration or Piggyback Registration.
(c) In connection with the S&N Demand Registration and in connection
with the Company's IPO, if S&N Registrable Securities are included therein (if
such IPO is other than the S&N Demand Registration), the Company shall reimburse
the holders of S&N Registrable Securities included in such registration for the
reasonable fees and disbursements of one counsel chosen by the holders of a
majority of the S&N Registrable Securities included in such registration, and
any other holder of Registrable Securities for the reasonable fees and
disbursements of each additional counsel retained by such holder for the purpose
of rendering a legal opinion on behalf of such holder in connection with any
underwritten Demand Registration or Piggyback Registration.
(d) To the extent Registration Expenses are not required to be paid by
the Company, each holder of securities included in any registration hereunder
shall pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
shall be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
6. Indemnification.
----------------
(a) The Company agrees to indemnify, to the extent permitted by law,
each holder of Registrable Securities, its officers and directors and each
Person who controls such holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses caused by any
untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any
12
<PAGE>
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same are caused by or contained in any information furnished in writing to the
Company by such holder expressly for use therein or by such holder's failure to
deliver a copy of the registration statement or prospectus or any amendments or
supplements thereto after the Company has furnished such holder with a
sufficient number of copies of the same. In connection with an underwritten
offering, the Company shall indemnify such underwriters, their officers and
directors and each Person who controls such underwriters (within the meaning of
the Securities Act) to the same extent as provided above with respect to the
indemnification of the holders of Registrable Securities.
(b) In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder shall furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, shall indemnify the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished in writing by such holder; provided that the obligation to indemnify
shall be individual, not joint and several, for each holder and shall be limited
to the net amount of proceeds received by such holder from the sale of
Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any Person's right to indemnification hereunder to the extent
such failure has not prejudiced the indemnifying party) and (ii) unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
13
<PAGE>
(d) The indemnification provided for under this Agreement shall remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and shall survive the transfer of securities. The Company
also agrees to make such provisions, as are reasonably requested by any
indemnified party, for contribution to such party in the event the Company's
indemnification is unavailable for any reason.
7. Participation in Underwritten Registration. No Person may participate
-------------------------------------------
in any registration hereunder which is underwritten unless such Person
(i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements; provided that no
holder of Registrable Securities included in any underwritten registration shall
be required to make any representations or warranties to the Company or the
underwriters (other than representations and warranties regarding such holder
and such holder's intended method of distribution) or to undertake any
indemnification obligations to the Company or the underwriters with respect
thereto, except as otherwise provided in paragraph 6 hereof.
8. Definitions.
------------
(a) "Chemical Registrable Securities" means (i) any shares of Common
-------------------------------
Stock issued or issuable upon conversion of the Series A-2 Preferred acquired by
CVCA pursuant to the Purchase Agreement and (ii) any Common Stock issued or
issuable with respect to the securities referred to in clause (i) above by way
of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization. As to
any particular Chemical Registrable Securities, such securities shall cease to
be Chemical Registrable Securities when they have been distributed to the public
pursuant to an offering registered under the Securities Act or sold to the
public through a broker, dealer or market maker in compliance with Rule 144
under the Securities Act (or any similar rule then enforce). For purposes of
this Agreement, a Person shall be deemed to be a holder of Chemical Registrable
Securities, and the Chemical Registrable Securities shall be deemed to be in
existence, whenever such Person has the right to acquire directly or indirectly
such Chemical Registrable Securities (upon conversion or exercise in connection
with a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected, and such Person shall be entitled to exercise the
rights of a holder of Chemical Registrable Securities hereunder.
14
<PAGE>
(b) "Common Stock" means the Company's Common Stock, par value $.001
------------
per share.
(c) "GHI Shares" means the shares of Common Stock issued in partial
----------
consideration for the purchase of all outstanding shares of capital stock of
Garnet Hill, Inc., a New Hampshire corporation ("GHI"), pursuant to the Stock
Purchase Agreement dated July 28, 1997 among the Company and the stockholders of
GHI.
(d) "Investor Registrable Securities" means (i) any shares of Common
-------------------------------
Stock issued or issuable upon conversion of the Series A Preferred and (ii) any
Common Stock issued or issuable with respect to the securities referred to in
clause (i) above by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular Investor Registrable Securities, such
securities shall cease to be Investor Registrable Securities when they have been
distributed in the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act (or any similar rule then in
force). For purposes of this Agreement, a Person shall be deemed to be a holder
of Investor Registrable Securities, and the Investor Registrable Securities
shall be deemed to be in existence, whenever such Person has the right to
acquire directly or indirectly such Investor Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected, and such
Person shall be entitled to exercise the rights of a holder of Investor
Registrable Securities hereunder.
(e) "Merger Shares" means the shares of Common Stock into which the
-------------
outstanding shares of common stock, $1.00 par value per share, of Ballard
Designs, Inc., a Georgia corporation ("BDI"), were converted pursuant to the
Agreement and Plan of Merger dated April 23, 1997 among the Company, BDI and
certain other parties thereto.
(f) "Other Registrable Securities" means (i) any shares of Common
----------------------------
Stock issued pursuant to the Exchange Agreement dated as of September 13, 1995,
between Cornerstone I and the Persons listed therein, (ii) any shares of Common
Stock issued or issuable upon conversion of the Series B Preferred, the Series C
Preferred or the Tracking Stock, (iii) the GHI Shares, (iv) the Merger Shares
and (v) any Common Stock issued or issuable with respect to the securities
referred to in clauses (i), (ii), (iii), or (iv) above by way of stock dividend
or stock split or in
15
<PAGE>
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Other Registrable Securities, such
securities shall cease to be Other Registrable Securities when they have been
distributed to the public pursuant to a offering registered under the Securities
Act or sold to the public through a broker, dealer or market maker in compliance
with Rule 144 under the Securities Act (or any similar rule then in force). For
purposes of this Agreement, a Person shall be deemed to be a holder of Other
Registrable Securities, and the Other Registrable Securities shall be deemed to
be in existence, whenever such Person has the right to acquire directly or
indirectly such Other Registrable Securities (upon conversion or exercise in
connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected, and such Person shall be entitled
to exercise the rights of a holder of Other Registrable Securities hereunder.
(g) "Purchase Agreement" means the Series A Preferred Stock Purchase
------------------
Agreement, dated September 13, 1995, as amended on November 15, 1995 and
January 31, 1996, among Oldco, MDCP, CVCA and certain other parties thereto.
(h) "Registrable Securities" means the Chemical Registrable
----------------------
Securities, Investor Registrable Securities, S&N Registrable Securities and
Other Registrable Securities. Notwithstanding the foregoing, securities of the
Company shall cease to be Registrable Securities if (i) the Company has been
subject to the reporting requirements under Section 13 of the Securities
Exchange Act of 1934 for at least six months, or (ii) the total amount of
securities of the Company held by such holder represents less than 1% of the
outstanding shares of Common Stock of the Company.
(i) "Reorganization Agreement" means the Agreement and Plan of
------------------------
Reorganization, dated as of August __, 1998, by and among the Company, Fred E.
Kamgar, Moira E. Kamgar, Robert M. Perkowitz and certain other parties thereto.
(j) "Series A Preferred" means the Company's Series A Convertible
-------------------
Preferred Stock, par value $.01 per share, issued pursuant to the Purchase
Agreement.
(k) "Series B Preferred" means the Company's Series B Convertible
------------------
Preferred Stock, par value $.01 per share, issued pursuant to that certain First
Amended and Restated Purchase Agreement dated as of September 13, 1995 (the
"Frontgate Purchase Agreement") among Oldco, The Cornerstone Brands Group, Inc.,
Cinmar L.P., Cinmar, Inc. and the other Persons listed on the signature pages
thereto.
(l) "Series C Preferred" means the Company's Series C Convertible
------------------
Preferred Stock, par value $0.1 per share, issued pursuant to the Frontgate
Purchase Agreement.
16
<PAGE>
(m) "S&N Holders" means Fred E. Kamgar, Moira E. Kamgar and Robert M.
-----------
Perkowitz.
(n) "S&N Registrable Securities" means (i) any shares of Common Stock
--------------------------
issued to the S&N Holders pursuant to the Reorganization Agreement and (ii) any
Common Stock issued or issuable with respect to the securities referred to in
clause (i) above by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular S&N Registrable Securities, such securities
shall cease to be S&N Registrable Securities when they have been distributed to
the public pursuant to an offering registered under the Securities Act or sold
to the public through a broker, dealer or market maker in compliance with Rule
144 under the Securities Act (or any similar rule then enforce). For purposes
of this Agreement, a Person shall be deemed to be a holder of S&N Registrable
Securities, and the S&N Registrable Securities shall be deemed to be in
existence, whenever such Person has the right to acquire directly or indirectly
such S&N Registrable Securities (upon conversion or exercise in connection with
a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected, and such Person shall be entitled to exercise the
rights of a holder of S&N Registrable Securities hereunder.
(o) "Tracking Stock" means the Company's Common Stock, designated as
--------------
Tracking Stock-Series 1.
(p) "Weeks Stockholders" means Helen Ballard Weeks, A. Ray Weeks, Jr.
------------------
and the ARW Family Trust.
(q) Unless otherwise stated, other capitalized terms contained herein
have the meanings set forth in the Purchase Agreement.
9. Miscellaneous.
--------------
(a) No Inconsistent Agreements. The Company shall not hereafter enter
---------------------------
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the holders of Registrable Securities in this
Agreement.
(b) Adjustments Affecting Registrable Securities. The Company shall
---------------------------------------------
not take any action, or permit any change to occur, with respect to its
securities which would materially adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement or which would materially adversely affect
the marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
17
<PAGE>
(c) Remedies. Any Person having rights under any provision of this
---------
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity or competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(d) Amendments and Waivers. Except as otherwise provided herein, the
-----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of at least 66 2/3% of the
Registrable Securities; provided that (i) the provisions of paragraph 1 hereof
may not be amended without the prior written consent of the holders of at least
75% of the holders of the Investor Registrable Securities, (ii) no provision of
this Agreement may be amended to treat any holder of Investor Registrable
Securities or Other Registrable Securities differently than any other such
holder and (iii) no provision of this Agreement relating to the S&N Holders or
the S&N Registrable Securities may be amended in a manner which would have a
disproportionate adverse effect on the S&N Holders without the prior written
consent of the holders of at least 51% of the S&N Registrable Securities. 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.
(e) Successors and Assigns. All covenants and agreements in this
-----------------------
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(f) Severability. Whenever possible, each provision of this Agreement
-------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
18
<PAGE>
(g) Counterparts. This Agreement may be executed simultaneously in
-------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
(h) Descriptive Headings. The descriptive headings of this Agreement
---------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
(i) Governing Law. The corporate law of the State of Delaware shall
--------------
govern all issues and questions concerning the relative rights of the Company
and its stockholders. All other issues and questions concerning the
construction, validity, interpretation and enforcement of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the Commonwealth of Massachusetts, without giving effect to
any choice of law or conflict of law rules or provisions (whether of the
Commonwealth of Massachusetts or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the Commonwealth of
Massachusetts.
(j) Notices. All notices, demands or other communications to be given
--------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to each holder of Registrable Securities at the
address indicated in the Company's records and to the Company at the address
indicated below:
Cornerstone Brands, Inc.
600 Atlantic Avenue
Suite 2800
Boston, Massachusetts 02110
Attention: President
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(k) Joinder. Any purchaser of Registrable Securities may become a
---------
party to this Agreement upon execution and delivery of a joinder agreement
between such purchaser and holders of at least 66-2/3% of the Registrable
Securities.
19
<PAGE>
(l) MDCP, CVCA and the Other Stockholders, Oldco and the Company
hereby acknowledge that (i) this Agreement reflects the assignment by Oldco to
the Company of Oldco's obligations under the Original Agreement, and the
assumption by the Company of Oldco's obligations under the Original Agreement
and (ii) all of the agreements contained in the Original Agreement, as amended
and restated hereby, relate solely to shares of capital stock of the Company,
and not to shares of capital stock in Oldco, and hereby consent to all such
transactions and hereby release Oldco from any and all obligations under the
Original Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
CORNERSTONE BRANDS, INC.
By: /s/ Donald J. Steiner
---------------------
Donald J. Steiner, Vice Chairman and
Founder
THE CORNERSTONE BRANDS GROUP, INC.
By: /s/ Donald J. Steiner
---------------------
Donald J. Steiner, Vice Chairman and
Founder
[Signature Page to Amended and Restated Registration Agreement]
20
<PAGE>
MADISON DEARBORN CAPITAL PARTNERS, L.P.
By: Madison Dearborn Partners, L.P.
Its: General Partner
By: Madison Dearborn Partners, Inc.
Its: General Partner
By: /s/ Benjamin Chereskin
----------------------
Its: Managing Director
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By: /s/ Stephen P. Murray
---------------------
Its: General Partner
/s/ Donald J. Steiner
---------------------
DONALD J. STEINER
D&M STEINER FAMILY LIMITED PARTNERSHIP
By: /s/ Donald J. Steiner
---------------------
Donald J. Steiner, General Partner
[Signature Page to Amended and Restated Registration Agreement]
21
<PAGE>
/s/ William T. End
------------------
WILLIAM T. END
W.T.E. FAMILY LIMITED PARTNERSHIP
By: /s/ William T. End
------------------
William T. End, General Partner
/s/ Mark Fasold
---------------
MARK FASOLD
CORY B. FASOLD 1996 IRREVOCABLE TRUST
By: /s/ Mark Fasold
---------------
Mark Fasold, Trustee
BRETT W. FASOLD 1996 IRREVOCABLE TRUST
By: /s/ Mark Fasold
---------------
Mark Fasold, Trustee
[Signature Page to Amended and Restated Registration Agreement]
22
<PAGE>
COLLEEN J. FASOLD 1996 IRREVOCABLE TRUST
By: /s/ Mark Fasold
---------------
Mark Fasold, Trustee
BOSTON CAPITAL VENTURES II, LIMITED
PARTNERSHIP
By: Boston Capital Partners II
Its: General Partner
By: Boston Capital Partners
Its: General Partner
By: /s/ H. J. von der Goltz
-----------------------
Its: General Partner
BOSTON CAPITAL VENTURES III, LIMITED
PARTNERSHIP
By: Boston Capital Partners III
Its: General Partner
By: BD Partners
Its: General Partner
By: /s/ H. J. von der Goltz
-----------------------
Its: General Partner
/s/ Thomas G. Stemberg
----------------------
THOMAS G. STEMBERG
[Signature Page to Amended and Restated Registration Agreement]
23
<PAGE>
/s/ Ned Levine
--------------
NED LEVINE
/s/ H. J. von der Goltz
-----------------------
H. JOHAN VON DER GOLTZ
/s/ John A. O'Steen
-------------------
JOHN A. O'STEEN
/s/ John A. O'Steen
-------------------
JOHN A. O'STEEN, AS CUSTODIAN FOR DAVID A. O'STEEN
UNDER THE OHIO UNIFORM TRANSFER TO MINORS ACT-21
/s/ John A. O'Steen
-------------------
JOHN A. O'STEEN, AS CUSTODIAN FOR J. PATRICK O'STEEN
UNDER THE OHIO UNIFORM ACT TRANSFER TO MINORS ACT-21
/s/ John A. O'Steen
-------------------
JOHN A. O'STEEN, AS TRUSTEE OF FIRSTCINCO
FBO JOHN A. O'STEEN TR U/A DTD 11/10/95
/s/ Paul D. Tarvin
------------------
PAUL D. TARVIN
________________________________________________
JERRY L. RUYAN
[Signature Page to Amended and Restated Registration Agreement]
24
<PAGE>
/s/ S. William Miller
---------------------
S. WILLIAM MILLER
/s/ Robert Guiher
-----------------
ROBERT GUIHER
/s/ Mark Dawes
--------------
MARK DAWES
MONTGOMERY ASSOCIATES, 1992 L.P.
By: /s/ Jack Levin
--------------
Its: Authorized Signatory
DOMINION INCOME MANAGEMENT PROFIT SHARING
By: /s/ Andre Evans
---------------
Its: Trustee
/s/ Walter Bernheimer
---------------------
WALTER BERNHEIMER
/s/ Geoffrey Scott Rehnert
--------------------------
GEOFFREY SCOTT REHNERT
[Signature Page to Amended and Restated Registration Agreement]
25
<PAGE>
/s/ James B. Hamblin
--------------------
JAMES B. HAMBLIN
/s/ Alice H. Williams
---------------------
ALICE H. WILLIAMS
/s/ Helen Ballard Weeks
-----------------------
HELEN BALLARD WEEKS
/s/ Robert Heazel
-----------------
ESTATE OF GLADNEY HEAZEL
/s/ A. Ray Weeks, Jr.
---------------------
A. RAY WEEKS, JR.
THE ARW FAMILY TRUST
By: /s/ Forrest W. Robinson
-----------------------
Trustee
/s/ John Walter
---------------
JOHN WALTER
/s/ Fred E. Kamgar
------------------
FRED E. KAMGAR
/s/ Moira E. Kamgar
-------------------
MOIRA E. KAMGAR
[Signature Page to Amended and Restated Registration Agreement]
26
<PAGE>
/s/ Robert M. Perkowitz
-----------------------
ROBERT M. PERKOWITZ
[Signature Page to Amended and Restated Registration Agreement]
27
<PAGE>
THE JAMES B. HAMBLIN QUALIFIED ANNUITY TRUST - 1998 U/I
DATED JUNE 19, 1998
BY: /s/ James B. Hamblin
--------------------
TRUSTEE
THE CAROLYN C. HAMBLIN QUALIFIED ANNUITY TRUST - 1998
U/I DATED JUNE 19, 1998
BY: /s/ James B. Hamblin
--------------------
TRUSTEE
[Signature Page to Amended and Restated Registration Agreement]
28
<PAGE>
THE BRADFORD C. WILLIAMS QUALIFIED ANNUITY TRUST - 1998
BY: /s/ Bradford C. Williams
------------------------
/s/ Alice H. Williams
---------------------
TRUSTEES
THE ALICE H. WILLIAMS QUALIFIED ANNUITY TRUST - 1998
BY: /s/ Alice H. Williams
---------------------
/s/ Bradford C. Williams
------------------------
TRUSTEES
[Signature Page to Amended and Restated Registration Agreement]
29
<PAGE>
SCHEDULE A
----------
Donald J. Steiner
D&M Steiner Family Limited Partnership
William T. End
W.T.E. Family Partnership
Mark Fasold
Cory B. Fasold 1996 Irrevocable Trust
Brett W. Fasold 1996 Irrevocable Trust
Colleen J. Fasold 1996 Irrevocable Trust
Boston Capital Ventures II, Limited Partnership
Boston Capital Ventures III, Limited Partnership
Thomas G. Stemberg
Ned Levine
H. Johan von der Goltz
John A. O'Steen
John A. O'Steen, as Custodian for David A. O'Steen under the Ohio Uniform
Transfer to Minors Act-21
John A. O'Steen as Custodian for J. Patrick O'Steen under the Ohio Uniform
Transfer to Minors Act-21
John A. O'Steen, as Trustee of Firstcinco FBO John A. O'Steen TR
U/A DTD 11/10/95
Paul D. Tarvin
A-1
<PAGE>
Jerry L. Ruyan
S. William Miller
Robert Guiher
Mark Dawes
Montgomery Associates, 1992 L.P.
Dominion Income Management Profit Sharing
Walter Bernheimer
Geoffrey Scott Rehnert
James B. Hamblin
The James B. Hamblin Qualified Annuity Trust - 1998 U/i Dated June 19, 1998
The Carolyn C. Hamblin Qualified Annuity Trust - 1998 U/i Dated June 19, 1998
Alice H. Williams
The Bradford C. Williams Qualified Annuity Trust - 1998
The Alice H. Williams Qualified Annuity Trust - 1998
Helen Ballard Weeks
Estate of Gladney Heazel
A. Ray Weeks, Jr.
The ARW Family Trust
John Walter
Fred E. Kamgar
Moira E. Kamgar
Robert M. Perkowitz
A-2
<PAGE>
SCHEDULE B
----------
Nationsbanc Montgomery Securities
Goldman Sachs
Merrill Lynch
Solomon Smith Barney
Morgan Stanley
Donaldson Lufkin Jenrette
Paine Webber
BT Alex. Brown
Credit Suisse First Boston
William Blair
Hambrecht & Quist LLC
B-1
<PAGE>
Exhibit 10.19
THIRD AMENDED AND RESTATED
LOAN AGREEMENT
BY AND BETWEEN
THE INTERNATIONAL CORNERSTONE GROUP, INC.
AND
FLEET NATIONAL BANK, AS AGENT AND A LENDER
AND
THE OTHER FINANCIAL INSTITUTIONS NOW OR
HEREAFTER PARTIES HERETO
$135,000,000 REVOLVING CREDIT
August 24, 1998
<PAGE>
INDEX TO
AMENDED AND RESTATED LOAN AGREEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 - DEFINITIONS AND ACCOUNTING AND OTHER TERMS 1
SECTION 1.1. CERTAIN DEFINED TERMS 1
SECTION 1.2. ACCOUNTING TERMS 17
SECTION 1.3. OTHER TERMS 17
ARTICLE 2 - AMOUNT AND TERMS OF THE LOANS 18
SECTION 2.1. THE REVOLVING CREDIT LOANS 18
SECTION 2.2. INTEREST AND FEES 21
SECTION 2.3. NOTATIONS 24
SECTION 2.4. COMPUTATION OF INTEREST 25
SECTION 2.5. TIME OF PAYMENTS AND PREPAYMENTS IN IMMEDIATELY
AVAILABLE FUNDS 25
SECTION 2.6. MANDATORY PAYMENT; REDUCTIONS OF COMMITMENTS 27
SECTION 2.7. VOLUNTARY PREPAYMENTS 28
SECTION 2.8. VOLUNTARY PREPAYMENT OF LABOR LOANS 28
SECTION 2.9. VOLUNTARY REDUCTION OF COMMITMENT 28
SECTION 2.10. PAYMENT ON NON-BUSINESS DAYS 28
SECTION 2.11. USE OF PROCEEDS 28
SECTION 2.12. SPECIAL LIBOR LOAN PROVISIONS 29
SECTION 2.13. SPECIAL PROVISIONS RELATING TO LETTERS OF CREDIT 33
SECTION 2.14. ELIGIBLE SUBSIDIARIES 37
SECTION 2.15. SETTLEMENT AMONG LENDERS 38
SECTION 2.16. SWING LOAN FACILITY 40
ARTICLE 3 - CONDITIONS OF LENDING 42
SECTION 3.1. CONDITIONS PRECEDENT TO THE COMMITMENT AND
INITIAL LOANS 42
SECTION 3.2. THE COMMITMENT AND THE LOANS 45
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES 45
SECTION 4.1. ORGANIZATION AND EXISTENCE 45
SECTION 4.2. AUTHORIZATION AND ABSENCE OF DEFAULTS 46
SECTION 4.3. ACQUISITION OF CONSENTS 46
SECTION 4.4. VALIDITY AND ENFORCEABILITY 46
SECTION 4.5. FINANCIAL INFORMATION 47
SECTION 4.6. NO LITIGATION 47
SECTION 4.7. REGULATION U 48
SECTION 4.8. ABSENCE OF ADVERSE AGREEMENTS 48
SECTION 4.9. TAXES 48
SECTION 4.10. ERISA 48
SECTION 4.11. OWNERSHIP OF PROPERTIES 48
SECTION 4.12. ACCURACY OF REPRESENTATIONS AND WARRANTIES 49
SECTION 4.13. NO INVESTMENT COMPANY 49
SECTION 4.14. SOLVENCY, ETC. 49
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
SECTION 4.15. APPROVALS 50
SECTION 4.16. OWNERSHIP INTERESTS 50
SECTION 4.17. LICENSES, REGISTRATIONS, COMPLIANCE WITH LAWS, ETC. 50
SECTION 4.18. PRINCIPAL PLACE OF BUSINESS; BOOKS AND RECORDS 51
SECTION 4.19. SUBSIDIARIES 51
SECTION 4.20. ENVIRONMENTAL COMPLIANCE 51
SECTION 4.21. MATERIAL AGREEMENTS, ETC. 51
SECTION 4.22. PATENTS, TRADEMARKS AND OTHER PROPERTY RIGHTS 52
ARTICLE 5 - COVENANTS 52
SECTION 5.1. PAYMENT OF TAXES, ETC. 52
SECTION 5.2. MAINTENANCE OF INSURANCE 52
SECTION 5.3. PRESERVATION OF EXISTENCE, ETC. 53
SECTION 5.4. COMPLIANCE WITH LAWS, ETC. 53
SECTION 5.5. INSPECTION RIGHTS 53
SECTION 5.6. KEEPING OF RECORDS AND BOOKS OF ACCOUNT 53
SECTION 5.7. MAINTENANCE OF PROPERTIES, ETC. 54
SECTION 5.8. POST-CLOSING ITEMS 54
SECTION 5.9. OTHER DOCUMENTS, ETC. 54
SECTION 5.10. MINIMUM NET WORTH 54
SECTION 5.11. MAXIMUM CASH FLOW LEVERAGE 54
SECTION 5.12. TOTAL FUNDED INDEBTEDNESS TO EBITDA 55
SECTION 5.13. MINIMUM ADJUSTED EBITDA 55
SECTION 5.14. FIXED CHARGE COVERAGE RATIO 55
SECTION 5.15. INTEREST COVERAGE RATIO 55
SECTION 5.16. CERTIFICATES AND REQUESTS 55
SECTION 5.17. DEPOSITORY 56
SECTION 5.18. NOTICE OF PURCHASE OF REAL ESTATE AND LEASES 56
SECTION 5.19. ADDITIONAL ASSURANCES 56
SECTION 5.20. APPRAISALS 56
SECTION 5.21. ENVIRONMENTAL COMPLIANCE 56
SECTION 5.22. REMEDIATION 56
SECTION 5.23. SITE ASSESSMENTS 57
SECTION 5.24. INDEMNITY 57
SECTION 5.25. REPORTING REQUIREMENTS 57
SECTION 5.26. ADDITIONAL SUBSIDIARIES 59
SECTION 5.27. GRANT OF SECURITY INTEREST 59
ARTICLE 6 - NEGATIVE COVENANTS OF THE BORROWER 60
SECTION 6.1. LIENS, ETC. 60
SECTION 6.2. CONTINENT LIABILITIES 62
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
SECTION 6.3. ACQUISITIONS, DISSOLUTION, MERGERS ETC. 62
SECTION 6.4. CHANGE IN NATURE OF BUSINESS 62
SECTION 6.5. OWNERSHIP 63
SECTION 6.6. SALE AND LEASEBACK 63
SECTION 6.7. SALE OF ACCOUNTS, ETC. 63
SECTION 6.8. INDEBTEDNESS 63
SECTION 6.9. OTHER NEGATIVE PLEDGE AGREEMENTS 64
SECTION 6.10. PAYMENT OR PREPAYMENT OF EQUITY 64
SECTION 6.11. DIVIDENDS, PAYMENTS AND DISTRIBUTIONS 64
SECTION 6.12. INVESTMENTS IN OR TO OTHER PERSONS 64
SECTION 6.13. TRANSACTIONS WITH AFFILIATES 65
SECTION 6.14. CHANGE OF FISCAL YEAR 65
SECTION 6.15. SUBORDINATION OF CLAIMS 65
SECTION 6.16. COMPLIANCE WITH ERISA 65
SECTION 6.17. CAPITAL EXPENDITURES 66
SECTION 6.18. HAZARDOUS WASTE 66
ARTICLE 7 - EVENTS OF DEFAULT 66
SECTION 7.1. EVENTS OF DEFAULT 66
SECTION 7.2. REMEDIES OF THE LENDERS 68
ARTICLE 8 - AGENT 68
SECTION 8.1. APPOINTMENT 69
SECTION 8.2. POWERS; GENERAL IMMUNITY 69
SECTION 8.3. REPRESENTATIONS AND WARRANTIES, NO RESPONSIBILITY
FOR APPRAISAL OF CREDITWORTHINESS 71
SECTION 8.4. RIGHT TO INDEMNITY 71
SECTION 8.5. PAYEE OF NOTE TREATED AS OWNER 72
SECTION 8.6. RESIGNATION BY AGENT 72
SECTION 8.7. SUCCESSOR AGENT 73
ARTICLE 9 - MISCELLANEOUS 73
SECTION 9.1. CONSENT TO JURISDICTION AND SERVICE OF PROCESS 73
SECTION 9.2. RIGHTS AND REMEDIES CUMULATIVE 74
SECTION 9.3. DELAY OR OMISSION NOT WAIVER 74
SECTION 9.4. WAIVER OF STAY OR EXTENSION LAWS 75
SECTION 9.5. AMENDMENTS, ETC. 75
SECTION 9.6. NOTICES 76
SECTION 9.7. COSTS, EXPENSES AND TAXES 77
SECTION 9.8. PARTICIPATIONS 77
SECTION 9.9. BINDING EFFECT; ASSIGNMENT 78
SECTION 9.10. ACTUAL KNOWLEDGE 78
SECTION 9.11. SUBSTITUTIONS AND ASSIGNMENTS 78
SECTION 9.12. PAYMENTS PRO RATA 81
SECTION 9.13. INDEMNIFICATION 81
SECTION 9.14. GOVERNING LAW 83
SECTION 9.15. SEVERABILITY OF PROVISIONS 83
SECTION 9.16. HEADINGS 83
SECTION 9.17. COUNTERPARTS 83
SECTION 9.18. RELEASE 83
</TABLE>
-iii-
<PAGE>
THIRD AMENDED AND RESTATED LOAN AGREEMENT
This Third Amended and Restated Loan Agreement is entered into as of
August 24, 1998, by and among THE INTERNATIONAL CORNERSTONE GROUP, INC., a
Delaware corporation (the "Borrower"), the financial institutions from time to
time party to this Agreement (the "Lenders"), and FLEET NATIONAL BANK, a
national banking association organized under the laws of the United States, as
agent for itself and the other Lenders (the "Agent," or, in its individual
capacity, "Fleet").
WHEREAS, the Borrower, the Lenders, and the Agent have entered into a
Loan Agreement dated as of July 22, 1997, as amended by Amendment No. 1 dated as
of September 10, 1997 and as amended by Amendment No. 2 dated as of March 2,
1998 (as amended, the "Loan Agreement").
WHEREAS, the Borrower has requested, among other things, that the
Lenders increase the Commitment under the Loan Agreement to $135,000,000;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties hereto hereby agree that the Loan Agreement
is hereby amended and restated to read in its entirety as follows:
ARTICLE 1.
DEFINITIONS AND ACCOUNTING AND OTHER TERMS
Section 1.1 Certain Defined Terms. As used in this Agreement, the
----------- ---------------------
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Adjusted EBITDA" means, for any fiscal period, EBITDA of the Borrower
---------------
and its Eligible Subsidiaries for such period, plus, following the acquisition
----
by the Borrower of any new Eligible Subsidiary, the four fiscal quarter EBITDA
of such Eligible Subsidiary, calculated on the method deemed satisfactory to the
Agent plus an amount equal to the cost savings projected by the Borrower as a
----
result of such acquisition and approved by the Majority Lenders; provided that
--------
for each fiscal period for which the Borrower is able to include in the
Borrower's EBITDA the actual results of such acquired Eligible Subsidiary
following the effective date of the acquisition thereof, the comparable prior
fiscal period of such historical EBITDA shall be excluded.
-1-
<PAGE>
"Adjusted Libor Rate" means, with respect to any Libor Loan to be made
-------------------
by the Lenders for the Interest Period applicable to such Libor Loan, the
interest rate per annum determined by the Agent (fixed throughout such Interest
Period (subject to adjustments for the Libor Rate Reserve Percentage)) and
rounded upwards, if necessary, to the next 1/16 of 1%) which is equal to the
quotient of (i) the rate of interest determined by the Agent to be the average
of the interest rates per annum at which Dollar deposits in immediately
available funds are offered to each Reference Lender by first-class banks in the
London interbank market at approximately 11:00 A.M., London time, two Business
Days prior to the Business Day on which such Interest Period begins, in an
amount approximately equal to the principal amount of such Libor Loan, for a
period of time equal to such Interest Period divided by (ii) a number equal to
the number one minus the Libor Rate Reserve Percentage. The "Libor Rate Reserve
Percentage" applicable to any Interest Period means the average of the maximum
effective rates (expressed as a decimal) of the statutory reserve requirements
(without duplication, but including, without limitation, basic, supplemental,
marginal and emergency reserves) applicable to each Reference Lender during such
Interest Period under regulations of the Board of Governors of the Federal
Reserve System (or any successor), including without limitation Regulation D or
any other regulation dealing with maximum reserve requirements which are
applicable to each Reference Lender with respect to its "Eurocurrency
Liabilities", as that term may be defined from time to time by the Board of
Governors of the Federal Reserve System (or any successor) or are otherwise
imposed by the Board of Governors of the Federal Reserve System (or any
successor) and which in any other respect relate directly to the funding of
loans bearing interest at rates based on the interest rates at which Dollar
deposits in immediately available funds are offered to banks by first-class
banks in the London interbank market. If any Reference Lender fails to provide
its offered quotation to the Agent, the Adjusted Libor Rate shall be determined
on the basis of the offered quotation of the other Reference Lender. The
Adjusted Libor Rate shall be adjusted automatically on and as of the effective
date of any change in the Libor Rate Reserve Percentage.
"Advance" and "Advances" means the funding by any Lender of all or a
------- --------
portion of the Loans in accordance with this Agreement.
"Affiliate" means singly and collectively, any Person which, directly
---------
or indirectly, is in control of, is controlled by, or is under common control
with, any other Person. For purposes of this definition, a Person shall be
deemed to be "controlled by" such other Person if such other Person possesses,
directly or indirectly, power either to (i) vote 10% or more of the securities
having ordinary voting power for the election of directors of such Person or
(ii) direct or cause the direction of the management and policies of such Person
whether by contract or otherwise, and the legal representative, successor or
assign of any such Person.
-2-
<PAGE>
"Agent" means Fleet or any other Person which is at the time in
-----
question serving as the agent under the terms of Article 8 hereof and the other
Financing Documents.
"Agreement" means this Loan Agreement, as the same may from time to
---------
time be amended or otherwise modified.
"A.M." means a time from and including 12:00 midnight to and excluding
----
12:00 noon on any Business Day using Eastern Standard (Daylight Savings) time.
"Applicable Margin" means a percentage per annum determined by
-----------------
reference to the ratio of Total Funded Debt to Adjusted EBITDA as set forth
below:
<TABLE>
- ------------------------------------------------------------------------------------------------------
TOTAL FUNDED DEBT/
- -------------------
ADJUSTED EBITDA LIBOR MARGIN PRIME RATE MARGIN
- --------------- ------------ -----------------
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
Less than 1:1 0.750% 0.00%
- ------------------------------------------------------------------------------------------------------
Equal to or greater than 1:1 and less than 1.5:1 0.875% 0.00%
- ------------------------------------------------------------------------------------------------------
Equal to or greater than 1.5:1 and less than 2:1 1.00% 0.00%
- ------------------------------------------------------------------------------------------------------
Equal to or greater than 2:1 and less than 2.5:1 1.25% 0.00%
- ------------------------------------------------------------------------------------------------------
Equal to or greater than 2.5:1 and less than 3:1 1.50% 0.00%
- ------------------------------------------------------------------------------------------------------
Equal to or greater than 3:1* 1.75% 0.25%
- ------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from the Closing Date to October 31, 1999, if the ratio of
Total Funded Debt to Adjusted EBITDA is equal to or greater than 3.5:1, the
LIBOR Margin will be 2.0% and the Prime Rate Margin will be .50%.
Any change in the Applicable Margin required pursuant to the foregoing
shall become effective on the fifth Business Day after the Agent receives the
Borrower's financial statements for the Borrower's fiscal quarter or year-end,
as the case may be. In the event that Borrower fails to provide any financial
statement on a timely basis in accordance with Sections 5.25(a) or (b), the
effective interest rate shall be the highest Applicable Margin specified above
until the fifth Business Day following receipt by the Agent of any such
financial statements.
"Authorized Representative" means such officers of the Borrower as
-------------------------
shall be duly authorized and designated in writing by the Borrower to execute
documents, instruments and agreements on its behalf, including but not limited
to Borrowing Requests, and to perform the functions of an Authorized
Representative under any of the Financing Documents.
-3-
<PAGE>
"Borrowed Money" means any obligation to repay money, any Indebtedness
--------------
evidenced by any note, debenture, guaranty, or similar obligation, including
without limitation the Loans, and any purchase money obligation including those
under a conditional sale or other title retention agreement, the net aggregate
rentals on any Capitalized Lease Obligation or any lease that is a substantial
equivalent of the financing of the property so leased, and any reimbursement
obligation for any letter of credit including any Letter of Credit.
"Borrowing Request" means a written request for the Loans in the form
-----------------
of Exhibit A, received by the Agent on behalf of the Lenders from the Borrower
in accordance with this Agreement, specifying the date on which the Borrower
desires such Loans and the disbursement instructions of the Borrower with
respect thereto.
"Borrower" has the meaning specified in the first paragraph of this
--------
Agreement.
"Business Condition" means the financial condition, business, and
------------------
assets of a Person.
"Business Day" means (i) for all purposes other than as covered by
------------
clause (ii) below, any day on which banks in Boston, Massachusetts are not
authorized or required by applicable law to close; and (ii) with respect to all
notices and determinations in connection with, and payments of principal and
interest on, Libor Loans, any day which is a Business Day described in clause
(i) and which is also a day for trading by and between banks in Dollar deposits
in the London interbank market.
"Capital Expenditures" means all expenditures paid or incurred by the
--------------------
Borrower or any Subsidiary in respect of (i) the acquisition, construction,
improvement or replacement of land, buildings, machinery, equipment, any other
fixed assets or leaseholds and (ii) to the extent related to and not included in
(i) above, materials, contract labor and direct labor, which expenditures have
been or should be, in accordance with GAAP, capitalized on the books of the
Borrower or such Subsidiary. Where a fixed asset is acquired by a lease which
is required to be capitalized pursuant to Statement of Financial Accounting
Standards number 13 or any successor thereto, the amount required to be
capitalized in accordance therewith shall be considered to be an expenditure in
the year such asset is first leased. Notwithstanding the foregoing to the
contrary, Capital Expenditures shall not include expenditures incurred in
connection with the construction and equipping of the Facility unless
specifically approved in writing by Agent which approval may be withheld in
Agent's sole discretion and subject to Section 5.27 herein.
-4-
<PAGE>
"Capitalized Lease Obligations" means all lease obligations which have
-----------------------------
been or should be, in accordance with GAAP, capitalized on the books of the
lessee.
"Cash Equivalent Investments" means any Investment in (i) direct
---------------------------
obligations of the United States or any agency, authority or instrumentality
thereof, or obligations guaranteed by the United States or any agency, authority
or instrumentality thereof, whether or not supported by the full faith and
credit of, a right to borrow from or the ability to be purchased by the United
States; (ii) commercial paper rated in the highest grade by a nationally
recognized statistical rating agency or which, if not rated, is issued or
guaranteed by any issuer with outstanding long-term debt rated A or better by
any nationally recognized statistical rating agency; (iii) demand and time
deposits with, and certificates of deposit and bankers acceptances issued by,
any office of the Agent, any Lender or any other bank or trust company which is
organized under the laws of the United States or any state thereof and has
capital, surplus and undivided profits aggregating at least $500,000,000, the
outstanding long-term debt of which or of the holding company of which it is a
subsidiary is rated A or better by any nationally recognized statistical rating
agency; (iv) any short-term note which has a rating of MIG-2 or better by
Moody's Investors Service Inc. or a comparable rating from any other nationally
recognized statistical rating agency; (v) any municipal bond or other
governmental obligation (including without limitation any industrial revenue
bond or project note) which is rated A or better by any nationally recognized
statistical rating agency; (vi) any other obligation of any issuer, the
outstanding long-term debt of which is rated A or better by any nationally
recognized statistical rating agency; (vii) any repurchase agreement with any
financial institution described in clause (iii) above, relating to any of the
foregoing instruments and fully collateralized by such instruments; (viii)
shares of any open-end diversified investment company that has its assets
invested only in investments of the types described in clause (i) through (vii)
above at the time of purchase and which maintains a constant net asset value per
share; and (ix) shares of any open-end diversified investment company registered
under the Investment Company Act of 1940, as amended, which maintains a constant
net asset value per share in accordance with regulations of the Securities &
Exchange Commission, has aggregate net assets of not less than $50,000,000 on
the date of purchase and either derives at least 95% of its gross income from
interest on or gains from the sale of investments of the type described in
clauses (i) through (vii), above or has at least 85% of the weighted average
value of its assets invested in investments of such types; provided that the
purchase of any shares in any particular investment company shall be limited to
an aggregate amount owned at any one time of $500,000. Each Cash Equivalent
Investment shall have a maturity of less than one year at the time of purchase;
provided that the maturity of any repurchase agreement shall be deemed to be the
repurchase date and not the maturity of the subject security and that the
maturity of any variable
-5-
<PAGE>
or floating rate note subject to prepayment at the option of the holder shall be
the period remaining (including any notice period remaining) before the holder
is entitled to prepayment.
"Certification of Officer" means a certificate in the form of Exhibit
------------------------
G hereto, completed and signed by an Authorized Representative of the Borrower
or any Subsidiary, and delivered to the Agent on behalf of the Lenders.
"Change of Control" means at any time prior to the completion of an
-----------------
initial public offering of the common stock of the Borrower, any one of the
following events: any change in the ownership of the Borrower such that Madison
Dearborn Capital Partners, Chase Capital Partners, and Boston Capital Ventures
collectively own less than 75% of the preferred equity interests in the
Borrower; except that any such stockholder may convert into common stock without
constituting a "Change of Control".
"Closing Date" means the date on which all of the conditions precedent
------------
set forth in Section 3.1 of this Agreement have been satisfied and the initial
-----------
Loan is funded in accordance with this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time.
"Commitment" means the Lenders' several commitments to make or
----------
maintain the Loans as set forth in Section 2.1 hereof in the maximum outstanding
amount of each Lender's Pro Rata Share of $135,000,000, less such Lender's Pro
----
Rata Share of the reductions set forth in Sections 2.6(b) and 2.9, and shall
include swing loans made by the Swing Loan Lender.
"Commitment Fee" has the meaning assigned to such term in Section
--------------
2.2(b).
"Commonly Controlled Entity" means a Person, whether or not
--------------------------
incorporated, which is under common control with the Borrower within the meaning
of Section 414(b) or (c) of the Code.
"Construction" means the construction by the Borrower of a
------------
distribution facility in Union Township, Butler County, Ohio.
"Construction Loan" means loans advanced to the Borrower in connection
-----------------
with the Construction.
"Construction Loan Agreement" means the Construction Loan Agreement
---------------------------
dated August 25, 1998, between Borrower and the Lenders, as it may be amended,
restated, supplemented or otherwise modified from time to time.
-6-
<PAGE>
"Construction Loan Documents" means, collectively, the Construction
---------------------------
Loan Agreement, the Mortgage, and each other agreement, instrument or document
now or hereafter executed in connection therewith, including, without
limitation, a Collateral Assignment of Leases and Rents, an Assignment of
Licenses, Permits and Agreements, an Assignment of Project Contracts, an
Assignment of Construction Contract, an Assignment of Engineers Contract, an
Assignment of Architects Contract, and a Hazardous Materials Indemnification
Agreement, all in form and substance satisfactory to the Lenders, as such
documents may be amended, restated, supplemented or otherwise modified from time
to time.
"Default" means an event or condition which with the giving of notice
-------
or lapse of time or both would become an Event of Default.
"Discharged Rights and Obligations" shall have the meaning assigned to
---------------------------------
such term in Section 9.11(d).
"Dollars" and the sign "$" mean lawful money of the United States of
-------
America.
"EBITDA" means, for any fiscal period: (1) with respect to the
------
Borrower and its Eligible Subsidiaries, Net Income plus, Interest Expense,
----
taxes, depreciation, amortization, minority interests, other non-cash charges,
fiscal 1998 non re-curring extraordinary charges capped at $9 million (for
fiscal year January 31, 1999 only), minus equity in gain of Affiliates, cash
impact of fiscal 1998 non-recurring extraordinary charges, minus The
Territory Ahead EBITDA x (1-Borrower's ownership %), minus Whispering
Pines EBITDA x (1-Borrower's ownership %), plus TravelSmith EBITDA x (Borrower's
ownership %) and provided, further, that EBITDA for Project Alpha shall be $0.00
until such time as the equity interest of Borrower in Project Alpha is eighty
percent (80%) or greater, at which time EBITDA for Project Alpha shall be
calculated as provided above for wholly-owned Eligible Subsidiaries.
"Effective Prime" means the Prime Rate plus the Applicable Margin for
---------------
Prime Rate Loans.
"Eligible Assignee" means (a) with respect to the Loans other than the
-----------------
Letter of Credit, (i) a commercial bank organized under the laws of the United
States, or any State thereof, and having total assets in excess of $500,000,000;
(ii) a savings and loan association or savings bank organized under the laws of
the United States, or any State thereof, and having total assets in excess of
$500,000,000; (iii) a commercial bank organized under the laws of any other
country that is a member of the Organization for Economic Corporation and
Development ("OECD") or has concluded special lending arrangements with the
International Monetary Fund associated with its General Arrangements to Borrow
or a political subdivision of any such country, and having total assets in
excess of $500,000,000, so long as such
-7-
<PAGE>
bank is acting through a branch or agency located in the United States; (iv) the
central bank of any country that is a member of the OECD; and (v) a finance
company, insurance company or other financial institution or fund (whether a
corporation, partnership, trust or other entity) that is engaged in making,
purchasing or otherwise investing in commercial loans in the ordinary course of
its business and having total assets in excess of $500,000,000, and (b) with
respect to Letters of Credit, a Person which is an Eligible Assignee under
subclause (i) or (iii) of clause (a) of this definition and is approved by the
Agent; provided, however, that an Affiliate of the Borrower shall not qualify as
an Eligible Assignee under clause (a) or (b) of this definition.
"Eligible Subsidiary" means any Subsidiary of the Borrower designated
-------------------
by the Borrower and accepted by Lender as an Eligible Subsidiary on Exhibit E
hereto, as amended from time to time, which Subsidiary has executed and
delivered a Subsidiary Guaranty in favor of the Agent and the Lenders. Except
as shown specifically provided for herein, in order to qualify as an Eligible
Subsidiary, the Borrower must own no less than one hundred percent (100%) of the
equity of such Subsidiary, such Subsidiary must execute a Pledge Agreement and
Lender must consent to qualify the Subsidiary as an Eligible Subsidiary.
Notwithstanding the foregoing, the Lenders agree TravelSmith Outfitters, Inc.
("TravelSmith"), The Territory Ahead, Inc. ("TTA") and Whispering Pines, LLC
("Whispering Pines"), a Delaware limited liability company, shall be designated
as Eligible Subsidiaries, subject to the requirements of Section 2.14(d) and
other entities may be designated as Eligible Subsidiaries in accordance with
Section 6.12(vii) herein.
"ERISA" means the Employee Retirement Income Security Act of 1974 as
-----
amended from time to time.
"Events of Default" has the meaning assigned to that term in Section
-----------------
7.1 of this Agreement.
"Exhibit" means, when followed by a letter, the exhibit attached to
-------
this Agreement bearing that letter and by such reference fully incorporated in
this Agreement.
"Facility" means the distribution facility being constructed in Union
--------
Township, Butler County, Ohio.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upward, if necessary, to the nearest 1/16th of 1%) equal to the weighted average
of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York, provided that (i) if such day is not a
--------
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next succeeding Business Day as so published, and
-8-
<PAGE>
(ii) if no such rate is so published on such next succeeding Business Day, the
Federal Funds Rate for such day shall be the average rate quoted to the Agent on
such day on such transactions as determined by the Agent in its reasonable
discretion exercised in good faith.
"Financing Documents" means, collectively, this Agreement, the Note,
-------------------
the Pledge Agreements, the Subsidiary Guaranties, the Construction Loan
Documents, the Security Documents, the Letters of Credit, the Letter of Credit
Documents, all Uniform Commercial Code financing statements executed in
connection with this Agreement, any agreement with any Lender providing any
interest rate protection arrangement and each other agreement, instrument or
document now or hereafter executed in connection herewith or therewith, as such
documents may be amended, restated, supplemented or otherwise modified from time
to time.
"Fixed Charge Coverage Ratio" means, for each period measured, with
---------------------------
respect to the Borrower and its Eligible Subsidiaries on a consolidated basis,
the ratio of (i) Adjusted EBITDA for such period, plus rent expense, minus taxes
---- -----
paid in cash during such period, minus Capital Expenditures (excluding
expenditures in connection with the Construction), to (ii) current maturities of
long term debt, plus interest, plus rent expense. For the purposes of this
---- ----
definition, the rent expense, taxes and Capital Expenditures for the equivalent
period paid by any Eligible Subsidiary acquired within the prior four fiscal
quarters shall be added to the calculation of such amounts.
"Funded Indebtedness" means any obligation of the Borrower and its
-------------------
Eligible Subsidiaries to repay funded Indebtedness, any indebtedness for
Borrowed Money, and any obligations in respect of banker's and other acceptances
or similar obligations.
"GAAP" means generally accepted accounting principles in effect from
----
time to time in the United States of America.
"Guaranties" means as applied to any Person, all guarantees,
----------
endorsements or other contingent or surety obligations with respect to
obligations of others whether or not reflected on the balance sheet of such
Person, including any obligation to furnish funds, directly or indirectly
(whether by virtue of partnership arrangements, by agreement to keep-well or
otherwise), through the purchase of goods, supplies or services, or by way of
stock purchases, capital contribution, advance or loan, or to enter into a
contract for any of the foregoing, for the purpose of payment of obligations of
any other Person.
"Guarantor(s)" means each of Cinmar, Inc., an Ohio corporation, The
------------
Territory Ahead, Inc., a Delaware corporation, TravelSmith Outfitters, Inc., a
California corporation, Cinmar, L.P., a Delaware limited partnership,
Cornerstone Holdings Group, Inc., a Delaware corporation, Garnet Hill, Inc., a
New Hampshire corporation, Ballard
-9-
<PAGE>
Designs, Inc., a Georgia corporation, Whispering Pines, LLC, a Delaware limited
liability company, Cornerstone Consolidated Services Group, , Inc., a Delaware
corporation, and Cornerstone Real Estate Company I, LLC, a Delaware limited
liability company, in each case for so long as such entity is an Eligible
Subsidiary, and each other Person that from time to time executes a guaranty in
favor of the Agent and the Lenders, including, without limitation, each other
Eligible Subsidiary.
"Hazardous Material" shall mean any substance or material defined or
------------------
designated as a hazardous or toxic waste, hazardous or toxic material, hazardous
or toxic substance, or other similar term, by any United States federal, state
or local environmental statute, regulation or ordinance.
"Holdings" means The Cornerstone Holdings Group, Inc., a Delaware
--------
corporation.
"Indebtedness" means, without duplication for any Person, (i) all
------------
indebtedness or other obligations of said Person for Borrowed Money or for the
deferred purchase price of property or services, including, without limitation,
all reimbursement obligations of said Person with respect to standby and/or
documentary letters of credit (ii) all indebtedness or other obligations of any
other Person ("Other Person") for Borrowed Money or for the deferred purchase
price of property or services, the payment or collection of which said Person
has guaranteed (except by reason of endorsement for deposit or collection in the
ordinary course of business) or in respect of which said Person is liable,
contingently or otherwise, including, without limitation, liable by way of
agreement to purchase or lease, to provide funds for payment, to supply funds to
purchase, sell or lease property or services primarily to assure a creditor of
such Other Person against loss or otherwise to invest in or make a loan to the
Other Person, or otherwise to assure a creditor of such Other Person against
loss, (iii) all indebtedness or other obligations of any Person for Borrowed
Money or for the deferred purchase price of property or services secured by (or
for which the holder of such indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or in any property owned by said
Person, whether or not said Person has assumed or become liable for the payment
of such indebtedness or obligations, (iv) Capitalized Lease Obligations of said
Person and (v) obligations of such Person under contracts pursuant to which such
Person has agreed to purchase interest rate protection or swap interest rate
obligations.
"Ineligible Subsidiary" means any Subsidiary of the Borrower that is
---------------------
not an Eligible Subsidiary.
"Interest Expense" means, for any fiscal period, the consolidated
----------------
interest, fees, charges, and expenses, however characterized, of the
-10-
<PAGE>
Borrower's and the Eligible Subsidiaries' Indebtedness, determined in accordance
with GAAP.
"Interest Period" means, with respect to each Libor Loan:
---------------
(i) initially, the period commencing on the date of such Libor
Loan and ending 30, 60, 90, or 180 days thereafter as the Borrower may elect in
the applicable Borrowing Request and subject to Section 2.12; and
(ii) thereafter, each period commencing on the last day of the
immediately preceding Interest Period applicable to such Libor Loan and ending
30, 60, 90, or 180 days thereafter as the Borrower may elect in the applicable
Borrowing Request and subject to Section 2.12;
provided that clauses (i) and (ii) of this definition are subject to the
- -------- ----
following:
(A) any Interest Period (other than an Interest Period determined
pursuant to clause (C) below) which would otherwise end on a day which is not a
Business Day shall be extended to the next succeeding Business Day unless such
Business Day falls in another calendar month, in which case such Interest Period
shall end on the immediately preceding Business Day;
(B) any Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall, subject to
clause (C) below, end on the last Business Day of a calendar month; and
(C) no Interest Period shall end after the Termination Date; and
(D) with respect to all Libor Loans, no more than twelve (12) Interest
Periods may be in effect at any time.
"Investment" means any investment in any Person whether by means of a
----------
purchase of capital stock, notes, bonds, debentures or other evidences of
Indebtedness and/or by means of a capital or partnership contribution, loan,
deposit, advance or other means.
"Lender" means Fleet or any other financial institution which
------
hereafter becomes a party hereto pursuant to the terms of Section 9.11, each in
its individual capacity.
"Letter of Credit" Any letter of credit issued by Fleet for the
----------------
account of the Borrower pursuant to Section 2.1(b), any related bankers
acceptance and bill of lading guaranty, and any letter of credit with respect to
which an indemnity agreement has been executed by the Agent for the benefit of
any other issuer of such letter of credit for the account of the Borrower
indemnifying such issuer for
-11-
<PAGE>
payment of any draw, fees or expenses due and owing under such letter of credit
(including letters of credit issued for the account of the Borrower on behalf of
an Eligible Subsidiary), as originally issued, or if amended or extended, as
amended or extended.
Letter of Credit Documents. With respect to a Letter of Credit, such
--------------------------
application therefor and reimbursement agreement therefor (whether in a single
document or several documents) as the Agent may require in the ordinary course
of business for its own account.
"Libor Loan" means any portion of any Loan bearing interest at the
----------
Libor Rate.
"Libor Rate" means, for any Interest Period, the Adjusted Libor Rate
----------
in effect on the first day of such Interest Period (subject to adjustment as
provided in the definition of Adjusted Libor Rate) plus the Applicable Margin
for Libor Loans from time to time in effect.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, encumbrance, lien (statutory or other) or other security agreement
or preferential arrangement of any kind or nature whatsoever (including without
limitation any conditional sale or other title retention agreement and any
Capitalized Lease Obligation) having substantially the same economic effect as
any of the foregoing and the filing of any financing statement under the
applicable Uniform Commercial Code or comparable law of any jurisdiction in
respect of any of the foregoing.
"Loans" and "Loan" means at any time the outstanding principal amount
----- ----
of Indebtedness owed to the Lenders or to any lender, including, without
limitation, Revolving Loans, Construction Loans and Swing Loans, as the context
may require pursuant to this Agreement.
"Majority Lenders" means Lenders holding an aggregate Pro Rata Share
----------------
of the outstanding principal balance of the Loans in an amount equal to or in
excess of 60% of the total outstanding principal balance of the Loans and if
there is no outstanding principal balance of the Loans, Lenders having at least
60% of the Commitment, but in any event not less than two (2) Lenders.
"Material Adverse Effect" means material adverse effect on (i) the
-----------------------
ability of the Borrower or any Subsidiary, as the case may be, to fulfill its
obligations under any of the Financing Documents or (ii) the Business Condition
of the Borrower or any Subsidiary, as the case may be.
"Mortgage" means the Mortgage and Security Agreement of the Borrower
--------
to the Lenders with respect to the land and buildings known and numbered as
Parcel 35, 38, 39, 40, 44 and 59 (Section 34, Town 3, Range 2) Union Township,
Butler County, Ohio, as it may be amended, restated, supplemented or otherwise
modified from time to time.
-12-
<PAGE>
"Multiemployer Plan" means a multiemployer plan as defined in Section
------------------
4001(a)(3) of ERISA.
"Net Equity Proceeds" means, with respect to the sale or issuance of
-------------------
any capital stock, any securities convertible into or exchangeable for capital
stock, or any warrants, rights or options to acquire capital stock by any
Person, the aggregate amount of cash received by or on behalf of such Person in
connection with such transaction, after deducting therefrom reasonable and
customary brokerage commissions, underwriting fees and discounts, legal fees,
finder's fees, and other similar fees and commission.
"Net Income" means, for any fiscal period and with respect to the
----------
Borrower and its Eligible Subsidiaries, the net after tax income (loss) for such
period determined in accordance with GAAP.
"Net Worth" means, for any fiscal period, the consolidated total
---------
assets of the Borrower and its Eligible Subsidiaries (after deduction of all
applicable reserves and allowances) minus the Total Liabilities of the Borrower
-----
and its Eligible Subsidiaries, all as determined in accordance with GAAP.
"Note" means any promissory note of the Borrower payable to the order
----
of a Lender, substantially in the form of Exhibit B, and evidencing all or a
portion of the Loan, and "Notes" means all of the Notes, collectively.
"Obligations" mean any and all Indebtedness, obligations and
-----------
liabilities of the Borrower or any Subsidiaries under any of the Financing
Documents to any one or more of the Lenders or the Agent of every kind and
description, absolute or contingent, due or to become due, whether for payment
or performance, now existing or hereafter arising, including, without
limitation, all Loans, interest, taxes, fees, charges, and expenses under the
Financing Documents and attorneys' fees chargeable to the Borrower or any
Subsidiaries or incurred by any of the Lenders or the Agent under any of the
Financing Documents.
"PBGC" means the Pension Benefit Guaranty Corporation established
----
pursuant to subtitle A of Title IV of ERISA.
"P.M." means a time from and including 12:00 noon on any Business Day
----
to the end of such Business Day using Eastern Standard (Daylight Savings) time.
"Permitted Encumbrances" means each Lien granted pursuant to any of
----------------------
the Security Documents, those Liens, and those security interests and title
encumbrances permitted under Section 6.1.
-13-
<PAGE>
"Person" means an individual, corporation, partnership, limited
------
liability company, joint venture, trust, or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Plan" means an employee benefit plan as defined in Section 3(3) of
----
ERISA maintained for employees of the Borrower or any Commonly Controlled
Entity.
"Pledge Agreements" means the Pledge Agreements dated July 22, 1997
-----------------
and April 28, 1998, as the case may be, and as executed from time to time,
pursuant to which all of the Borrower's and Holdings' or other Subsidiary's
ownership interests in their respective Subsidiaries have been pledged to the
Agent.
"Premises" has the meaning assigned to such term in Section 4.20.
--------
"Prime Rate" means the higher of (i) the floating rate of interest per
----------
annum designated from time to time by the Agent as being its "prime rate" of
interest, such interest rate to be adjusted on the effective date of any change
thereof by the Agent, it being understood that such rate of interest may not be
the lowest rate of interest from time to time charged by the Agent and (ii) the
Federal Funds Rate, such interest rate to be adjusted on the effective date of
any change thereof by the Federal Reserve Bank of New York.
"Prime Rate Loan(s)" means any portion of the Loans bearing interest
------------------
at Effective Prime.
"Project Alpha" means the acquisition of an equity interest in the
-------------
Sundance Catalog Company, Ltd. and affiliated entities.
"Projections" means the Borrower's written projections of Borrower's
-----------
five-year future performance on a consolidated basis delivered to the Agent
prior to the Closing.
"Pro Rata Share" means (i) with respect to the Commitment, each
--------------
Lender's percentage share of the Commitment as set forth immediately opposite
such Lender's name on Annex I, and (ii) with respect to the Loans, each Lender's
percentage share of the aggregate outstanding principal balance of the Loans and
"Pro Rata Shares" means such percentage shares of the Lenders.
"Reference Lender(s)" means the Agent or two Lenders selected by the
-------------------
Agent in its reasonable discretion and acceptable to the Borrower from time to
time as a reference lender for purposes of determining the Adjusted Libor Rate.
"Reimbursement Obligations" means the reimbursement or repayment
--------------------------
obligations of the Borrower with respect to the Letters of Credit.
-14-
<PAGE>
"Reportable Event" shall have the meaning assigned to that term in
----------------
Section 4043 of ERISA for which the requirement of 30 days' notice to the PBGC
has not been waived by the PBGC.
"Revolving Loan" means the revolving loans and the Construction Loans
--------------
to be made by the Lenders to the Borrower from time to time in the maximum
outstanding principal amount of the Commitment, all subject and pursuant to
Section 2.1(a).
"Section" means, when followed by a number, the section or subsection
-------
of this Agreement bearing that number.
"Security Documents" means any and all documents, instruments and
------------------
agreements now or hereafter providing security for the Loans and any other
Indebtedness of the Borrower or any Subsidiary to any of the Lenders and/or the
Agent, including without limitation the following documents, instruments and
agreements between the Agent and the Borrower or any Subsidiary; any guaranty by
a Subsidiary; any mortgage of the Borrower or any Subsidiary, any pledge of the
capital stock of any Subsidiary; Uniform Commercial Code financing statements or
similar filings perfecting the above-referenced security interests, pledges and
assignments, all as executed, delivered to and accepted by the Agent on or prior
to the Closing Date or subsequent to the Closing Date as may be required by this
Agreement, as any of the foregoing may be amended in writing by the Agent and
any other party or parties thereto.
"Selling Lender" shall have the meaning assigned to such term in
--------------
Section 9.11(a).
"Senior Funded Indebtedness" means Funded Indebtedness of the Borrower
--------------------------
and its Eligible Subsidiaries that is not Subordinated Funded Indebtedness.
"Single Employer Plan" means any Plan as defined in Section
--------------------
4001(a)(15) of ERISA.
"Subordinated Funded Indebtedness" means the consolidated Indebtedness
--------------------------------
of the Borrower and its Eligible Subsidiaries, the payment of principal of and
interest on which is expressly subordinated in right of payment, to the prior
payment in full of the Obligations, by a written agreement in a form and
substance satisfactory to the Agent.
"Subsidiary" means any corporation, partnership, limited liability
----------
company or entity of which more than 50% of the outstanding capital stock or
voting interests or rights having ordinary voting power to elect a majority of
the board of directors or other managers of such entity (irrespective of whether
or not at the time capital stock or voting interests or rights of any other
class or classes of such Person shall or might have voting power upon the
occurrence of
-15-
<PAGE>
any contingency) is at the time directly or indirectly owned by a Person or by
such Person and/or one or more Subsidiaries or the management of which
corporation or entity is under control of a Person and/or any other Subsidiary,
directly or indirectly through one or more Persons and any other Person which,
under GAAP, should at any time for financial reporting purposes be consolidated
or combined with a Person and/or any other Subsidiary.
"Subsidiary Guaranty" means a Guaranty (either Limited or Unlimited)
-------------------
in form and substance satisfactory to the Agent executed by a Subsidiary of the
Borrower in favor of the Agent.
"Substituted Lender" has the meaning set forth in Section 9.11 hereof.
------------------ ------- ----
"Substitution Agreement" has the meaning assigned to such term in
----------------------
Section 9.11(a).
"Swing Loans" means Loans made by the Swing Loan Lender pursuant to
-----------
Section 2.16.
"Swing Loan Lender" shall mean Fleet National Bank or the other
-----------------
Lenders pursuant to Section 2.16(d).
"Swing Loan Sublimit" shall mean $5,000,000.
-------------------
"Termination Date" means the earlier to occur of (i) August 25, 2003
----------------
and (ii) such earlier date on which the Revolving Loan becomes due and payable
pursuant to the terms hereof.
"Total Liabilities" means, with respect to the Borrower and its
-----------------
Eligible Subsidiaries, the consolidated liabilities, both short-term and long-
term, excluding shareholder equity, of the Borrower and its Eligible
Subsidiaries, all as determined in accordance with GAAP.
"Wholly-Owned Subsidiary" means any Subsidiary of Borrower of which
-----------------------
the Borrower owns, directly or indirectly, one hundred percent (100%) of the
equity of such Subsidiary. Each Wholly-Owned Subsidiary shall execute and
deliver a Subsidiary Guaranty (Unlimited) in the form of Exhibit H hereto in
favor of the Agent and the Lenders.
Section 1.2 Accounting Terms. All accounting terms not specifically
----------- ----------------
defined herein shall be construed in accordance with GAAP, calculations of
amounts for the purposes of calculating any financial covenants or ratios
hereunder shall be made in accordance with GAAP applied on a basis consistent
with those used in the Borrower's financial statements referred to in Section
4.5 (other than departures therefrom not material in their impact), and all
financial data submitted pursuant to this Agreement shall be prepared in
accordance with GAAP.
-16-
<PAGE>
Section 1.3 Other Terms. References to "Articles", "Sections",
----------- -----------
"subsections" and "Exhibits" shall be to Sections, subsections and Exhibits and
of this Agreement unless otherwise specifically provided. In this Agreement,
"hereof," "herein," "hereto," "hereunder" and the like mean and refer to this
Agreement as a whole and not merely to the specific section, paragraph or clause
in which the respective word appears; words importing any gender include the
other genders; references to "writing" include printing, typing, lithography and
other means of reproducing words in a tangible visible form; the words
"including," "includes" and "include" shall be deemed to be followed by the
words "without limitation"; references to agreements and other contractual
instruments shall be deemed to include subsequent amendments, assignments, and
other modifications thereto, but only to the extent such amendments, assignments
and other modifications are not prohibited by the terms of this Agreement or any
other Financing Document; references to Persons include their respective
permitted successors and assigns or, in the case of governmental Persons,
Persons succeeding to the relevant functions of such Persons; and all references
to statutes and related regulations shall include any amendments of same and any
successor statutes and regulations.
ARTICLE 2
AMOUNT AND TERMS OF THE LOANS
Section 2.1 The Revolving Credit Loans.
----------- --------------------------
(a) Each Lender severally agrees, subject to the terms and conditions
of this Agreement, to make Revolving Loans to the Borrower from time to time
after receipt by the Agent of, and at the times provided for in, a Borrowing
Request from the Borrower in accordance with this Agreement, during the period
commencing on the Closing Date and ending on the Business Day immediately
preceding the Termination Date, in an aggregate principal amount at any time
outstanding not to exceed such Lender's Pro Rata Share of the Commitment. Up to
$35,000,000 of the Commitment shall be available for Construction Loans, which
Construction Loans shall be advanced to the Borrower pursuant to and subject to
the terms of the Construction Loan Agreement. In all other respects,
Construction Loans shall be governed by the terms of this Agreement. The
aggregate principal amount of all Loans plus the amount drawable or drawn and
----
not reimbursed under all Letters of Credit at any time outstanding shall not at
any time exceed the Commitment except for Construction Loans which may not be
drawn on a revolving basis. The Borrower may borrow, repay pursuant to Sections
2.7 and 2.8, and reborrow, from the Closing Date until the last Business Day
preceding the Termination Date, the amount available under the Commitment except
for Construction Loans which may not be drawn on a revolving basis, provided,
however, that the amount of any Construction Loans repaid to the Lenders shall
be available for Revolving Loans and Swing Loans up to the amount of the
-17-
<PAGE>
Commitment. Any Loan not repaid by the Termination Date shall be due and payable
on such date.
(b) Letters of Credit. Subject to the terms and conditions set forth
-----------------
herein, and so long as no Default or Event of Default has occurred, the Borrower
may also request Letters of Credit, provided that the aggregate drawable or
--------
drawn and not reimbursed amount of Letters of Credit at any time outstanding
hereunder after giving effect to such request, shall not exceed the lesser of
(i) $20,000,000 and (ii) the Commitment minus the sum of the outstanding amount
-----
of all Loans and the aggregate drawable or drawn and not reimbursed amount of
all Letters of Credit. All Letters of Credit shall expire on or before the
Business Day preceding the Termination Date. Letters of Credit may be issued by
Fleet, in its sole discretion, subject to the conditions of this Agreement. The
Borrower shall be liable to the Agent for reimbursement of any and all draws
under any Letter of Credit and all other amounts required to be paid under the
applicable Letter of Credit Documents. If the Borrower fails to promptly pay to
the Agent any amounts drawn under the Letters of Credit or any other amount
required to be paid in accordance with the terms hereof and the Letter of Credit
Documents, the Lenders are hereby irrevocably authorized and directed, in its
sole discretion, to make a Revolving Loan in an amount sufficient to discharge
all such amounts due under any Letter of Credit including any other amounts
required to be paid hereunder or under the Letter of Credit Documents, including
all interest accrued thereon but unpaid at the time of such Revolving Loan, and
such Revolving Loan shall be a Prime Rate Loan.
(c) Requests for Revolving Loans.
----------------------------
(a) Any Authorized Representative of the Borrower may request
Revolving Loans by notice to the Agent, given not later than 11:00 A.M. on the
day of the proposed Loan in the case of a Prime Rate Loan, and not later than
the third Business Day prior to the effective date of such Loan in the case of a
Libor Loan or a Prime Rate Loan being converted to a Libor Loan. Each such
Borrowing Request shall provide the information required by the form attached
hereto as Exhibit A and shall be by telephone or telecopier. Each Borrowing
Request shall be irrevocable and binding on the Borrower. Any request for the
making of a Libor Loan or conversion of a Prime Rate Loan to a Libor Loan shall
be for an amount of not less than $500,000, or increments of $100,000 in excess
thereof.
(d) Funding of Requests. Promptly after receipt of a Borrowing
-------------------
Request, the Agent shall notify each Lender by telephone or telecopier of the
proposed borrowing. Each Lender agrees that after its receipt of notification
from Agent of Agent's receipt of a Borrowing Request, such Lender shall make
available to Agent its Pro Rata Share (or such portion thereof as may be
necessary to provide Agent with such Pro Rata Share in Dollars and in
immediately available funds, without consideration or use of any contra accounts
of any Lender) of the
-18-
<PAGE>
requested Loan by wire transfer to Agent so that Agent receives such Pro Rata
Share in Dollars and in immediately available funds not later than 12:00 P.M.
(Boston, Massachusetts time) on the first day of the Interest Period for any
such requested Libor Loan and on the Business Day for such Loan set forth in
Borrower's Request for any such requested Prime Rate Loan, and Agent shall
advance funds to the Borrower by depositing such funds in Borrower's account
with the Agent, or otherwise in accordance with the direction of the Borrower as
specified in the applicable Borrowing Request, upon the Agent's receipt of such
funds. Unless the Agent shall have been notified by any Lender (which notice may
be telephonic if confirmed promptly in writing) prior to the first day of the
Interest Period in respect of any Loan which such Lender is obligated to make
under this Agreement, that such Lender does not intend to make available to
Agent such Lender's Pro Rata Share of such Loan on such date, Agent may assume
that such Lender has made such amount available to Agent on such date and Agent
in its sole discretion may, but shall not be obligated to, make available to the
Borrower a corresponding amount on such date. If Agent advances said
corresponding amount from its own funds, and if such corresponding amount
thereafter is not in fact made available to Agent by such Lender, Agent shall be
entitled to recover such corresponding amount from such Lender promptly upon
demand by Agent together with interest thereon, for each day from such date
until the date such amount is paid to Agent, at the Federal Funds Rate for three
(3) Business Days and thereafter at the interest rate applicable to the Loan in
question. If such Lender does not pay such corresponding amount forthwith upon
Agent's demand therefor, Agent shall promptly notify the Borrower and the
Borrower shall promptly pay such corresponding amount plus all interest accrued
thereon to Agent. Nothing contained in this Section shall be deemed to relieve
any Lender from its obligation to fulfill its obligations hereunder or to
prejudice any rights which the Borrower may have against any Lender as a result
of any default by such Lender hereunder.
(e) Optional Conversion of Loans. The Borrower may on any Business
----------------------------
Day, upon notice given to the Agent not later than 12:00 P.M. (Boston time) on
the third Business Day prior to the date of the proposed conversion and subject
to the provisions of Section 2.09, convert all or any portion of any Prime Rate
Loan to a Libor Loan, or all or any portion of any Libor Loan to a Prime Rate
Loan; provided, however, that any conversion of any Libor Loan into a Prime Rate
--------
Loan shall be made only on the last day of the applicable Interest Period, and
any conversion of a Prime Rate Loan into Libor Loan shall be in an amount not
less than the minimum amount specified in Section 2.1(c). Each such notice of
conversion shall, specify (i) the date of such conversion, (ii) the Loans to be
converted and (iii) if such conversion is into a Libor Loan, the duration of the
initial Interest Period for such Loan. Each notice of conversion shall be
irrevocable and binding on the Borrower.
(f) Mandatory Conversion of Loans.
-----------------------------
-19-
<PAGE>
(i) On the date on which the aggregate unpaid principal amount
of any Libor Loan shall be reduced, by payment or prepayment or otherwise, to
less than $500,000, such Loan shall automatically convert into a Prime Rate
Loan.
(ii) If the Borrower shall fail to select the duration of any
Interest Period for any Libor Loan, the Agent will forthwith so notify the
Borrower and the Lenders, whereupon each such Libor Loan will automatically, on
the last day of the then existing Interest Period therefor, convert into a Prime
Rate Loan.
Section 2.2 Interest and Fees.
----------- -----------------
(a) Interest. Interest shall accrue on the Loans at Effective Prime
--------
or the Libor Rate for each of the relevant Interest Periods subject to and in
accordance with the terms and conditions of this Agreement and the Note(s);
provided that if a Default or an Event of Default exists and is continuing and
has not been cured during any applicable grace period, no Borrowing Request
electing the Libor Rate shall be effective and any Loan or portion thereof with
respect to which any such Borrowing Request would otherwise have been effective
shall bear interest at Effective Prime plus, so long as an Event of Default
exists and is continuing, two percent (2%); all of the foregoing being
applicable until such Default or Event of Default is cured or waived and a
Borrowing Request electing the Libor Rate for such Loan or portion thereof which
is effective in accordance with this Agreement is submitted to the Agent in
accordance with Section 2.1(c). The Borrower shall pay such interest to the
Agent for the pro rata account of each Lender monthly in arrears in the case of
Prime Rate Loans, and quarterly in arrears or at the end of each Interest Period
(whichever is shorter) in the case of Libor Loans. All provisions of this
Agreement and the Note(s) and any other Financing Document are expressly subject
to the condition that in no event, whether by reason of acceleration of maturity
of the Indebtedness evidenced by any Note or otherwise, shall the amount paid or
agreed to be paid thereunder which is deemed interest under applicable law
exceed the maximum permitted rate of interest under applicable law (the "Maximum
Permitted Rate"), which shall mean the law in effect on the date of this
Agreement, except that if there is a change in such law which results in a
higher Maximum Permitted Rate, then each such Financing Document shall be
governed by such amended law from and after its effective date. In the event
that fulfillment of any provision of any Financing Document results in the rate
of interest charged being in excess of the Maximum Permitted Rate, the
obligation to be fulfilled shall automatically be reduced to eliminate such
excess. If, notwithstanding the foregoing, the Agent or any Lender receives an
amount which under applicable law would cause the interest rate under any
Financing Document to exceed the Maximum Permitted Rate, the portion thereof
which would be excessive shall automatically be deemed a prepayment of and be
applied to the unpaid principal
-20-
<PAGE>
balance of the Note(s), , to the extent of then outstanding Loans and not a
payment of interest and to the extent said excessive portion exceeds the
outstanding principal amount of Loans, said excessive portion shall be repaid to
the Borrower.
(b) Fees. Commencing September 30, 1998 and continuing through the
----
Termination Date, the Borrower shall pay to the Agent quarterly for the pro rata
account of each Lender, a commitment fee in an amount equal to the percentage
per annum, in accordance with the table set forth below, of the amount, if any,
by which the Commitment for the quarterly period just ended (or in the case of
the first such payment, the period from the Closing Date to the date such
payment is due) exceeds the sum of (i) the actual daily outstanding principal
balances of the Revolving Loans and Swing Loans plus (ii) the outstanding
----
drawable or drawn and not reimbursed amounts of any Letters of Credit (the
"Commitment Fees").
<TABLE>
<CAPTION>
----------------------------------------------------------------------
TOTAL FUNDED DEBT/
-------------------
ADJUSTED EBITDA COMMITMENT FEE
--------------- --------------
----------------------------------------------------------------------
<S> <C>
Less than 1:1 0.200%
----------------------------------------------------------------------
Equal to or greater than 1:1 and less than 1.5:1 0.225%
----------------------------------------------------------------------
Equal to or greater than 1.5:1 and less than 2:1 0.250%
----------------------------------------------------------------------
Equal to or greater than 2:1 and less than 2.5:1 0.300%
----------------------------------------------------------------------
Equal to or greater than 2.5:1 and less than 3:1 0.375%
----------------------------------------------------------------------
Equal to or greater than 3:1* 0.400%
----------------------------------------------------------------------
</TABLE>
* For the period from the Closing Date to October 31, 1999, if the ratio of
Total Funded Debt to Adjusted EBITDA is equal to or greater than 3.5:1, the
Commitment Fee will be 0.45%.
Any change in the Commitment Fees required pursuant to the foregoing shall
become effective on the fifth Business Day after the Agent receives the
Borrower's financial statement for the Borrower's fiscal quarter or year-end, as
the case may be. In the event that Borrower fails to provide any financial
statement on a timely basis in accordance with Section 5.25(a) or (b), any
----------------------
interest rate or Commitment Fees increase payable as a result thereof shall be
retroactively effective to the date on which the financial statement in question
should have been received by the Agent in accordance with Section 5.25(a) or
------------------
(b), and the Borrower shall pay any amount due as a result thereof upon written
demand from the Agent. The Agent shall send the Borrower written acknowledgment
of each change in the Commitment Fees in accordance with the Agent's customary
procedures as in effect from time to time, but the failure to send such
acknowledgment shall have no effect on the effectiveness or applicability of the
foregoing provisions of this definition or
-21-
<PAGE>
Borrower's obligations with respect to payment and calculation of the Commitment
Fees.
(c) Letter of Credit Fees. The Borrower shall pay to the Agent for
---------------------
the ratable benefit of the Lenders a fee for each documentary Letter of Credit
issued at a per annum rate applied to the principal amount of said Letter of
Credit in accordance with the table below . The Borrower shall pay to the Agent
for the ratable benefit of the Lenders a fee for each stand-by Letter of Credit
issued, at a per annum rate applied to the principal amount of said Letter of
Credit in accordance with the table below:
<TABLE>
<CAPTION>
STANDBY LETTER DOCUMENTARY LETTER
-------------- ------------------
TOTAL FUNDED DEBT/EBITDA OF CREDIT FEE OF CREDIT FEE
------------------------ ------------- -------------
-------------------------------------------------------------------------------------------------
<S> <C> <C>
less than 1:1 .750 .375%
-------------------------------------------------------------------------------------------------
Equal to or greater than 1:1 and less than 1.5:1 .875% .4375%
-------------------------------------------------------------------------------------------------
Equal to or greater than 1.5:1 and less than 2:1 1.00% .50%
-------------------------------------------------------------------------------------------------
Equal to or greater than 2:1 and less than 2.5:1 1.25% .625%
-------------------------------------------------------------------------------------------------
Equal to or greater than 2.5:1 and less than 3:1 1.50% .75%
-------------------------------------------------------------------------------------------------
Equal to or greater than 3:1* 1.75% .875%
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the Closing Date to October 31, 1999, if the
ratio of Total Funded Debt to EBITDA is equal to or greater than 3.5:1 the
Documentary Fee will be 1.0% and the Standby Letter of Credit Fee will be 2.0%.
Such fees shall be due and payable quarterly in arrears. In addition,
the Borrower shall pay to Fleet for its own account Fleet's customary issuance,
amendment, negotiation and administrative fees with respect to each Letter of
Credit in such amounts and at such times as Fleet shall specify.
(d) Increased Costs - Capital. If, after the date hereof, any Lender
-------------------------
shall have reasonably determined that the adoption after the date hereof of any
applicable law, governmental rule, regulation or order regarding capital
adequacy of banks or bank holding companies, or any change therein, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by such Lender or such Lender's holding
company with any policy, guideline, directive or request regarding capital
adequacy (whether or not having the force of law and whether or not
-22-
<PAGE>
failure to comply therewith would be unlawful) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on the capital of such Lender or such Lender's holding company as a
consequence of the obligations hereunder of such Lender to a level below that
which such Lender could have achieved but for such adoption, change or
compliance (taking into consideration the policies of such Lender or such
Lender's holding company with respect to capital adequacy immediately before
such adoption, change or compliance and assuming that the capital of such Lender
or such Lender's holding company was fully utilized prior to such adoption,
change or compliance) by an amount reasonably deemed by such Lender to be
material, then such Lender shall notify the Agent and the Borrower thereof and
the Borrower shall pay to the Agent for the account of such Lender from time to
time as specified by such Lender such additional amounts as shall be sufficient
to compensate such Lender for such reduced return, each such payment to be made
by the Borrower within five (5) Business Days after each demand by such Lender;
provided that the liability of the Borrower to pay such costs shall only accrue
with respect to costs accruing from and after the 180th day prior to the date of
each such demand. A certificate in reasonable detail of one of the officers of
such Lender describing the event giving rise to such reduction and setting forth
the amount to be paid to such Lender hereunder and a computation of such amount
shall accompany any such demand and shall, in the absence of manifest error, be
conclusive. In determining such amount, such Lender shall act reasonably and
will use any reasonable averaging and attribution methods. If the Borrower
shall, as a result of the requirements of this Section 2.2(c) above, be required
to pay any Lender the additional costs referred to above and the Borrower, in
its sole discretion, shall deem such additional amounts to be material, the
Borrower shall have the right to substitute another financial institution that
is an Eligible Assignee for such Lender which has certified the additional costs
to the Borrower, and the Agent shall use reasonable efforts at no cost to the
Agent to assist the Borrower to locate such substitute financial institution.
Any such substitution shall take place in accordance with Section 9.11 and shall
otherwise be on terms and conditions reasonably satisfactory to the Agent, and
until such time as such substitution shall be consummated, the Borrower shall
continue to pay such additional costs. Upon any such substitution, such Lender
shall be obligated to assign all of its interest under this Agreement and the
other Financing Documents to the designated Eligible Assignee.
Section 2.3 Notations. At the time of (i) the making of each
----------- ---------
Revolving Loan, (ii) each change in the interest rate under any Note; and (iii)
each payment or prepayment of any Note, each Lender may enter upon its records
an appropriate notation evidencing (a) such Lender's Pro Rata Share of the
Loans, and (b) the interest rate and Interest Period applicable thereto, or (c)
such payment or prepayment (voluntary or involuntary) of principal, and (d) in
the case of payments or prepayments (voluntary or involuntary) of principal,
that
-23-
<PAGE>
portion of the applicable Loan which was paid or prepaid. No failure to make any
such notation shall affect the Borrower's unconditional obligations to repay the
Loans and all interest, fees and other sums due in connection with this
Agreement, the Note(s), or any Financing Document in full, nor shall any such
failure, standing alone, constitute grounds for disproving a payment of
principal by the Borrower. In the absence of manifest error, such notations and
each Lender's records containing such notations shall constitute presumptive
evidence of the facts stated therein, including, without limitation, the
outstanding amount of such Lender's Pro Rata Share of the Loans and all amounts
due and owing to such Lender at any time. Any such notations and such Lender's
records containing such notations may be introduced in evidence in any judicial
or administrative proceeding relating to this Agreement, the Loans or any Note.
Section 2.4 Computation of Interest. Interest due under this
----------- -----------------------
Agreement and any Note shall be computed on the basis of a year of 360 days for
the actual number of days elapsed.
Section 2.5 Time of Payments and Prepayments in Immediately
----------- -----------------------------------------------
Available Funds.
- ---------------
(a) Time. All payments and prepayments of principal, fees, interest
----
and any other amounts owed from time to time under this Agreement and/or under
each Note shall be made to the Agent for the pro rata account of each Lender at
the address referred to in Section 9.6 in Dollars and in immediately available
funds prior to 2:00 P.M. on the Business Day that such payment is due, provided
that the Borrower hereby authorizes and instructs the Agent to charge against
the Borrower's accounts with the Agent on each date on which a payment is due
hereunder and/or under any Note and on any subsequent date, if and to the extent
any such payment is not made when due, an amount up to the principal, interest
and fees due and payable to the Lenders, the Agent or any Lender hereunder
and/or under any Note and such charge shall be deemed payment hereunder and
under the Note(s) in question to the extent that immediately available funds are
then in such accounts. To the extent that immediately available funds are then
in such accounts, the failure of the Agent to charge any such account or the
failure of the Agent to charge any such account prior to 2:00 P.M. shall not be
the basis for an Event of Default under Section 7.1(a) and any amount due on the
Loans on such date shall be deemed paid; provided that the Agent shall have the
right to charge any such account on any subsequent date for such unpaid payment
and an Event of Default shall exist if sufficient immediately available funds
are not in such accounts on the date the Agent so charges such account after the
expiration of any applicable cure period. In the event of any charge against the
Borrower's accounts by the Agent pursuant to this Section, the Agent shall use
reasonable efforts to provide notice to the Borrower of such charge in
accordance with the Agent's customary procedures, but the failure to provide
such notice shall not in any way be a basis for any liability of the Agent nor
shall such failure
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<PAGE>
adversely affect the validity and effectiveness of any such action by the Agent.
Any payment or prepayment which is received by the Agent after 2:00 P.M. on a
Business Day shall be deemed received for all purposes of this Agreement on the
next succeeding Business Day provided that, if the failure by the Agent to
-------- ----
receive such funds prior to 2:00 P.M. is due to the Agent's failure to charge
the account of the Borrower prior to 2:00 P.M., the funds shall be deemed
received on such Business Day; and, provided further that, solely for the
--------
purpose of determining whether a Default or Event of Default has occurred under
Section 7.1(a), any such payment or prepayment, if received by the Agent prior
to the close of the Agent's business on a Business Day, shall be deemed received
on such Business Day. All payments of principal, interest, fees and any other
amounts which are owing to any or all of the Lenders that are received by the
Agent in immediately available Dollars shall be remitted by the Agent to the
Lenders promptly upon receipt. The amount of each payment remitted by the Agent
to each Lender shall be such amount as shall be necessary to provide such Lender
with its Pro Rata Share of such payment.
(b) Setoff, etc. Regardless of the adequacy of any collateral for any
-----------
of the Obligations, upon the occurrence and during the continuance of any Event
of Default, each Lender is hereby authorized at any time and from time to time,
without notice to the Borrower (any such notice being expressly waived by the
Borrower), to set off and apply any and all deposits (general or special, time
or demand, provisional or final) at any time held and any other Indebtedness at
any time owing by such Lender to or for the credit or the account of the
Borrower against any and all of the Obligations of the Borrower irrespective of
whether or not such Lender shall have made any demand under this Agreement or
any Note and although such obligations may be unmatured. Each such Lender
agrees to promptly notify the Borrower and the Agent after any such setoff and
application; provided that the failure to give such notice shall not affect the
validity of such setoff and application. Promptly following any notice of
setoff received by the Agent from a Lender pursuant to the foregoing, the Agent
shall notify each other Lender thereof. The rights of each Lender under this
Section 2.5(b) are in addition to all other rights and remedies (including,
without limitation, other rights of setoff) which such Lender may have and are
subject to Section 9.12. If any Lender shall obtain at any time any payment
(whether voluntary, involuntary, through the exercise of any right of set-off,
or otherwise) on account of Obligations due and payable to such Lender hereunder
and under the Notes at such time in excess of its Pro Rata Share of payments
obtained by all Lenders hereunder and under the Notes at such time in excess of
its Pro Rata Share of payments obtained by all the Lenders at such time, such
Lender shall forthwith purchase from the other Lenders such participations in
the Obligations as shall be necessary to cause such purchasing Lender to share
the excess payment ratably with each of them, provided, however, that if all or
any portion of such excess payment is thereafter recovered from such purchasing
Lender, such purchase from each other Lender shall be
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<PAGE>
rescinded and such other Lender shall repay to the purchasing Lender the
purchase price to the extent of such other Lender's Pro Rata Share of such
recovery together with an amount equal to such Lender's Pro Rata Share of any
interest other amount paid or payable by the purchasing Lender in respect of the
total amount so recovered. The Borrower agrees that any Lender so purchasing a
participation from another Lender pursuant to this Section 2.5(b) may, to the
fullest extent permitted by law, exercise all its rights of payment (including
the right of set-off) with respect to such participation as fully as if such
Lender were the direct creditor of the Borrower in the amount of such
participation.
(c) Unconditional Obligations and No Deductions. The Borrower's
-------------------------------------------
obligation to make all payments provided for in this Agreement, the Note(s), and
the other Financing Documents shall be unconditional. Each such payment shall
be made without deduction for any claim, defense or offset of any type,
including without limitation any withholdings and other deductions on account of
income or other taxes and regardless of whether any claims, defenses or offsets
of any type exist.
Section 2.6 Mandatory Payments; Reductions of Commitments.
----------- ---------------------------------------------
(a) In addition to each other principal payment required hereunder,
the outstanding principal balances of the Revolving Loans shall be repaid on the
Termination Date.
(b) The Commitment shall be reduced on the last day of each calendar
quarter commencing with the first calendar quarter ending after the third
anniversary of the Closing Date by an amount in each case equal to five percent
(5%) of the Commitment outstanding on the third anniversary of the Closing Date.
On the date of each such reduction in the Commitment, the Borrower shall repay
to the Agent for the benefit of the Lenders the amount by which the aggregate
outstanding Loans exceed the Commitments after giving effect to such reduction.
(c) All amounts repaid by the Borrower's Eligible Subsidiaries in
respect of intercompany loans shall be paid directly to the Agent for the
benefit of the Lenders for application to the then outstanding principal of the
Loans. In the event that the Borrower receives any such payments in respect of
intercompany loans, the Borrower shall hold such amounts in trust for the Agent
and the Lenders, and shall promptly pay over such amounts to the Agent for the
benefit of the Lenders for application to the then outstanding principal of the
Loans.
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<PAGE>
Section 2.7 Voluntary Prepayments. All or any portion of the unpaid
----------- ---------------------
principal balance of any Prime Rate Loans may be prepaid at any time, without
premium or penalty.
Section 2.8 Voluntary Prepayment of Libor Loans. Notwithstanding
----------- -----------------------------------
anything to the contrary contained herein, in any Note, or in any other
Financing Document, the Borrower shall be permitted to prepay without premium or
penalty any portion of Libor Loans only on the last day of the Interest Period
applicable thereto.
Section 2.9 Voluntary Reduction of Commitment. At the Borrower's
----------- ---------------------------------
option, the Commitment may be permanently and irrevocably reduced in whole or in
part by an amount of at least $1,000,000 and to the extent in excess thereof in
integral multiples of $500,000 at any time and from time to time; provided that
(i) the Borrower gives the Agent written notice of the exercise of such option
at least three (3) Business Days prior to the effective date thereof, (ii) the
aggregate outstanding balance of the Loans, if any, does not exceed the
Commitment as so reduced on the effective date of such reduction, and (iii) the
Borrower is not, and after giving effect to such reduction, would not be in
violation of Section 2.8. Any such reduction shall concurrently reduce the
Dollar amount of each Lender's Pro Rata Share of the Commitment and the
Commitment.
Section 2.10 Payment on Non-Business Days. Whenever any payment to
------------ ----------------------------
be made hereunder or under any Note shall be stated to be due on a day other
than a Business Day, such payment may be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
computation of payment of fees, if any, and interest under this Agreement and
under such Note.
Section 2.11 Use of Proceeds. The Borrower shall use the proceeds of
------------ ---------------
the Revolving Loans solely for the Borrower's and its Eligible Subsidiaries'
working capital needs, for the Construction, letters of credit, and other
general corporate purposes, for Acquisitions permitted in Section 6.3, and for
Investments permitted by Section 6.12, provided, however, that the maximum
amount of the proceeds of the Revolving Loans which may be used in connection
with such Acquisitions or Investments permitted by Section 6.3 shall not exceed:
(i) $35,000,000 in connection with any one such Acquisition or Investment; and
(ii) $50,000,000 in the aggregate in any twelve (12) month period in connection
with all such Acquisitions or Investments.
Section 2.12 Special Libor Loan Provisions. The Libor Loans shall be
------------ -----------------------------
subject to and governed by the following terms and conditions:
(a) Requests. Each Borrowing Request selecting the Libor Rate must be
--------
received by the Agent in accordance with Section 2.1(c).
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<PAGE>
(b) Libor Loans Unavailable. Notwithstanding any other provision of
-----------------------
this Agreement, if, prior to or on the date on which all or any portion of the
Loans is to be made as or converted into a Libor Loan, any of the Lenders (or
the Agent with respect to (ii) below) shall reasonably determine (which
determination shall be conclusive and binding on the Borrower), that
(i) Dollar deposits in the relevant amounts and for the
relevant Interest Period are not offered to such Lender in the London interbank
market,
(ii) by reason of circumstances affecting the London interbank
market, adequate and reasonable means do not exist for ascertaining the Adjusted
Libor Rate, or
(iii) the Adjusted Libor Rate shall no longer represent the
effective cost to such Lender for Dollar deposits in the London interbank
market,
such Lender shall notify the Agent not later than the close of business on the
second Business Day prior to the date on which such Libor Loan is to be made.
The Agent shall promptly give notice of such determination to the Borrower, and
all or such portion of the Loans, as the case may be, which are subject to any
of Section 2.12(b) (i), (ii) through (iii) as a result of such Lender's
determination shall be made as or converted into, as the case may be, Prime Rate
Loans and such Lender shall have no further obligation to make Libor Loans,
until further written notice to the contrary is given by the Agent to the
Borrower. If such circumstances subsequently change so that such Lender shall
no longer be so affected, such Lender's obligation to make or maintain its Pro
Rata Share of all or any portion of the Loans as Libor Loans shall be reinstated
when such Lender obtains actual knowledge of such change of circumstances, and
promptly after obtaining such actual knowledge, such Lender shall forward
written notice thereof to the Agent. After receipt of such notice, the Agent
shall promptly forward written notice thereof to the Borrower. During any
period throughout which any of the Lenders has no obligation to make or maintain
its Pro Rata Share(s) of the Loans as Libor Loans, no Borrowing Request electing
the Libor Rate shall be effective with regard to the Loans to the extent of the
Pro Rata Share(s) of such Lender(s), but shall be effective as to the other
Lenders.
(c) Libor Lending Unlawful. In the event that any change in
----------------------
applicable laws or regulations (including the introduction of any new applicable
law or regulation) or in the interpretation thereof (whether or not having the
force of law) by any governmental or other regulatory authority charged with the
administration thereof, shall make it unlawful for any of the Lenders to make or
continue to maintain its Pro Rata Share of all or any portion of the Loans as
Libor Loans, each such Lender shall promptly notify the Agent by
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<PAGE>
telephone or telex thereof, and of the reasons therefor, and the obligation of
such Lender to make or maintain its Pro Rata Share of the Loans or such portion
thereof as Libor Loans shall, upon the happening of such event, terminate and
the Agent shall, by telephonic notice to the Borrower, declare that such
obligation has so terminated with respect to such Lender, and such Pro Rata
Share of the Loans or any portion thereof to the extent then maintained as Libor
Loans, shall, on the last day on which such Lender can lawfully continue to
maintain such Pro Rata Share of the Loans or any portion thereof as Libor Loans,
automatically convert into Prime Rate Loans without additional cost to the
Borrower. If circumstances subsequently change so that such Lender shall no
longer be so affected, such Lender's obligation to make or maintain its Pro Rata
Share of all or any portion of the Loans as Libor Loans shall be reinstated when
such Lender obtains actual knowledge of such change of circumstances, and
promptly after obtaining such actual knowledge such Lender shall forward written
notice thereof to the Agent. After receipt of such notice, the Agent shall
promptly forward written notice thereof the Borrower. During any period
throughout which any of the Lenders has no obligation to make or maintain its
Pro Rata Share(s) of the Loans as Libor Loans, no Borrowing Request electing the
Libor Rate shall be effective with regard to the Loans to the extent of the Pro
Rata Share(s) of such Lender(s), but shall be effective as to the other Lenders.
(d) Additional Costs on Libor Loans. The Borrower further agrees to
-------------------------------
pay to the Agent for the account of the applicable Lender or Lenders such
amounts as will compensate any of the Lenders for any increase in the cost to
such Lender of making or maintaining (or of its obligation to make or maintain)
all or any portion of its Pro Rata Share of the Loans as Libor Loans and for any
reduction in the amount of any sum receivable by such Lender under this
Agreement in respect of making or maintaining all or any portion of such
Lender's Pro Rata Share of the Loans as Libor Loans, in either case, from time
to time by reason of:
(i) any reserve, special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, such
Lender, under or pursuant to any law, treaty, rule, regulation (including,
without limitation, any Regulations of the Board of Governors of the Federal
Reserve System) or requirement in effect on or after the date hereof, any
interpretation thereof by any governmental authority charged with administration
thereof or by any central bank or other fiscal or monetary authority or other
authority, or any requirement imposed by any central bank or such other
authority whether or not having the force of law; or
(ii) any change in (including the introduction of any new)
applicable law, treaty, rule, regulation or requirement or in the interpretation
thereof by any official authority, or the imposition of any requirement of any
central bank, whether or not having the force
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<PAGE>
of law, which shall subject such Lender to any tax (other than taxes on net
income imposed on such Lender), levy, impost, charge, fee, duty, deduction or
withholding of any kind whatsoever or change the taxation of such Lender with
respect to making or maintaining all or any portion of its Pro Rata Share of the
Loans as Libor Loans and the interest thereon (other than any change which
affects, and to the extent that it affects, the taxation of net income of such
Lender); provided, that with respect to any withholding the foregoing shall not
apply to any withholding tax described in sections 1441, 1442 or 3406 of the
Code, or any succeeding provision of any legislation that amends, supplements or
replaces any such section, or to any tax, levy, impost, duty, charge, fee,
deduction or withholding that results from any noncompliance by a Lender with
any federal, state or foreign law or from any failure by a Lender to file or
furnish any report, return, statement or form the filing or furnishing of which
would not have an adverse effect on such Lender and would eliminate such tax,
impost, duty, deduction or withholding;
In any such event, such Lender shall promptly notify the Agent thereof and the
Agent shall promptly notify the Borrower thereof and the additional amounts
required to fully compensate such Lender for such increased or new cost or
reduced amount as reasonably determined by such Lender. Such additional amounts
shall be payable within ten (10) Business Days after the Borrower's receipt of
said notice. Such Lender's certificate as to any such increased or new cost or
reduced amount (including calculations, in reasonable detail, showing how such
Lender computed such cost or reduction) shall be submitted by the Agent to the
Borrower and shall, in the absence of manifest error, be conclusive. In
determining any such amount, the Lender(s) may use any reasonable averaging and
attribution methods.
(e) Libor Funding Losses. In the event any of the Lenders shall incur
--------------------
any loss or expense (including, without limitation, anticipated lost profits,
and any loss or expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by such Lender to fund or maintain all or any
portion of the Loans as Libor Loans) as a result of:
(i) payment or prepayment by the Borrower of all or any portion
of any Libor Loan on a date other than the last day of the Interest Period
applicable to such Libor Loan, for any reason; provided, however that this
clause shall not be deemed to grant the Borrower any right to convert a Libor
Loan to a Prime Rate Loan prior to the end of any Interest Period or to imply
such right;
(ii) conversion of all or any portion of any Libor Loan on a day
other than the last day of an Interest Period applicable to such Loan to a Prime
Rate Loan for any reason including, without limitation, acceleration of the
Loans upon or after an Event of Default, or any other cause, whether voluntary
or involuntary, and whether or not referred to or described in this Agreement,
other than
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<PAGE>
any such conversion resulting solely from application of Sections 2.12(b) or
2.12(c) by any Lender; or
(iii) any failure by the Borrower to borrow the Loans as Libor
Loans on the date specified in any Borrowing Request selecting the Libor Rate,
other than any such failure resulting solely from application of Sections
2.12(b) or 2.12(c) by any Lender;
such Lender shall promptly notify the Agent thereof, and of the reasons
therefor. Upon the request of the Agent, the Borrower shall pay directly to the
Agent for the account of such Lender such amount as will (in the reasonable
determination of such Lender, which shall be correct in the absence of manifest
error) reimburse such Lender for such loss or expense. Each Lender shall
furnish to the Borrower, upon written request from the Borrower received by the
Agent, a written statement setting forth the computation of any such amounts
payable to such Lender under this Section 2.12(e).
If the Borrower shall, as a result of the requirements of Section
2.12(d) above, be required to pay any Lender the additional costs referred to
therein, but not be required to pay such additional costs to the other Lender or
Lenders and the Borrower, in its sole discretion, shall deem such additional
amounts to be material or in the event that Libor Loans from a Lender are
unavailable to the Borrower as a result solely of the provisions of Sections
2.12(b), 2.12(c) or 2.12(d), but are available from the other Lender or Lenders,
the Borrower shall have the right to substitute another financial institution
that is an Eligible Assignee for such Lender which is entitled to such
additional costs or which is relieved from making Libor Loans and the Agent
shall use reasonable efforts (with all reasonable costs of such efforts by the
Agent to be borne by the Borrower) to assist the Borrower to locate such
substitute financial institution. Any such substitution shall take place in
accordance with Section 9.11 and otherwise be on terms and conditions reasonably
satisfactory to the Agent, and until such time as such substitution shall be
consummated, the Borrower shall continue to pay such additional costs and comply
with the above-referenced Sections. Upon any such substitution, such Lender
shall be obligated to assign all of its interest under this Agreement and the
other Financing Documents to the designated Eligible Assignee.
(f) Assumptions Concerning Funding of Libor Loans. The calculation of
---------------------------------------------
all amounts payable to the Lenders under this Section 2.12 shall be made as
though each Lender actually funded its relevant Libor Loans through the purchase
of a deposit in the London interbank market bearing interest at the Libor Rate
in an amount equal to that Libor Loan and having a maturity comparable to the
relevant Interest Period and through the transfer of such deposit from an
offshore office of such Lender to a domestic office of such Lender in the United
States of America; provided, however, that each Lender may fund each of its
Libor Loans in any manner it sees fit and the
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<PAGE>
foregoing assumption shall be utilized solely for the purpose of calculating
amounts payable under this Section 2.12.
Section 2.13 Special Provisions Relating to Letters of Credit.
------------ ------------------------------------------------
(a) Requests for Letters of Credit. Whenever the Borrower desires to
------------------------------
obtain a Letter of Credit, the Borrower shall submit to the Agent a letter of
credit application, in form and substance satisfactory to the Agent, no later
than six (6) Business Days prior to the proposed date of issuance of the Letter
of Credit. Promptly after the issuance of any Letter of Credit, and, in any
event, no less often than once per week, the Agent shall give each Lender notice
of the issuance of such Letter of Credit.
(b) Payment of Reimbursement Obligations.
------------------------------------
(i) Payment to Fleet. Notwithstanding any provisions to the
----------------
contrary in any Letter of Credit Document, the Borrower agrees, to reimburse
Fleet for any drawings (whether partial or full) under each Letter of Credit and
to pay to Fleet the amount of all other Reimbursement Obligations and other
amounts payable to Fleet under or in connection with such Letter of Credit
immediately when due, irrespective of any claim, set-off, defense or other right
which the Borrower may have at any time against Fleet or any other Person; and
(ii) Recovery or Avoidance of Payments. In the event any payment
---------------------------------
by or on behalf of the Borrower with respect to any Letter of Credit (or any
Reimbursement Obligation relating thereto) received by Fleet or the Agent and
distributed by the Agent to the Lenders on account of their respective
participations therein, is thereafter set aside, avoided or recovered from Fleet
or the Agent in connection with any receivership, liquidation or bankruptcy
proceeding, each Lender shall, upon demand by the Agent, pay to the Agent, for
the account of the Agent or Fleet, such Lender's Pro Rata Share of such amount
set aside, avoided or recovered together with interest at the rate required to
be paid by the Agent upon the amount required to be repaid by such Lender.
(c) Participations.
--------------
(i) Purchase of Participations. Immediately upon issuance of a
--------------------------
Letter of Credit by Fleet, each Lender shall be deemed to have irrevocably and
unconditionally purchased and received, without recourse or warranty, an
undivided interest and participation in such Letter of Credit equal to such
Lender's Pro Rata Share of the face amount thereof (including, without
limitation, all obligations of the Borrower with respect thereto, and any
security therefor or guaranty thereof);
(ii) Sharing of Letter of Credit Payments. In the event that
------------------------------------
Fleet makes a payment under any Letter of Credit and Fleet shall
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<PAGE>
not have been repaid such amount by the Borrower, Fleet shall notify each Lender
of such failure prior to 11 a. m. on any Business Day, and notwithstanding the
occurrence or continuance of a Default or Event of Default at the time of such
payment, each Lender shall pay Fleet on such Business Day, the amount of such
Lender's Pro Rata Share of such unreimbursed payment in U. S. Dollars in
immediately available funds. Any amount due and payable by any Lender under this
section which is paid after the date when due, shall bear interest at the
Federal Funds Effective Rate, which interest shall be due and payable on the
date of such Lender's payment under this section;
(iii) Sharing of Reimbursement Obligation Payments. Whenever
--------------------------------------------
Fleet receives a payment from or on behalf of the Borrower on account of a
Reimbursement Obligation as to which the Agent has previously received for the
account of Fleet payment from a Lender pursuant to this section, Fleet shall
promptly pay to the Agent, for the benefit of such Lender, such Lender's Pro
Rata Share of the amount of such payment on the Business Day on which
immediately available funds are received by Fleet, if prior to 11:00 A.M. and
otherwise on the next succeeding Business Day;
(iv) Documentation. Upon the request of any Lender, the Agent
-------------
shall furnish to such Lender copies of any Letter of Credit, Letter of Credit
Document, or application for any Letter of Credit and such other document as may
reasonably be requested by such Lender in connection therewith; and
(v) Obligations Irrevocable. The obligation of each Lender to
-----------------------
make payments to the Agent with respect to any Letter of Credit and such
Lender's participation therein and the obligation of the Borrower to make
payments to Fleet or to the Agent, for the account of the Lenders, shall not be
subject to any qualification or exception whatsoever and shall be made in
accordance with the terms and conditions of this Agreement, including, without
limitation, any of the following circumstances:
(A) Any lack of validity or enforceability of this
Agreement or any of the other Loan Documents;
(B) The existence of any claim, set-off, defense or other
right which the Borrower may have at any time against a beneficiary named in a
Letter of Credit or any transferee or assignee of any Letter of Credit (or any
Person for whom any such transferee or assignee may be acting), Fleet, the
Agent, any Lender, or any other Person, whether in connection with this
Agreement, any Letter of Credit, the transactions contemplated herein or any
unrelated transactions (including any underlying transactions between the
Borrower or any other Person and the beneficiary named in any Letter of Credit);
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<PAGE>
(C) Any draft, certificate or any other document presented
under the Letter of Credit upon which payment has been made in good faith and
according to its terms proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect;
(D) The surrender or impairment of any Collateral or any
other security for the Obligations or the performance or observance of any of
the terms of any of the Loan Documents;
(E) The occurrence of any Default or Event of Default; or
(F) The Agent's failure to give notice to the Lenders of
the issuance of any Letter of Credit;
provided that, no Lender shall be obligated to pay such Lender's Pro Rate Share
- --------------
of any unreimbursed amount arising from any wrongful payment made by Fleet under
a Letter of Credit as a result of acts or omissions constituting willful
misconduct or gross negligence on the part of Fleet.
(d) Indemnification. In addition to amounts payable as elsewhere
---------------
provided in this Agreement, the Borrower agrees, to protect, indemnify, pay and
save the Lenders and the Agent harmless from and against any and all claims,
demands, liabilities, damages, losses, costs, charges and expenses (including
reasonable attorneys' fees) which any Lender or the Agent may incur or be
subject to as a consequence, directly or indirectly, of
(i) the issuance of any Letter of Credit, other than as a result
of the gross negligence or willful misconduct of such Lender or the Agent, as
determined by a court of competent jurisdiction; or
(ii) the failure of Fleet to honor a drawing under any Letter of
Credit as a result of any act or omission, whether rightful or wrongful, of any
present or future de jure or de facto governmental authority (all such acts or
-- ---- -- -----
omissions being hereinafter referred to collectively as "Government Acts").
(e) Assumption of Risk by the Borrower. As among the Borrower, the
----------------------------------
Lenders and the Agent, the Borrower assumes all risks of the acts and omissions
of, or misuse of any of the Letters of Credit by, the respective beneficiaries
of such Letters of Credit. In furtherance and not in limitation of the
foregoing, subject to the provisions of the applications for the issuance of
Letters of Credit, the Lenders and the Agent shall not be responsible for:
(i) the form, validity, sufficiency, accuracy, genuineness or
legal effect of any document submitted by any Person in connection with the
application for and issuance of and presentation of drafts
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<PAGE>
with respect to any of the Letters of Credit, even if it should prove to be, in
any or all respects, invalid, insufficient, inaccurate, fraudulent or forged;
(ii) the validity or sufficiency of any instrument transferring
or assigning or purporting to transfer or assign any Letter of Credit or the
rights or benefits thereunder or proceeds thereof, in whole or in part, which
may prove to be invalid or ineffective for any reason;
(iii) the failure of the beneficiary of any Letter of Credit to
comply duly with the conditions required in order to draw upon such Letter of
Credit;
(iv) errors, omissions, interruptions or delays in transmission
or delivery of any messages, by mail, cable, telegraph, telex or otherwise,
whether or not they be in cipher;
(v) errors in interpretation of technical terms;
(vi) any loss or delay in the transmission or otherwise of any
document required in order to make a drawing under any Letter of Credit or of
the proceeds thereof;
(vii) the misapplication by the beneficiary of any Letter of
Credit of the proceeds of any drawing under such Letter of Credit; or
(viii) any consequences arising from causes beyond the control of
the Lenders or the Agent, including, without limitation, any Government Acts.
None of the foregoing shall affect, impair or prevent the vesting of any of the
Agent's rights or powers under this Section.
(f) Cash Collateral. If, notwithstanding the provisions of Section
---------------
2.1(b) hereof, any Letter of Credit is outstanding on the Termination Date, then
on or prior to such Termination Date, the Borrower shall, promptly on demand by
the Agent, deposit with the Agent, for the ratable benefit of the Lenders, with
respect to each Letter of Credit then outstanding, as the Agent shall specify,
cash collateral ("Cash Collateral") in an amount necessary to reimburse the
Agent and the Lenders for payments made by Fleet under such Letter of Credit.
Such Cash Collateral shall be held by the Agent for the benefit of the Lenders,
as security for, and to provide for the payment of, the Reimbursement
Obligations. In addition, the Agent may at any time after the Termination Date
apply any or all of such Cash Collateral to the payment of any or all of the
Obligations then due and payable. The Borrower may, as an alternative to
providing such Cash Collateral, arrange for a back-up letter of credit for the
benefit of the Agent, from a financial institution satisfactory to the Agent in
its sole discretion.
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Section 2.14 Eligible Subsidiaries.
------------ ---------------------
(a) The Borrower shall from time to time designate each of its
Subsidiaries as an Eligible Subsidiary or an Ineligible Subsidiary, as set forth
on Exhibit E hereto. A new Exhibit E shall be substituted by the Borrower upon
any change in the status of any Subsidiary as Eligible or Ineligible. Eligible
Subsidiaries shall be eligible to receive the benefit of the credit under this
Agreement pursuant to intercompany loans made by the Borrower to such Eligible
Subsidiaries, or letters of credit issued on behalf of such Eligible
Subsidiaries at the application and direction of the Borrower.
(b) Ineligible Subsidiaries shall not be permitted to receive any
direct monetary benefit of the credit under this Agreement. An Ineligible
Subsidiary may obtain financing from financial institutions and grant security
interests, liens or encumbrances on its assets; provided that the terms of any
--------
such financing may not include (i) except as permitted by Sections 6.2 and 6.8,
any Guaranty of, or other recourse to, the Borrower or any of its Eligible
Subsidiaries; or (ii) any provision pursuant to which a change of control of
such Ineligible Subsidiary would constitute an event of default or otherwise
permit any lender to accelerate such Ineligible Subsidiary's indebtedness,
unless such provision expressly permits the exercise by the Agent of its
remedies under the Pledge Agreement.
(c) At the Borrower's discretion, an Eligible Subsidiary that is not
a Wholly-Owned Subsidiary may be redesignated as an Ineligible Subsidiary, and
an Ineligible Subsidiary may be redesignated as a wholly-owned Eligible
Subsidiary, so long as no Default or Event of Default shall have occurred and be
continuing at the time of, or occur as a result of, such redesignation. If at
any time while there is no Event of Default hereunder, TravelSmith, TTA or
Whispering Pines is redesignated as an Ineligible Subsidiary and the entity
being redesignated has satisfied in full its obligations under its respective
Guaranty to Lender, the Guaranty and all collateral pledged by such entity in
connection therewith shall be released by Lender.
(d) Upon the acquisition by the Borrower of any new Subsidiary that
will be designated as an Eligible Subsidiary, the Borrower shall deliver (i) a
Certification of Officer in the form of Exhibit G hereto, (ii) pro forma
financial statements to the Agent calculating the financial covenants hereunder
and giving effect to such proposed acquisition, (iii) a certificate of an
officer of the Borrower certifying that no Default or Event of Default has
occurred and is continuing at the time of, or would result from the consummation
of, such acquisition, and (iv) a copy of any applicable stockholder or similar
agreement, and such other information as the Agent may request. The terms of
any stockholders or similar agreement entered into at the time of such
acquisition shall contain no restrictions on the pledge or transfer of any
equity interest owned by the Borrower,
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other than reasonable rights of first refusal. Each new Eligible Subsidiary that
is not a Wholly-Owned Subsidiary shall execute and deliver a Subsidiary Guaranty
in the form of Exhibit F hereto in favor of the Agent and the Lenders, and each
new Wholly-Owned Subsidiary shall execute and deliver a Subsidiary Guaranty in
the form of Exhibit H hereto in favor of the Agent and the Lenders, which
Subsidiary Guaranty in each case shall be delivered concurrently with the
delivery of the other documents required by this Section 2.14(d). In the event
that, at any time, an Eligible Subsidiary that is not a Wholly-Owned Subsidiary
becomes a Wholly-Owned Subsidiary, such Subsidiary shall execute and deliver a
Subsidiary Guaranty in the form of Exhibit H hereto in favor of the Agent and
the Lenders.
Section 2.15 Settlement Among Lenders.
------------ ------------------------
(a) Settlement Procedures as to Loans.
---------------------------------
(i) The Agent may elect, in its discretion, to settle accounts
among the Lenders with respect to the Loans less frequently than each Business
Day. If the Agent so elects, it may designate from time to time each such date
as a "Settlement Date" by delivering to each Lender a settlement report not
later than 2:30 p.m. (Boston time) on the proposed Settlement Date, which
settlement report (each a "Settlement Report") shall be with respect to the
period beginning on the previous Settlement Date and ending on such designated
Settlement Date. On each Settlement Date, payments shall be made by or to the
Agent and the Lenders in the manner provided in this Section 2.15 in accordance
with such Settlement Report so that as of each Settlement Date, and after giving
effect to the transactions to take place on such Settlement Date, each Lender's
Net Outstandings (as hereinafter defined) shall equal such Lender's Pro Rata
Share of all Loans then outstanding. For purposes of this Section 2.15, "Net
Outstandings" with respect to any Lender at any time shall mean (a) all amounts
paid by such Lender to the Agent in respect of Loans or otherwise under this
Agreement, minus (b) all amounts which are received by the Agent and paid over
-----
to such Lender for application in reduction of the outstanding principal amount
of the Loans.
(ii) Net Decrease in Outstandings. If on any Settlement Date the
----------------------------
increase, if any, in the dollar amount of any Lender's Net Outstandings is less
than such Lender's Pro Rata Share of amounts received by the Agent since the
previous Settlement Date, such Lender and the Agent, in their respective
records, shall apply such Lender's Pro Rata Share of such amounts to the
increase in such Lender's Net Outstandings, and the Agent shall pay to such
Lender the excess allocable to such Lender.
(iii) Net Increase in Outstandings. If on any Settlement Date the
----------------------------
increase, if any, in the dollar amount of any Lender's Net Outstandings exceed
such Lender's Pro Rata Share of amounts received by the Agent since the previous
Settlement Date, such Lender and the
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Agent, in their respective records shall apply such Lender's Pro Rata Share of
such amounts to the increase in such Lender's Net Outstandings, and such Lender
shall pay to the Agent, for its own account, any excess.
(iv) No Loans; No Change in Outstandings. If a Settlement Report
-----------------------------------
indicates that no Loans have been made during the period since the previous
Settlement Date, then such Lender's Pro Rata Share of any amounts received by
the Agent shall be paid by the Agent to such Lender. If a Settlement Report
indicates that the increase in the dollar amount of a Lender's Net Outstandings
is exactly equal to such Lender's Pro Rata Share of amounts received by the
Agent since the previous Settlement Date, such Lender and Agent, in their
respective records, shall apply such Lender's Pro Rata Share of such amounts to
the increase in such Lender's Net Outstandings.
(v) Payments to Agent. Payment by any Lender to the Agent shall
-----------------
be made not later than 3:30 p.m. (Boston time) on the Business Day such payment
is due. Payment by the Agent to any Lender shall be made by wire transfer by
3:30 p.m. (Boston time) on such Business Day.
(vi) Lender Payment Default. If a Lender shall, at any time,
----------------------
fail to make any payment to the Agent required hereunder, the Agent may, but
shall not be required to, retain payments that would otherwise be made to such
Lender hereunder and apply such payments to such Lender's defaulted obligations
hereunder, at such time, and in such order, as the Agent may elect in its sole
discretion.
(vii) Interest. With respect to the payment of any funds under
--------
this Section 2.15, whether from the Agent to a Lender or from a Lender to the
Agent, the party failing to make full payment when due pursuant to the terms
hereof shall, upon demand by the other party, pay such amount together with
interest on such amount at the Federal Funds Rate.
Section 2.16 SWING LOAN FACILITY.
(a) The Swing Loan. The Swing Loan Lender agrees, subject to the
--------------
terms and conditions of this Agreement, upon notice by the Borrower made to the
Swing Loan Lender in accordance with Section 2.16(b)(i), to make Swing Loans to
the Borrower during the period commencing on the Closing Date and ending on the
Business Day immediately preceding the Termination Date, in an aggregate
principal amount not to exceed the Swing Loan Sublimit. Amounts borrowed by the
Borrower under this Section 2.16 may be repaid and reborrowed, subject to the
conditions of this Agreement. Notwithstanding any other provisions of this
Agreement and in addition to the Swing Loan Sublimit limitation set forth above
(a) at no time shall the sum of (i) the aggregate principal amount of all
outstanding Swing Loans (after giving effect to all amounts requested and the
application of the proceeds thereof) plus (ii) the aggregate principal amount of
----
all
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outstanding Revolving Loans (after giving effect to all amounts requested and
the application of the proceeds thereof), plus (iii) the aggregate amount
----
drawable or drawn and not reimbursed under all Letters of Credit, exceed the
aggregate amount of the Commitment and (b) at no time shall the aggregate Loans
of the Swing Loan Lender (both in its capacity as the Swing Loan Lender and in
its capacity as a Lender) exceed the dollar equivalent of its Pro Rata Share of
the Commitment; provided, however, that subject to the limitations set forth in
-------------------
this Section 2.16(a) from time to time the ratio of (x) the sum of the aggregate
Loans of the Swing Loan Lender (both in its capacity as the Swing Loan Lender
and in its capacity as a Lender) to (y) the sum of the aggregate Loans of all
Lenders (including the Swing Loan Lender both in its capacity as the Swing Loan
Lender and in its capacity as a Lender) may exceed its Pro Rata Share of the
Commitment.
(b) Requests for Swing Loans
------------------------
(i) Any Authorized Representative of the Borrower may request Swing
Loans by notice to the Swing Loan Lender, given not later than 11:00 A.M. on the
day of the proposed Swing Loan. Each such Borrowing Request shall provide the
information required by the form attached hereto as Exhibit A and shall be by
telephone or telecopier. Each Borrowing Request shall be irrevocable and
binding on the Borrower. Each Swing Loan shall be evidenced by the Note of the
Swing Loan Lender.
(ii) After receipt of a Borrowing Request for a Swing Loan, the Swing
Loan Lender, on the Business Day for such Swing Loan set forth in Borrower's
Request for any such requested Swing Loan, shall advance funds to the Borrower
by depositing such funds in Borrower's account with the Swing Loan Lender, or
otherwise in accordance with the direction of the Borrower as specified in the
applicable Borrowing Request.
(c) Interest on Swing Loans. Interest shall accrue on the Swing Loans
-----------------------
at Effective Prime and shall be payable monthly in arrears for the account of
the Swing Loan Lender, subject to and in accordance with the terms and
conditions of this Agreement and the Note(s); provided that if a Default or an
Event of Default exists and is continuing and has not been cured during any
applicable grace period, any Swing Loan or portion thereof with respect to which
any such Borrowing Request would otherwise have been effective shall bear
interest at Effective Prime plus, so long as an Event of Default exists and is
continuing, two percent (2%); all of the foregoing being applicable until such
Default or Event of Default is cured or waived.
(d) Mandatory Participations in Swing Loans. If any Event of Default
---------------------------------------
shall occur, Lender irrevocably agrees that it will, at the request of the Swing
Loan Lender, (1) purchase an undivided percentage participation interest in the
outstanding Swing Loan equal to such Revolving Lender's Pro Rata Share of the
Commitment, and (2)
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immediately transfer to the Swing Loan Lender, in immediate available funds, an
amount equal to such Lender's Pro Rate Share of the Commitment multiplied by the
aggregate amount of all Swing Loans outstanding at such time. After receipt by
the Swing Loan Lender of any Lender's payment pursuant to clause (2) above, the
Swing Loan Lender shall cause the Agent to properly register such Lender's
participation interest, and thereafter, the Agent shall pay to such Lender such
Pro Rata Share of the Commitment of all amounts paid by the Borrower in respect
of the Swing Loan Advances (appropriately adjusted, in the case of interest
payments, to reflect the period of time during which such Lender's participation
interest was outstanding and funded); provided, that, in the event the Agent is
required to return or refund to the Borrower any payment received in respect of
the Swing Loan Advances, such Lender shall promptly return to the Agent such
Lender's Pro Rata Share of the Commitment of the amount required to be returned
or refunded.
ARTICLE 3.
CONDITIONS OF LENDING
Section 3.1 Conditions Precedent to the Commitment and Initial Loans.
----------- --------------------------------------------------------
The Commitment and the obligation of the Lenders to make the initial Loan are
subject to performance by the Borrower of all of its obligations under this
Agreement and to the satisfaction of the conditions precedent that all legal
matters incident to the transactions contemplated hereby or incidental to the
Loans shall be reasonably satisfactory to counsel for the Agent and that the
Lenders shall have received on or before the Closing Date all of the following,
each dated the Closing Date or another date acceptable to the Lenders and each
to be in form and substance reasonably satisfactory to the Agent or if any of
the following is not a deliverable, the satisfaction of such condition in form
and substance reasonably satisfactory to the Agent:
(a) The Financing Documents, including, without limitation, those
hereinafter set forth and the Borrower's and any Subsidiary's certificate of
incorporation or other organizational documents.
(b) Certificate of the secretary of the Borrower and each Eligible
Subsidiary certifying as to the resolutions of the shareholders or board of
directors of the Borrower and each Eligible Subsidiary authorizing and approving
each of the Financing Documents to which the Borrower and each Eligible
Subsidiary is a party and other matters contemplated hereby and certifying as to
the names and signatures of the Authorized Representative(s) of the Borrower and
each Eligible Subsidiary authorized to sign each Financing Document to be
executed and delivered by or on behalf of the Borrower and each Eligible
Subsidiary. The Agent and the Lenders may conclusively rely on each such
certificate until the Agent shall receive a further
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certificate canceling or amending the prior certificate and submitting the
signatures of the Authorized Representative(s) named in such further
certificate.
(c) Favorable opinions of Rich, May, Bilodeau & Flaherty, P.C., counsel
for the Borrower, and favorable opinions of counsel to the Guarantors, in form
and substance reasonably satisfactory to the Agent.
(d) A certificate stating that:
(i) The representations and warranties contained in Article 4 or
contained in any of the other Financing Documents are correct on and as of the
Closing Date as though made on and as of such date; and
(ii) No Default or Event of Default has occurred and is continuing, or
would result from the making of the Loans.
(e) Certificates of good standing or legal existence of the secretaries of
state of the states of organization and qualification of and covering the
Borrower and any Subsidiaries dated reasonably near the Closing Date.
(f) A Borrowing Request.
(g) All documents, instruments and agreements necessary to terminate,
cancel and discharge the documents, instruments and agreements evidencing or
securing any and all existing Indebtedness of the Borrower Liens securing such
Indebtedness other than those listed in Schedule 6.8.
(h) Payment to the Agent and the Lenders of the fees specified in this
Agreement as being payable on the Closing Date and all reasonable out-of-pocket
costs and expenses incurred by the Agent in connection with the transactions
contemplated hereby, including, but not limited to, reasonable outside legal
expenses and any accounting fees, auditing fees, appraisal fees, and other fees
associated with any independent analyses of the Borrower and any Subsidiary and
evidence that all other reasonable fees and costs payable by the Borrower in
connection with the transactions contemplated by this Agreement and completed on
the Closing Date have been paid in full.
(i) A Compliance Certificate in the form of Exhibit C, duly completed and
reflecting, inter alia, compliance by the Borrower as of the opening of business
----- ----
on the first Business Day after the Closing Date but based on the Borrower's
financial information as of the last day of the Borrower's most recent fiscal
quarter, adjusted to give effect to the Loans made on the Closing Date with the
financial covenants provided for herein.
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(j) Such other information about the Borrower and/or its Business
Condition as the Lenders may reasonably request.
(k) True copies of, and/or true copies of any revisions to, the financial
statements, the Projections, the pro forma Closing Date financial statements
giving effect to the Loans, receipt by the Agent of background reference checks
satisfactory to the Agent, and other information provided pursuant to Section
-------
4.5 and certification by the Borrower of the Projections.
- ---
(l) True descriptions of any pending or threatened litigation against or
by Borrower or any Subsidiary.
(m) Evidence that all necessary material third party consents have been
obtained, including but not limited to consents and waivers of preferred
stockholders of the Borrower, and consents and waivers of other stockholders,
members, or partners of Subsidiaries of the Borrower as set forth on Schedule
4.3 hereto, and all required filings with any governmental authority have been
duly completed.
(n) The financial statements described in Section 4.5 together with the
Borrower's pro forma Closing Date balance sheet. Such financial statements shall
be accompanied by an certificate of the chief financial officer of the Borrower
to the effect that (i) the representations of the Borrower set forth in Section
4.14 are accurate as of the Closing Date and (ii) that no Material Adverse
Effect has occurred since the date of the Borrower's most recent audited
financial statements delivered to the Lenders except as set forth or reflected
in the financial statements described in Section 4.5 or otherwise disclosed in
writing and acceptable to the Agent.
(o) The fact that the representations and warranties of the Borrower
contained in Article 4, infra, and in each of the other Financing Documents are
-----
true and correct in all material respects on and as of the Closing Date except
as altered hereafter by actions not prohibited hereunder. The Borrower's
delivery of this Agreement and the Notes, and of each Borrowing Request to the
Agent shall be deemed to be a representation and warranty by the Borrower as of
the date thereof to such effect.
(p) That there has been no enactment of any law by any governmental
authority having jurisdiction over the Agent or any Lender which would make it
unlawful in any respect for such Lender to make the Loans and no Material
Adverse Effect has occurred.
(q) The Agent shall have reviewed any shareholder agreements and stock
subscription agreements to which the Borrower is a party, and the terms of such
agreements shall be satisfactory to the Agent in its sole discretion.
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<PAGE>
(r) Searches of UCC filing jurisdictions for the Borrower and each
Subsidiary showing no prior security interests in the assets of the Borrower and
its Eligible Subsidiaries, or signed termination statements terminating any such
financing statements, except for capitalized leases.
(s) All documents required by the Financing Documents, including, without
limitation, surveys, title insurance policies, permits, approvals, and
environmental site assessments in connection with the Construction Loan
Documents.
Section 3.2. The Commitment and the Loans. The Commitment and the
----------- ----------------------------
obligation of each Lender to make or maintain its Pro Rata Share of any Advance
or Loan and the Obligation of the Swing Loan Lender to make Swing Loans are
subject to performance by the Borrower of all its obligations under this
Agreement and to the satisfaction of the following further conditions precedent:
(a) The fact that, immediately prior to and upon the making of each Loan,
no Event of Default or Default shall have occurred and be continuing;
(b) The fact that the representations and warranties of the Borrower
contained in Article 4, infra and in each of the other Financing Documents, are
-----
true and correct in all material respects on and as of the date of each Advance
or Loan except as altered hereafter by actions consented to or not prohibited
hereunder. The Borrower's delivery of this Agreement and the Notes, and of each
Borrowing Request to the Agent shall be deemed to be a representation and
warranty by the Borrower as of the date of such Advance or Loan as to the facts
specified in Sections 3.2(a) and (b);
(c) Receipt by Agent on or prior to the Business Day specified of a
Borrowing Request stating the amount requested for the Loan or Advance in
question and a Borrowing Request for such Loan, all signed or requested orally
by an Authorized Representative of Borrower on behalf of the Borrower;
(d) That there exists no law or regulation by any governmental authority
having jurisdiction over the Agent or any of the Lenders which would make it
unlawful in any respect for such Lender to make its Pro Rata Share of the Loan
or Advance, including, without limitation, Regulations U, T, G and X of the
Board of Governors of the Federal Reserve System and no Material Adverse Effect
has occurred.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Agent and the Lenders that,
after giving effect to the Loans and the application of the
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proceeds thereof (which representations and warranties shall survive the making
of the Loans) as follows:
Section 4.1 Organization and Existence. The Borrower and any Subsidiary
----------- --------------------------
is a corporation, limited partnership, or limited liability company, duly
organized, validly existing and in good standing under the laws of the state of
its incorporation or organization and is duly qualified to do business in all
jurisdictions in which such qualification is required, all as noted on Schedule
4.1, except where failure to so qualify would not have a Material Adverse
Effect, and has all requisite power and authority to conduct its business, to
own its properties and to execute and deliver, and to perform all of its
obligations under the Financing Documents.
Section 4.2 Authorization and Absence of Defaults. Except as described on
----------- -------------------------------------
Schedule 4.2, the execution, delivery to the Agent and the Lenders and
performance by the Borrower and any Eligible Subsidiary of the Financing
Documents have been duly authorized by all necessary action (including
governmental action) and do not and will not (i) require any consent or approval
of the shareholders or board of directors of the Borrower or any Eligible
Subsidiary which has not been obtained, (ii) violate, to the best knowledge of
the Borrower, any provision of any law, rule, regulation (including, without
limitation, Regulations U and X of the board of governors of the federal reserve
system), order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to the Borrower or any Eligible
Subsidiary and/or the articles of organization or by-laws, as applicable, of the
Borrower or any Eligible Subsidiary, (iii) result in a material breach of or
constitute a material default under any indenture or loan or credit agreement or
any other agreement, lease or instrument to which the Borrower or any Eligible
Subsidiary is or are a party or parties or by which it or they or its or their
properties may be bound or affected; or (iv) result in, or require, the creation
or imposition of any Lien on any of the Borrower's or any Eligible Subsidiary's
respective properties or revenues other than Liens granted to the Agent by any
of the Financing Documents securing the Obligations. To the best of their
knowledge, the Borrower and any Eligible Subsidiary are in compliance with any
such applicable law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award or any such indenture, other agreement, lease or
instrument, except where the failure to be in compliance does not have a
Material Adverse Effect.
Section 4.3 Acquisition of Consents. Except as noted on Schedule 4.3, no
----------- -----------------------
authorization, consent, approval, license, exemption of or filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, other than those which
have been obtained, is or will be necessary to the valid execution and delivery
to the Agent or the Lenders or performance by the Borrower or any Subsidiary of
any
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Financing Documents and each of the foregoing which has been obtained is in full
force and effect.
Section 4.4 Validity and Enforceability. Each of the Financing Documents
----------- ---------------------------
when delivered hereunder will constitute the legal, valid and binding
obligations of each of the Borrower and any Eligible Subsidiary which is or are
a party thereto enforceable against the Borrower, and any Eligible Subsidiary
which is or are a party thereto in accordance with their respective terms except
as the enforceability thereof may be limited by the effect of general principles
of equity and bankruptcy and similar laws affecting the rights and remedies of
creditors generally.
Section 4.5 Financial Information. The following information with respect
----------- ---------------------
to the Borrower has heretofore been furnished to the Agent:
(a) Audited consolidated and consolidating annual financial statements of
the Borrower and its Subsidiaries for the period ended January 25, 1998, and
unaudited consolidated and consolidating financial statements of the Borrower
and its Subsidiaries for the period ended April 30, 1998; and
(b) The Projections.
(c) The pro forma financial statements of the Borrower as of the Closing
Date provided pursuant to Section 3.1(l).
-------------
Each of the financial statements referred to above in Section 4.5(a) was
prepared in accordance with GAAP (subject, in the case of interim statements, to
the absence of footnotes and normal year-end adjustments) applied on a
consistent basis, except as stated therein. To the best of the Borrower's
knowledge, each of the financial statements referred to above in Sections 4.5(a)
and 4.5(c) fairly presents the financial condition or pro forma financial
condition, as the case may be, of the Person being reported on at such dates and
is complete and correct in all material respects and no Material Adverse Effect
has occurred since the date thereof. The Projections were prepared by the
Borrower in good faith.
Section 4.6 No Litigation. There are no actions, suits or proceedings
----------- -------------
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower and/or any Subsidiary or any of their properties before any court
or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which if determined adversely to the
Borrower and/or any Subsidiary would draw into question the legal existence of
the Borrower or any such Subsidiary, or the validity, authorization or
enforceability of any of the Financing Documents or any provision thereof, or
could reasonably be expected to have a Material Adverse Effect; except those
matters, if any, described on Schedule 4.6, none
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of which, in Borrower's good faith opinion, will (i) have such Material Adverse
Effect or (ii) draw into question (a) the legal existence of the Borrower or any
such Subsidiary or (b) the validity, authorization or enforceability of any of
the Financing Documents or any provision thereof.
Section 4.7 Regulation U. The Borrower is not engaged in the business of
----------- ------------
extending credit for the purpose of purchasing or carrying "margin stock" within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System (12 CFR Part 221), does not own and has no present intention of acquiring
any such margin stock or a "margin security" within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System (12 CFR, Part 207). None
of the proceeds of the Loans will be used directly or indirectly by the Borrower
for the purpose of purchasing or carrying, or for the purpose of reducing or
retiring any Indebtedness which was originally incurred to purchase or carry,
any such margin security or margin stock or for any other purpose which might
constitute the transaction contemplated hereby a "purpose credit" within the
meaning of said Regulation G or Regulation U, or cause this Agreement to violate
any other regulation of the Board of Governors of the Federal Reserve System or
the Securities and Exchange Act of 1934, as amended, or any rules or regulations
promulgated under either said statute.
Section 4.8 Absence of Adverse Agreements. Neither the Borrower nor any
----------- -----------------------------
Eligible Subsidiary is a party to any indenture, loan or credit agreement or any
lease or other agreement or instrument or subject to any corporate or
partnership restriction which would have a Material Adverse Effect.
Section 4.9 Taxes. The Borrower and each Subsidiary has filed all tax
----------- -----
returns (federal, state and local) required to be filed and paid all taxes shown
thereon to be due, including interest and penalties, except for those taxes, if
any, which are being contested in good faith and by appropriate proceedings, and
for which proper reserve or other provision has been made in accordance with
GAAP and except where any failure to file or pay would not have a Material
Adverse Effect on the Borrower or any Subsidiary and except as described in
Schedule 4.9.
Section 4.10 ERISA. Neither Borrower nor any Commonly Controlled Entity
------------ -----
maintains, contributes to, or is required to make or accrue a contribution or
has within any of the six preceding years maintained, contributed to or been
required to make or accrue a contribution to any Plan subject to regulation
under Title IV of ERISA, any Plan that is subject to the minimum funding
requirements of Section 412 of the Code or Section 302 of ERISA, or any
Multiemployer Plan.
Section 4.11 Ownership of Properties.
------------ -----------------------
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<PAGE>
(a) Except for Permitted Encumbrances, Borrower and any Eligible Subsidiary
has good title to all of its properties and assets free and clear of all
restrictions and Liens of any kind other than those which could not have a
Material Adverse Effect or a material adverse effect on the validity,
authorization and/or enforceability of the Financing Documents and/or any
provision thereof.
(b) Schedule 4.11 accurately and completely lists the location of all real
property owned or leased by Borrower or any Subsidiary as of the date hereof.
Borrower and each Subsidiary enjoys quiet possession under all material leases
of real property to which it is a party as a lessee, and all of such leases are
valid, subsisting and, to Borrower's knowledge, in full force and effect.
(c) To Borrower's knowledge, except as specified in Schedule 4.11, as of
the date hereof, none of the real property occupied by Borrower or any
Subsidiary is located within any federal, state or municipal flood plain zone.
(d) Except as set forth in Schedule 4.11, all of the material properties
used in the conduct of the Borrower's and each Subsidiary's business (i) are in
good repair, working order and condition (reasonable wear and tear excepted) and
reasonably suitable for use in the operation of Borrower's, and each
Subsidiary's business; and (ii) to Borrower's knowledge are currently operated
and maintained, in all material respects, in accordance with the requirements of
applicable governmental authorities.
Section 4.12 Accuracy of Representations and Warranties. None of
------------ ------------------------------------------
Borrower's representations or warranties set forth in this Agreement or in any
document or certificate furnished pursuant to this Agreement or in connection
with the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state a material fact necessary to make any statement
of fact contained herein or therein, in light of the circumstances under which
it was made, not misleading; except that unless provided otherwise any such
document or certificate which is dated speaks as of the date stated and not the
present.
Section 4.13 No Investment Company. Neither the Borrower nor any
------------ ---------------------
Subsidiary is an "investment company" or a company "controlled" by an
"investment company" as such terms are defined in the Investment Company Act of
1940, as amended, which is required to register thereunder.
Section 4.14 Solvency, etc. After giving effect to the consummation of
------------ -------------
each Loan outstanding and to be made under this Agreement as of the time this
representation and warranty is given, the Borrower (a) will be able to pay its
debts as they become due, (b) will have funds and capital sufficient to carry on
its business and all businesses in which it is about to engage, and (c) will own
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<PAGE>
property in the aggregate having a value both at fair valuation and at fair
salable value in the ordinary course of the Borrower's business greater than the
amount required to pay its Indebtedness, including for this purpose unliquidated
and disputed claims. The Borrower will not be rendered insolvent by the
execution and delivery of this Agreement and the consummation of any
transactions contemplated herein.
Section 4.15 Approvals. Except as set forth in Schedule 4.3, all
------------ ---------
approvals required from all Persons including without limitation all
governmental authorities with respect to the Financing Documents have been
obtained.
Section 4.16 Ownership Interests. The schedule of ownership interests in
------------ -------------------
the Borrower and any Subsidiaries set forth in Schedule 4.16 is true, accurate
and complete and the investments made for all ownership interests disclosed
therein have in fact been fully paid. The requirements that certain of the
Borrower's stockholders make deferred investments pursuant to the Stock Purchase
Agreement dated as of September 13, 1995, as amended are subject to no
contingencies, except as set forth on the attached Schedule 4.16.
Section 4.17 Licenses, Registrations, Compliance with Laws, etc. Schedule
------------ --------------------------------------------------
4.17 accurately and completely describes all permits, governmental licenses,
registrations and approvals, material to carrying out of Borrower's and each of
the Subsidiaries' businesses as presently conducted and as required as of the
date hereof by law or the rules and regulations of any federal, foreign
governmental, state, county or local association, corporation or governmental
agency, body, instrumentality or commission having jurisdiction over the
Borrower or any of the Subsidiaries, including but not limited to the United
States Environmental Protection Agency, the United States Department of Labor,
the United States Occupational Safety and Health Administration, the United
States Equal Employment Opportunity Commission, the Federal Trade Commission and
the United States Department of Justice and analogous and related state and
foreign agencies. All existing authorizations, licenses and permits are in full
force and effect, are duly issued in the name of, or validly assigned to the
Borrower or a Subsidiary and the Borrower or a Subsidiary has full power and
authority to operate thereunder. There is no material violation or material
failure of compliance or, to Borrower's knowledge, allegation of such violation
or failure of compliance on the part of the Borrower or any Subsidiary with any
of the foregoing permits, licenses, registrations, approvals, rules or
regulations and there is no action, proceeding or investigation pending or to
the knowledge of the Borrower threatened nor has the Borrower or any Subsidiary
received any notice of such which might result in the termination or suspension
of any such permit, license, registration or approval which in any case could
have a Material Adverse Effect.
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<PAGE>
Section 4.18 Principal Place of Business; Books and Records. The
------------ ----------------------------------------------
Borrower's chief executive offices are located at Borrower's addresses set forth
in Section 9.6. All of the Borrower's books and records are kept at one or more
of its addresses set forth in Section 9.6.
Section 4.19 Subsidiaries. The Borrower's Subsidiaries, together with the
------------ ------------
Borrower's percentage ownership in each, are identified on Schedule 4.19.
Section 4.20 Environmental Compliance. Neither the Borrower nor, to the
------------ ------------------------
knowledge of the Borrower, any other Person:
(a) has ever caused, permitted, or suffered to exist any Hazardous Material
to be spilled, placed, held, located or disposed of on, under, or about, any of
the facilities owned, leased or used by the Borrower (the "Premises"), or from
the Premises into the atmosphere, any body of water, any wetlands, or on any
other real property, nor to Borrower's knowledge does any Hazardous Material
exist on, under or about the Premises other than, with respect to any of the
foregoing: (i) as disclosed on Schedule 4.20, or (ii) in respect of Hazardous
Material generated, stored, transported, used or disposed of in compliance with
law;
(b) has any knowledge that any of the Premises has ever been used (whether
by the Borrower or, to the knowledge of the Borrower, by any other Person) as a
treatment, storage or disposal (whether permanent or temporary) site for any
Hazardous Waste as defined in 42 U.S.C.A. 6901, et seq. (the Resource Recovery
-- ---
and Conservation Act); and
(c) has any knowledge of any notice of violation, Lien or other notice
issued by any governmental agency with respect to the environmental condition of
the Premises or any other property occupied by the Borrower, or any other
property which was included in the property description of the Premises or such
other real property within the preceding three years except as disclosed to the
Agent.
Section 4.21 Material Agreements, etc. Schedule 4.21 attached hereto
------------ ------------------------
accurately and completely lists all material agreements to which the Borrower or
any of the Subsidiaries are a party as of the date hereof, including without
limitation all software licenses, and all material construction, engineering,
consulting, employment, management, operating and related agreements, if any,
which are presently in effect. All of the material agreements to which Borrower
or any Subsidiary is a party, are legally valid, binding, and, to Borrower's
knowledge, in full force and effect and neither the Borrower, any of the
Subsidiaries nor, to Borrower's knowledge, any other parties thereto are in
material default thereunder.
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<PAGE>
Section 4.22 Patents, Trademarks and Other Property Rights. Schedule
------------ ---------------------------------------------
4.22 attached hereto contains a complete and accurate schedule as of the date
hereof, of all registered trademarks, registered copyrights and patents of the
Borrower and/or any of the Subsidiaries, and pending applications therefor, and
all other intellectual property in which the Borrower and/or any of the
Subsidiaries has any rights other than "off-the shelf" software which is
generally available to the general public at retail. Except as set forth in
Schedule 4.22, the Borrower and any Subsidiaries own, possess, or have licenses
- -------------
to use all the patents, trademarks, service marks, trade names, copyrights and
non-governmental licenses, and all rights with respect to the foregoing,
necessary for the conduct of their respective businesses as now conducted,
without, to the Borrower's knowledge any conflict with the rights of others with
respect thereto.
ARTICLE 5
AFFIRMATIVE COVENANTS
From and after the date hereof for so long as there is Indebtedness of the
Borrower to any Lender and/or the Agent under any of the Financing Documents or
any part of the Commitment is in effect, the Borrower will, with respect to
itself and, unless noted otherwise below, with respect to each of its
Subsidiaries, ensure that each Subsidiary will:
Section 5.1 Payment of Taxes, etc. Pay and discharge all taxes and
----------- ---------------------
assessments and governmental charges or levies imposed upon it or upon its
income or profits, or upon any properties belonging to it, prior to the date on
which penalties attach thereto, and all lawful claims for the same which, if
unpaid, might become a Lien upon any of its properties, provided that (unless
and until foreclosure, restraint, sale or any similar proceeding is pending and
is not stayed, discharged or bonded within 30 days after commencement) the
Borrower shall not be required to pay any such tax, assessment, charge, levy or
claim which is being contested in good faith and by proper proceedings and for
which adequate reserves or other provisions have been made in accordance with
GAAP, unless failure to pay could not result in a Material Adverse Effect.
Section 5.2 Maintenance of Insurance. Borrower shall keep in full force
----------- ------------------------
and effect a policy of public liability insurance against claims of bodily
injury, death or property damage occurring in any building. Certificates of all
such insurance shall be delivered to the Agent concurrently with the execution
and delivery of this Agreement, and thereafter all renewal or replacement
certificates shall be delivered to the Agent not less than thirty (30) days
prior to the expiration date of the policy to be renewed or replaced,
accompanied by evidence satisfactory to the Agent that all premiums payable with
respect to such policies have been paid by Borrower.
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<PAGE>
Borrower shall have the right of free choice in the selection of the agent or
the insurer through or by which the insurance required hereunder is to be
placed; provided, however, said insurer has at all times a general
policyholder's rating of A or A+ in Best's latest rating guide.
Section 5.3 Preservation of Existence, etc. Preserve and maintain in
----------- -------------------------------
full force and effect its legal existence, and all material rights, franchises
and privileges in the jurisdiction of its organization, preserve and maintain
all material licenses, governmental approvals, trademarks, patents, trade
secrets, copyrights and trade names owned or possessed by it and which are
necessary or, in the reasonable business judgment of the Borrower, desirable in
view of its business and operations or the ownership of its properties and
qualify or remain qualified as a foreign corporation in each jurisdiction in
which such qualification is necessary or, in its reasonable business judgment,
desirable in view of its business and operations and ownership of its properties
except where the failure to so qualify will not have a Material Adverse Effect.
Section 5.4 Compliance with Laws, etc. Comply with the requirements
----------- -------------------------
of all present and future applicable laws, rules, regulations and orders of any
governmental authority having jurisdiction over it and/or its business, except
where the failure to comply would not have a Material Adverse Effect.
Section 5.5 Inspection Rights. Permit, during normal business hours
----------- -----------------
and, prior to the occurrence of an Event of Default which is continuing, upon
the giving of reasonable notice, the Agent, the Lenders and any agents or
representatives thereof, to examine and make copies of (at Borrower's cost and
expense) and abstracts from the records and books of account of, and visit the
properties of the Borrower and any Eligible Subsidiary to discuss the affairs,
finances and accounts of the Borrower or any Eligible Subsidiary with any of
their partners, officers or management level employees and/or any independent
certified public accountant of the Borrower and/or any Eligible Subsidiary.
Section 5.6 Keeping of Records and Books of Account. Keep adequate
----------- ---------------------------------------
records and books of account, in which complete entries will be made in
accordance with GAAP and with applicable requirements of any governmental
authority having jurisdiction over the Borrower and/or any Subsidiary in
question, reflecting all financial transactions.
Section 5.7 Maintenance of Properties, etc. Maintain and preserve
----------- ------------------------------
all of its properties necessary or useful in the proper conduct of its business,
in good working order and condition, ordinary wear and tear excepted, and in
accordance with each of the Security Documents.
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<PAGE>
Section 5.8 Post-Closing Items. Complete in a timely fashion all
----------- ------------------
actions required in any post-closing letter executed in connection with this
Agreement.
Section 5.9 Other Documents, etc. Except as otherwise required by
----------- --------------------
this Agreement, pay, perform and fulfill all of its obligations and covenants
under each material document, instrument or agreement to which it is a party;
provided that so long as the Borrower or any Subsidiary is contesting any
claimed default by it or them under any of the foregoing by proper proceedings
conducted in good faith and for which any adequate reserves or other provisions
in accordance with and to the extent required by GAAP have been made, such
default shall not be deemed a violation of this covenant.
Section 5.10 Minimum Net Worth. Maintain at all times, as measured
------------ -----------------
at the end of each fiscal quarter of the Borrower, consolidated Net Worth of the
Borrower and its Eligible Subsidiaries of not less than $85,000,000, plus 100%
----
of Net Equity Proceeds received by the Borrower after the Closing Date, plus for
----
each fiscal year of the Borrower ending January 31, 1999 and thereafter, not
less than 75% of Net Income for such fiscal year.
Section 5.11 Maximum Cash Flow Leverage. Maintain as of the end of
------------ --------------------------
each fiscal quarter of the Borrower, a ratio of (i) Senior Funded Indebtedness
for the Borrower and its Eligible Subsidiaries to (ii) Adjusted EBITDA for the
Borrower and its Eligible Subsidiaries for the four fiscal quarters most
recently ended, of not more than the amounts set forth below:
<TABLE>
<CAPTION>
PERIOD RATIO
- ------ -----
<S> <C>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Closing Date through 7/31/99 4.00:1*
- --------------------------------------------------------------------------------------------------------
8/1/99 through 7/31/00 3.25:1*
- --------------------------------------------------------------------------------------------------------
8/1/00 through 7/31/01 2.75:1
- --------------------------------------------------------------------------------------------------------
8/1/01 and thereafter 2.25:1
- --------------------------------------------------------------------------------------------------------
</TABLE>
* For quarters ending 4/30/99 through 10/31/99, these ratios will be increased
by .25:1 upon the receipt by the Borrower of a binding Commitment reasonable
acceptable to Lenders, for an off-balance sheet refinancing of the Construction
Loans, in form and substance satisfactory to the Lenders.
Section 5.12 Total Funded Indebtedness to EBITDA. Maintain as of the
------------ -----------------------------------
end of each fiscal quarter of the Borrower, a ratio of (i) Funded Indebtedness
for the Borrower and its Eligible Subsidiaries to (ii) Adjusted EBITDA for the
Borrower and its Eligible Subsidiaries for the four fiscal quarters most
recently ended, of not more than the amounts set forth below:
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------------------------------------
PERIOD RATIO
- --------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
<S> <C>
Closing Date through 7/31/99 4.00:1*
- -------------------------------------------------------------------------------------------------------
8/1/99 through 7/31/00 3.75:1*
- -------------------------------------------------------------------------------------------------------
8/1/00 through 7/31/01 3.25:1
- -------------------------------------------------------------------------------------------------------
8/1/01 and thereafter 2.75:1
- -------------------------------------------------------------------------------------------------------
</TABLE>
* For quarters ending 4/30/99 through 10/31/99, these ratios will be increased
by .25:1 upon the receipt by the Borrower of a binding commitment, reasonable
acceptable to Lenders, for an off-balance sheet refinancing of the Construction
Loans, in form and substance satisfactory to the Lenders, provided however that
such refinancing will close within (60) days of such receipt.
Section 5.13 Minimum Adjusted EBITDA. Maintain as of the end of each
------------ -----------------------
fiscal quarter of the Borrower, Adjusted EBITDA for the Borrower and its
Eligible Subsidiaries for the four fiscal quarters most recently ended of not
less than the amounts set forth below:
<TABLE>
- --------------------------------------------------------------------------------------------------------
<S> <C>
Closing Date through 1/30/99 18,000,000 $
- --------------------------------------------------------------------------------------------------------
FYE 1/31/99 through 1/30/00 20,000,000 $
- --------------------------------------------------------------------------------------------------------
FYE 1/31/00 through 1/30/01 30,000,000 $
- --------------------------------------------------------------------------------------------------------
FYE 1/31/01 through 1/30/02 40,000,000 $
- --------------------------------------------------------------------------------------------------------
FYE 1/31/02 through 1/30/03 55,000,000 $
- --------------------------------------------------------------------------------------------------------
FYE 1/31/03 to maturity 65,000,000 $
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
The thresholds set forth above shall be increased by the amount of
eighty-percent (80%) of any EBITDA for any new Eligible Subsidiary.
Section 5.14 Fixed Charge Coverage Ratio. Maintain as of the end of
------------ ---------------------------
each fiscal quarter of the Borrower, for the four fiscal quarters most recently
ended, a Fixed Charge Coverage Ratio of not less than 2.00:1.00.
Section 5.15 Interest Coverage Ratio.[INTENTIONALLY DELETED]
------------ -----------------------
Section 5.16 Certificates and Requests. Provide each certificate
------------ -------------------------
required under this Agreement and each Borrowing Request so that the statements
contained therein are accurate and complete in all material respects.
Section 5.17 Depository. Use the Agent as a principal depository of
----------
Borrower's funds.
Section 5.18 Notice of Purchase of Real Estate and Leases. Promptly
------------ --------------------------------------------
notify the Agent in the event that the Borrower shall purchase any real estate
or enter into any lease of real estate or of equipment material to the operation
of the Borrower's business, supply the Agent with a copy of the related purchase
agreement or of such
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<PAGE>
lease, as the case may be, and if requested by the Agent, execute and deliver,
or cause to be executed and delivered, to the Agent for the benefit of the
Lenders a deed of trust, mortgage, assignment or other document, together with
landlord consents, in the case of leased property, reasonably satisfactory in
form and substance to the Agent, granting a valid first Lien (subject to any
Liens permitted under Section 6.1 hereof) on such real property or leasehold as
security for the Financing Documents.
Section 5.19 Additional Assurances. From time to time hereafter,
------------ ---------------------
execute and deliver or cause to be executed and delivered, such additional
instruments, certificates and documents, and take all such actions, as the Agent
shall reasonably request for the purpose of implementing or effectuating the
provisions of the Financing Documents, and upon the exercise by the Agent of any
power, right, privilege or remedy pursuant to the Financing Documents which
requires any consent, approval, registration, qualification or authorization of
any governmental authority or instrumentality, exercise and deliver all
applications, certifications, instruments and other documents and papers that
the Agent may be so required to obtain.
Section 5.20 Appraisals. Permit the Agent and its agents, at any
------------ ----------
time and in the sole discretion of the Agent or at the request of the Majority
Lenders, to conduct appraisals of the Borrower's business, the reasonable cost
of which shall be borne by the Borrower.
Section 5.21 Environmental Compliance. Comply in all material
------------ ------------------------
respects with the requirements of all federal, state, and local environmental
laws; notify the Lenders promptly in the event of any spill of Hazardous
Material materially affecting the Premises occupied by the Borrower from time to
time; forward to the Lenders promptly any written notices relating to such
matters received from any governmental agency; and pay promptly when due any
uncontested fine or assessment against the Premises.
Section 5.22 Remediation. Immediately contain and remove any
------------ -----------
Hazardous Material found on the Premises in compliance with applicable laws and
at the Borrower's expense, subject however, to the right of the Agent, at the
Agent's option but at the Borrower's expense, to have an environmental engineer
or other representative review the work being done.
Section 5.23 Site Assessments. Promptly upon the request of the
------------ ----------------
Agent, based upon the Agent's reasonable belief that a material Hazardous Waste
or other environmental problem exists with respect to any Premises, provide the
Agent with a Phase I environmental site assessment report and, if Agent finds a
reasonable basis for further assessment in such Phase I assessment, a Phase II
environmental site assessment report, or an update of any existing report, all
in scope, form and content and performed by such company as may be reasonably
satisfactory to the Agent.
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<PAGE>
Section 5.24 Indemnity. Indemnify, defend, and hold the Agent and
------------ ---------
the Lenders harmless from and against any claim, cost, damage (including without
limitation consequential damages), expense (including without limitation
reasonable attorneys' fees and expenses), loss, liability, or judgment now or
hereafter arising as a result of any claim for environmental cleanup costs, any
resulting damage to the environment and any other environmental claims against
the Borrower, any Subsidiary, the Lenders and/or the Agent arising out of the
transactions contemplated by this Agreement, or any of the Premises. The
provisions of this Section shall continue in effect and shall survive (among
other events), until the applicable statute of limitations pertaining to such
environmental claim has expired, any termination of this Agreement, foreclosure,
a deed in lieu transaction, payment and satisfaction of the Obligations of
Borrower, and release of any collateral for the Loans. The Agent shall promptly
notify the Borrower of any claim of the Agent or any Lender under this Section
5.24, but failure to notify promptly shall not affect the Borrower's obligations
hereunder.
Section 5.25 Reporting Requirements. From the date hereof and
------------ ----------------------
thereafter for so long as the Borrower is indebted to any Lender and/or the
Agent under any of the Financing Documents, the Borrower will furnish or cause
to be furnished to the Agent for distribution to the Lenders:
(a) As soon as practicable after the end of each Borrower fiscal year
and in any event within 120 days after the end of each such fiscal year,
consolidated and consolidating balance sheets of the Borrower and any
Subsidiaries as at the end of such year, and the related statements of income
and cash flows or shareholders' equity of the Borrower and its Subsidiaries
setting forth, in each case, the corresponding figures for the preceding fiscal
year (in each case including financial statements for non-consolidated
subsidiaries), such statements to be certified by a firm of independent
certified public accountants selected by Borrower and reasonably acceptable to
the Agent, to be accompanied by a copy of the auditors' management letter and a
statement to the effect that such accountants have examined this Agreement and
that no Default or Event of Default exists;
(b) As soon as is practicable after the end of each fiscal month of
each Borrower fiscal year and in any event within 45 days thereafter, its
consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries as of the end of such period and the related statements of income
and cash flows and shareholders' equity of the Borrower and its Subsidiaries
together prepared and certified by an Authorized Representative prepared in
accordance with GAAP;
(c) Simultaneous with the furnishing of each of the financial
statements delivered pursuant to Section 5.25(a) and Section 5.25(b)
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<PAGE>
at the end of each fiscal quarter, a certificate of an Authorized
Representative, in the form of Exhibit C to the effect that no Event of Default
or Default has occurred, or if there shall have been an Event of Default, such
certificate shall disclose the nature thereof and the actions the Borrower has
taken and is prepared to take with respect thereto. Each such certificate shall
also contain a calculation of the financial covenants contained in this
Agreement;
(d) As soon as possible and in any event upon acquiring knowledge of
an Event of Default or Default, continuing on the date of such statement, the
written statement of an Authorized Representative setting forth details of such
Event of Default or Default and the actions which the Borrower has taken and
proposes to take with respect thereto;
(e) Promptly after the commencement thereof, notice of all material
actions, suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
affecting the Borrower and/or any Subsidiary;
(f) On or before the last day of each fiscal year of the Borrower,
updated financial projections for the Borrower and any Subsidiaries on a
consolidated quarterly basis for the period ending on the Termination Date, in
detail reasonably satisfactory to the Agent.
(g) Such other information respecting the Business Condition of the
Borrower or any Subsidiaries as the Agent or any Lender may from time to time
reasonably request;
(h) Prompt written notice of loss of any Material Adverse Effect and
an explanation thereof and of the actions the Borrower proposes to take with
respect thereto;
(i) Promptly upon becoming aware thereof written notice of the
following events, (i) the occurrence or expected occurrence of any Reportable
Event with respect to any Plan, or (ii) the institution of proceedings or the
taking or expected taking of any other action by PBGC or the Borrower or any
Commonly Controlled Entity to terminate, withdraw or partially withdraw from
any Plan and, with respect to any Multiemployer Plan, the Reorganization (as
defined in Section 4241 of ERISA) or Insolvency (as defined in Section 4245 of
ERISA) of such Multiemployer Plan and in addition to such notice, deliver to the
Agent whichever of the following may be applicable: (a) a certificate setting
forth details as to such Reportable Event and the action that the Borrower or
Commonly Controlled Entity proposes to take with respect thereto, together with
a copy of any notice of such Reportable Event that may be required to be filed
with PBGC, or (b) any notice delivered by PBGC evidencing its intent to
institute such proceedings
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<PAGE>
or any notice to PBGC that such Plan is to be terminated, as the case may be;
(j) With each request for an Advance, and in addition within five (5)
days of the end of each calendar month, a certificate of the chief financial
officer of the Borrower as of the end of such month setting forth all
outstanding amounts owing to the Borrower by each of its Subsidiaries as of the
date of such certificate. Such certificate shall be binding upon the Borrower
and its Eligible Subsidiaries absent manifest error; and
(k) Promptly after the filing thereof, copies of all reports filed by
the Borrower or any subsidiary with the Securities Exchange Commission
Section 5.26 Additional Subsidiaries. Concurrently with the
------------ -----------------------
acquisition or creation by the Borrower of any Eligible Subsidiary after the
date of this Agreement (i) cause such Eligible Subsidiary (that is not a Wholly-
Owned Subsidiary) to execute and deliver to the Agent a Subsidiary Guaranty in
the form of Exhibit H hereto, (ii) cause such Eligible Subsidiary which is or
which at any time becomes a Wholly-Owned Subsidiary to execute and deliver to
the Agent a Subsidiary Guaranty in the form of Exhibit H hereto, (iii) execute
and deliver to the Agent an updated Annex A to a Pledge Agreement, or a new
executed Pledge Agreement (iv) deliver the stock of such Eligible Subsidiary to
be pledged to the Agent for the benefit of the Lenders, and (v) deliver a
revised Exhibit E to the Agent showing the new Eligible Subsidiary.
Section 5.27. Grant of Security Interest. As security for the full
------------ --------------------------
and punctual payment and performance of all Loans, if any, made by Lenders in
connection with the purchase by Borrower of certain shelving, racking, trade
fixtures, computers (including computer programs, tapes and related electronic
data processing software) equipment and personal property to be used in
connection with the Facility (including any and all proceeds or products
thereof, the "Additional Collateral"), the Borrower hereby grants to the Agent,
for the benefit of itself in its individual capacity as a Lender and as Agent
hereunder and for the ratable benefit of each of the other Lenders, a continuing
security interest in the Additional Collateral, whether such Additional
Collateral is now owned or existing or is owned, acquired, or arises hereafter,
wherever located and any and all additions, substitutions, accessions, proceeds
and products to, for or of any of the foregoing. At that time the Borrower
makes a request under the Revolving Line of Credit to purchase the Additional
Collateral and the request is approved by Agent, which approval may be withheld
at Agent's sole discretion, the Borrower shall deliver to Agent any instrument,
document of title, security, chattel paper or other property or any proceeds or
products thereof, or any interest therein; the Borrower shall be the lawful
owner thereof an shall have good right to pledge, sell, assign or transfer the
same; none of such
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<PAGE>
property shall have been pledged, sold, assigned or transferred to any person
other than the Agent or in any way encumbered; and the Borrower shall defend the
same against the claims and demands of all persons.
ARTICLE 6
NEGATIVE COVENANTS OF THE BORROWER
From and after the date hereof for so long as there is Indebtedness of
the Borrower to any Lender and/or the Agent under any of the Financing Documents
or any part of the Commitment is in effect, neither the Borrower nor any of its
Subsidiaries will:
Section 6.1 Liens, etc. Create, incur, assume or suffer to exist any
----------- ----------
Lien of any nature, upon or with respect to any of its properties, now owned or
hereafter acquired, or assign as collateral or otherwise convey as collateral,
any right to receive income, except Liens:
(a) For taxes, assessments or governmental charges or levies on
property if the same shall not at the time be delinquent or thereafter can be
paid without penalty or interest, or (if foreclosure, distraint, sale or other
similar proceedings shall not have been commenced or if commenced not stayed,
bonded or discharged within 30 days after commencement) are being contested in
good faith and by appropriate proceedings diligently conducted and for which
adequate reserves or other provisions have been made in accordance with GAAP;
(b) Imposed by law, such as landlords', carriers', warehousemen's and
mechanics' liens, bankers' set off rights and other similar Liens arising in the
ordinary course of business for sums not yet due or being contested in good
faith and by appropriate proceedings diligently conducted and for which adequate
reserves or other provisions have been made in accordance with GAAP;
(c) Arising in the ordinary course of business out of pledges or
deposits under worker's compensation laws, unemployment insurance, old age
pensions, or other social security or retirement benefits, or similar
legislation;
(d) Arising from or upon any judgment or award, provided that such
judgment or award is being contested in good faith by proper appeal proceedings
diligently conducted and for which adequate reserves or other provisions have
been made in accordance with GAAP and only so long as execution thereon shall be
stayed;
(e) Set forth on Schedule 6.1;
(f) Liens now or hereafter granted pursuant to the Security Documents
or otherwise now or hereafter granted to the Agent for the benefit of the
Lenders as collateral for the Loans and/or Borrower's
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other Obligations arising in connection with or under any of the Financing
Documents;
(g) On deposits to secure the performance of bids, trade contracts
(other than for Borrowed Money), leases, statutory obligations, surety bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of the Borrower's or any Subsidiary's business;
(h) In the nature of easements, rights of way, restrictions and other
similar encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or materially
interfere with the ordinary conduct of business by any Borrower or any
Subsidiary;
(i) Securing Indebtedness permitted to exist under Section 6.8(c);
provided that the Lien securing any such Indebtedness is limited to the item of
property purchased or leased in each case;
(j) Noted in UCC-1 financing statements filed solely for notice or
precautionary purposes by lessors under operating leases which do not secure
Indebtedness and which are limited to the items of equipment leased pursuant to
the lease in question;
(k) Granted by Ineligible Subsidiaries to secure inventory and other
business financing; and
(l) Granted by Eligible Subsidiaries in favor of the Borrower;
provided that at the request of the Agent the Borrower shall assign such
- --------
security interest to the Agent for the benefit of the Lenders.
Section 6.2 Contingent Liabilities. Create, incur, assume,
----------- ----------------------
guarantee, endorse or otherwise become directly or contingently liable in
connection with any Guaranties, except:
(a) Guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
(b) Guaranties permitted by Section 6.8; and
(c) Guaranties set forth on Schedule 6.2.
Section 6.3 Acquisitions, Dissolution, Mergers, Etc.
-----------------------------------------
(a) Acquire, in one or a series of transactions, all or any
substantial portion of the assets or ownership interests in another Person
("Acquisition") unless:
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(i) such Person is engaged in the business of catalog sales or
related or associated businesses,
(ii) one hundred percent (100%) of the equity of such Person will be
owned by the Borrower,
(iii) such Person's EBITDA in each of the prior two (2) fiscal years
was not less than $1.00, and
(iv) there would be no Default after giving effect to such
acquisition, including, without limitation, with respect to Sections 5.10
through 5.15.
(b) Dissolve, liquidate, wind up, merge or consolidate or combine with
another Person unless the Borrower or its Subsidiary is the surviving entity, or
sell, assign, lease or otherwise dispose of (whether in one transaction or in a
series of transactions) any material assets, whether now owned or hereafter
acquired, or any of the Borrower's or any Subsidiary's material interests in
real property other than assets which are replaced within thirty (30) days of
any asset sale, assignment, lease or disposition with assets of like kind,
usefulness and value.
Section 6.4 Change in Nature of Business. Make any material change in
----------- ----------------------------
the nature of its business.
Section 6.5 Ownership. As to the Borrower, cause or permit the
----------- ---------
occurrence of any Change of Control.
Section 6.6 Sale and Leaseback. Enter into any sale and leaseback
----------- ------------------
arrangement or any leases except: (i) with respect to the property subject to
the Construction Loan, with the prior written consent of the Lenders; and (ii)
in the normal course of business of the Borrower or any Subsidiary at reasonable
rents comparable to those paid for similar leasehold interests in the relevant
area.
Section 6.7 Sale of Accounts, etc. Sell, assign, discount or dispose
----------- ---------------------
in any way of any accounts receivable, promissory notes or trade acceptances
held by the Borrower or any Subsidiary, with or without recourse, except in the
ordinary course of the Borrower's or any Eligible Subsidiary's business.
Section 6.8 Indebtedness. Incur, create, become or be liable
----------- ------------
directly or indirectly in any manner with respect to or permit to exist any
Indebtedness except:
(a) Indebtedness under the Financing Documents;
(b) Indebtedness with respect to trade payable obligations and other
normal accruals and customer deposits in the ordinary course of business not yet
due and payable in accordance with customary trade
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terms or with respect to which the Borrower or any Subsidiary is contesting in
good faith the amount or validity thereof by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP;
(c) Indebtedness with respect to Capitalized Lease Obligations and
purchase money Indebtedness with respect to real or personal property; provided
that the amount of any purchase money Indebtedness does not exceed the lesser of
the cost or fair market value of the asset purchased with the proceeds of such
Indebtedness;
(d) Indebtedness owing by the Borrower to any Subsidiary or by any
Subsidiary to the Borrower or any other Subsidiary;
(e) Indebtedness subordinated to the obligations of the Borrower and
the Subsidiaries to the Lenders, pursuant to agreements and on terms and
conditions satisfactory to the Agent and the Lenders in their sole discretion.
(f) Indebtedness permitted by Section 6.2; and
(g) Indebtedness incurred by Ineligible Subsidiaries for inventory and
other business financing.
Section 6.9 Other Negative Pledge Agreements. Enter into any
----------- --------------------------------
agreement, oral or written, with any Person, other than the Agent and the
Lenders, which prohibits the Borrower or any Eligible Subsidiary from granting ,
or in any way restricts the Borrower's or any Eligible Subsidiary's ability to
grant any Lien on any of the Borrower's or any Eligible Subsidiary's assets.
Section 6.10 Payment or Prepayment of Equity. Make any payment or
------------ -------------------------------
prepayment of any principal of or interest on or any payment, prepayment,
redemption, defeasance, sinking fund payment, other repayment of principal or
capital or deposit for the purpose of any of the foregoing on or in connection
with the capital stock of the Borrower or its Subsidiaries.
Section 6.11 Dividends, Payments and Distributions. Declare or pay
------------ -------------------------------------
any dividends, management fees or like fees or make any other distribution of
cash or property or both to any of the Borrower's stockholders other than
compensation for services rendered to the Borrower and/or any Subsidiary or use
any of its assets for payment, purchase, conversion, redemption, retention,
acquisition or retirement of any beneficial interest in the Borrower or set
aside or reserve assets for sinking or like funds for any of the foregoing
purposes, make any other distribution by reduction of capital or otherwise in
respect of any beneficial interest in the Borrower or permit any Subsidiary
which is not a Wholly-Owned Subsidiary to take any such actions.
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Section 6.12 Investments in or to Other Persons. Subject to the
------------ ----------------------------------
limitations set forth in Section 2.11 herein and as otherwise set forth in this
Section 6.12, make or commit to make any Investment in or to any other Person
(including, without limitation, any Subsidiary) other than (i) advances to
employees for business expenses not to exceed $5,000 in the aggregate
outstanding for any one employee and not to exceed $50,000 in the aggregate
outstanding at any one time to all such employees, (ii) other employee loans not
to exceed $100,000 in the aggregate outstanding at any one time to all such
employees, (iii) Cash Equivalent Investments, (iv) subject to the limitations in
Section 2.11, Investments (other than loans) by the Borrower in any Subsidiary
which is permitted under Section 6.3 and which is organized under the laws of a
state in the United States of America and all of the assets of which are located
in the United States of America; provided that the Borrower-owned capital stock
--------
of such Subsidiary is encumbered by first priority perfected Liens granted to
and held by the Agent for the benefit of the Lenders pursuant to the Stock
Pledge Agreement, or such other agreement as the Agent shall reasonably deem
necessary or appropriate to effect such Liens, (v) Investments in accounts,
contract rights and chattel paper (as defined in the Uniform Commercial Code)
and notes receivable, arising or acquired in the ordinary course of business,
(vi) loans to Eligible Subsidiaries (that are not Wholly-Owned Subsidiaries) for
working capital purposes, provided that no such loans shall be evidenced by a
--------
promissory note or any other instrument, (vi) Investments in Wholly-Owned
Subsidiaries, (vii) Investments (other than loans) in an aggregate amount of not
more than $2,000,000 in other Persons in the business of catalog sales or
related or associated business provided that Borrower will own at least eighty
(80%) percent ownership interest in the Person and such Person executes a
Subsidiary Guaranty in the form of Exhibit H hereto (except for Project Alpha),
(viii) Investments in TravelSmith, TTA and Whispering Pines so long as such
entity remains an Eligible Subsidiary, (ix) Investments in Project Alpha of up
to $5,250,000 (provided that Borrower executes a Pledge Agreement for the stock
in Project Alpha), (x) Investments described on Schedule 6.12 (xi) Acquisitions
permitted under Section 6.3 herein.
Section 6.13 Transactions with Affiliates. Engage in any transaction
------------ ----------------------------
or enter into any agreement with an Affiliate, or in the case of Affiliates or
Subsidiaries, with the Borrower or another Affiliate or Subsidiary, except in
the ordinary course of business, as permitted by any other provision of this
Agreement other than on an arm's length basis.
Section 6.14 Change of Fiscal Year. Change its fiscal year.
---------------------
Section 6.15 Subordination of Claims. Subordinate any present or
------------ -----------------------
future claim against or obligation of another Person, except as ordered in a
bankruptcy or similar creditors' remedy proceeding of such other Person.
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Section 6.16 Compliance with ERISA. With respect to Borrower and any
------------ ---------------------
Commonly Controlled Entity (a) withdraw from or cease to have an obligation to
contribute to, any Multiemployer Plan, (b) engage in any "prohibited
transaction" (as defined in Section 4975 of the Code) involving any Plan, (c)
except for any deficiency caused by a waiver of the minimum funding requirement
under section 412 of the Code, as described above, incur or suffer to exist any
material "accumulated funding deficiency" (as defined in section 302 of ERISA
and section 412 of the Code) of the Borrower or any Commonly Controlled Entity,
whether or not waived, involving any Single Employer Plan, (d) incur or suffer
to exist any Reportable Event or the appointment of a trustee or institution of
proceedings for appointment of a trustee for any Single Employer Plan if, in the
case of a Reportable Event, such event continues unremedied for ten (10) days
after notice of such Reportable Event pursuant to sections 4043(a), (c) or (d)
of ERISA is given, if in the reasonable opinion of the Majority Lenders any of
the foregoing is likely to result in a Material Adverse Effect.
Section 6.17 Capital Expenditures. Incur Capital Expenditures during
------------ --------------------
each fiscal year in excess of those set forth in the projections provided to the
Lenders pursuant to Section 5.25(f).
Section 6.18 Hazardous Waste. Become involved, or permit, to the
------------ ---------------
extent reasonably possible after the exercise by the Borrower of reasonable due
diligence and preventive efforts, any tenant of its real property to become
involved, in any operations at such real property generating, storing,
disposing, or handling Hazardous Material or any other activity that could lead
to the imposition on the Borrower or the Agent or any Lender, or any such real
property of any material liability or Lien under any environmental laws.
ARTICLE 7
EVENTS OF DEFAULT
Section 7.1 Events of Default. The Borrower shall be in default
----------- -----------------
under each of the Financing Documents, upon the occurrence of any one or more of
the following events ("Events of Default"):
(a) if the Borrower shall fail to pay (i) any principal, payable under
this Agreement, or any Note, when the same is due and payable, or (ii) any
interest, fees and/or other amounts (excluding principal) within 5 days after it
is due and payable;
(b) if the Borrower or any Subsidiary shall make an assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall admit in writing its inability to pay its debts as they become due
or shall file a voluntary petition in bankruptcy, or shall file any petition or
answer seeking any reorganization, arrangement, composition, adjustment,
liquidation, dissolution or similar relief under the present or any future
federal
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bankruptcy laws or other applicable federal, state or other statute, law or
regulation, or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator of it or of all or any substantial part of its
properties, or if partnership or corporate action shall be taken for the purpose
of effecting any of the foregoing; or
(c) The Borrower or any Subsidiary shall be the subject of an
involuntary bankruptcy proceeding, or any proceeding seeking any reorganization,
arrangement, composition, adjustment, liquidation, dissolution, or similar
relief under the present or any future federal bankruptcy law or other
applicable federal, foreign, state or other statute, law or regulation shall be
commenced, or (iii) if any trustee, receiver or liquidator of any of them or of
all or any substantial part of any or all of their properties shall be appointed
without their consent or acquiescence; and such proceeding or appointment shall
not be discharged, vacated, dismissed or stayed within sixty (60) days after
commencement thereof; or
(d) if final judgment or judgments in excess of $500,000 in the
aggregate shall be rendered against the Borrower or any Subsidiary and shall
remain undischarged, unstayed or unpaid for an aggregate of thirty (30) days
(whether or not consecutive) after entry thereof; or
(e) if the Borrower or any Subsidiary shall default (after giving
effect to any applicable grace period) in the due and punctual payment of the
principal of or interest on any Indebtedness exceeding in the aggregate
$1,000,000 (other than the Loans), or if any default shall have occurred and be
continuing after any applicable grace period under any mortgage, note or other
agreement evidencing, securing or providing for the creation of such
Indebtedness, which results in the acceleration of such Indebtedness or which
permits, or with the giving of notice would permit, any holder or holders of any
such Indebtedness to accelerate the stated maturity thereof; or
(f) the Borrower or any Subsidiary shall fail to comply with Section
5.3 (insofar as such Section requires the preservation of the corporate
existence of the Borrower or any Subsidiary), any of Sections 5.5, 5.10 through
5.14, 5.25 or Article 6 of this Agreement or under any covenant, representation
or warranty contained in any of the Security Documents for which no cure period
is provided in such Security Document; or
(g) the Borrower or any Subsidiary shall fail to comply with any
covenant or condition contained in this Agreement or in any of the other
Financing Documents to be observed or performed pursuant to the terms hereof or
any Financing Document, as the case may be, other than a covenant or condition
referred to in any other subsection of this Section 7.1 and such failure shall
continue unremedied or unwaived for thirty (30) days, or (i) in the case of any
covenant or condition for which another grace period is provided, for such grace
period, or (ii)
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if any of the representations and warranties made or deemed made by the Borrower
to the Agent and/or any Lender pursuant to any of the Financing Documents proves
to have been false or misleading in any material respect when made and such
falseness or misleading representation or warranty would be reasonably likely to
have a material adverse effect on the Agent or any Lender or their rights and
remedies or a Material Adverse Effect; or
(h) if there shall be any attachment of any deposits or other
property of the Borrower and/or any Subsidiary in the possession of any Lender
or any attachment of any other property of the Borrower and/or any Subsidiary
the fair market value of which is $500,000 or more which shall not be
discharged, vacated or stayed within thirty (30) days of the date of such
attachment; or
(i) any certification of the financial statements, furnished to the
Agent pursuant to this Agreement, shall contain any qualification; provided,
however, that such qualifications will not be deemed an Event of Default if in
each case (i) such certification shall state that the examination of the
financial statements covered thereby was conducted in accordance with generally
accepted auditing standards, including but not limited to all such tests of the
accounting records as are considered necessary in the circumstances by the
independent certified public accountants preparing such statements, (ii) such
financial statements were prepared in accordance with GAAP and (iii) such
qualification does not involve the "going concern" status of the entity being
reported upon; or
(j) any investor party to the Series A Preferred Stock Purchase
Agreement dated as of September 13, 1995, (as amended, the "Stock Purchase
Agreement") obligated to purchase Series A-1 or A-2 Preferred Stock shall
default in its obligations to make such additional purchases of Series A-1 or A-
2 Preferred Stock pursuant to the terms of the Stock Purchase Agreement, or the
Borrower shall fail to satisfy the conditions precedent to such additional
purchases.
Section 7.2 Remedies of the Lenders. Upon the occurrence and during
----------- -----------------------
the continuance of any one or more of the Events of Default, the Agent, at the
request of the Majority Lenders, shall, by written notice to the Borrower,
declare the obligation of the Lenders to make or maintain the Loans or issue
Letters of Credit to be terminated, whereupon the same and the Commitment shall
forthwith terminate, and the Agent, at the request of the Majority Lenders,
shall, by notice to the Borrower, declare the entire unpaid principal amount of
each Note and all fees and interest accrued and unpaid thereon and/or under this
Agreement, each Note, and/or any of the other Financing Documents and any and
all other Indebtedness under this Agreement, each Note, and/or any of the other
Financing Documents to the Agent and/or any of the Lenders and/or to any holder
of all or any portion of each Note to be forthwith due and payable, whereupon
each Note, including any and all such accrued fees and interest and other such
Indebtedness shall
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become and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Borrower; provided, however, that upon the occurrence of an Event of Default
-------- -------
under Sections 7.1(b) or 7.1(c), all of the unpaid principal amount of each
Note, all fees and interest accrued and unpaid thereon and/or under this
Agreement and/or under any of the other Financing Documents and any and all
other such Indebtedness of the Borrower to any of the Lenders and/or to any such
holder shall thereupon be due and payable in full without any need for the Agent
and/or any Lender to make any such declaration or take any action and the
Lenders' obligations to make the Loans shall simultaneously terminate. Upon
demand by the Majority Lenders after the occurrence of any Event of Default, the
Borrower shall immediately provide to the Agent cash in an amount equal to the
aggregate maximum undrawn amount outstanding under Letters of Credit to be held
by the Agent as collateral security for the Reimbursement Obligations. The Agent
shall exercise all remedies on behalf of and for the account of each Lender and
on behalf of its respective Pro Rata Share of the Loans (plus, in the case of
----
the Swing Loan Lender, the aggregate amount of Swing Loans outstanding), its
Note, and the Indebtedness of the Borrower owing to it or any of the foregoing,
including, without limitation, all remedies available under or as a result of
this Agreement, the Notes, or any of the other Financing Documents or any other
document, instrument or agreement now or hereafter securing any Note without any
such exercise being deemed to modify in any way the fact that each Lender shall
be deemed a separate creditor of the Borrower to the extent of its Note and Pro
Rata Share of the Loans (plus, in the case of the Swing Loans Lender, an amount
----
equal to the aggregate amount of outstanding Swing Loans) and any other amounts
payable to such Lender under this Agreement and/or any of the other Financing
Documents and the Agent shall be deemed a separate creditor of the Borrower to
the extent of any amounts owed by the Borrower to the Agent.
ARTICLE 8
AGENT
Section 8.1 Appointment. The Agent is hereby appointed as Agent,
----------- -----------
hereunder and each Lender hereby authorizes the Agent to act under the Financing
Documents as its Agent hereunder and thereunder, respectively. The Agent agrees
to act as such upon the express conditions contained in this Article 8. The
provisions of this Article 8 are solely for the benefit of the Agent, and,
except as expressly provided in Section 8.6, neither the Borrower nor any third
party shall have any rights as a third party beneficiary of any of the
provisions hereof. In performing its functions and duties under this Agreement
and the other Financing Documents to which the Agent is a party, the Agent shall
act solely as Agent of the Lenders and does not assume nor shall the Agent be
deemed to have assumed any
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obligation towards or relationship of agency or trust with or for the Borrower,
any Affiliate or any Subsidiary.
Section 8.2 Powers; General Immunity.
----------- ------------------------
(a) Duties Specified. Each Lender irrevocably authorizes the Agent to
----------------
take such action on such Lender's behalf, including, without limitation, to
execute and deliver the Financing Documents to which the Agent is a party and to
exercise such powers hereunder and under the Financing Documents and other
instruments and agreements referred to herein as are specifically delegated to
the Agent by the terms hereof and thereof, together with such powers as are
reasonably incidental thereto. The Agent shall have only those duties and
responsibilities which are expressly specified in this Agreement or in any of
the Financing Documents and may perform such duties by or through its agents or
employees. The duties of the Agent shall be mechanical and administrative in
nature; and the Agent shall not have by reason of this Agreement or any of the
Financing Documents a fiduciary relationship in respect of any Lender; and
nothing in this Agreement or any of the Security Documents, expressed or
implied, is intended to or shall be so construed as to impose upon the Agent any
obligations in respect of this Agreement or any of the Financing Documents or
the other instruments and agreements referred to herein except as expressly set
forth herein or therein.
(b) No Responsibility For Certain Matters. The Agent shall not be
-------------------------------------
responsible to any Lender for the execution, effectiveness, genuineness,
validity, enforceability, collectibility or sufficiency of any of the Financing
Documents or any other document, instrument or agreement now or hereafter
executed in connection herewith or therewith, or for any representations,
warranties, recitals or statements made herein or therein or made in any written
or oral statement or in any financial or other statements, instruments, reports,
certificates or any other documents in connection herewith or therewith by or on
behalf of the Borrower and/or any Subsidiary to the Agent or any Lender, or be
required to ascertain or inquire as to the performance or observance of any of
the terms, conditions, provisions, covenants or agreements contained herein or
therein or as to the use of the proceeds of the Loans or of the existence or
possible existence of any Default or Event of Default.
(c) Exculpatory Provisions. Neither the Agent nor any of its
----------------------
officers, directors, employees or agents shall be liable to any Lender for any
action taken or omitted hereunder or under any of the Financing Documents, or
in connection herewith or therewith unless caused by its or their gross
negligence or willful misconduct. If the Agent shall request instructions from
Lenders with respect to any action (including the failure to take an action) in
connection with any of the Financing Documents, the Agent shall be entitled to
refrain from taking such action unless and until the Agent, shall have received
instructions from the Majority Lenders (or all of the Lenders
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if the action requires their consent). Without prejudice to the generality of
the foregoing, (i) the Agent shall be entitled to rely, and shall be fully
protected in relying, upon any communication, instrument or document believed by
it to be genuine and correct and to have been signed or sent by the proper
person or persons, and shall be entitled to rely and shall be protected in
relying on opinions and judgments of attorneys (who may be attorneys for the
Borrower and/or any Subsidiary), accountants, experts and other professional
advisors selected by it; and (ii) no Lender shall have any right of action
whatsoever against the Agent as a result of the Agent acting or (where so
instructed) refraining from acting under any of the Financing Documents or the
other instruments and agreements referred to herein in accordance with the
instructions of the Majority Lenders (or all of the Lenders if the action
requires their consent). The Agent shall be entitled to refrain from exercising
any power, discretion or authority vested in it under any of the Financing
Documents or the other instruments and agreements referred to herein unless and
until it has obtained the instructions of the Majority Lenders (or all of the
Lenders if the action requires their consent).
(d) Agent Entitled to Act as Lender. The agency hereby created shall
-------------------------------
in no way impair or affect any of the rights and powers of, or impose any duties
or obligations upon, Fleet in its individual capacity as a Lender and/or Swing
Loan Lender hereunder. With respect to its participation in the Loans and the
Commitment, Fleet shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not performing the duties
and functions delegated to it hereunder, and the term "Lender" or "Lenders" or
any similar term shall, unless the context clearly otherwise indicates, include
Fleet in its individual capacity including, without limitation, its capacity as
Swing Loan Lender. The Agent and its affiliates may accept deposits from, lend
money to and generally engage in any kind of banking, trust, financial advisory
or other business with the Borrower, or any Affiliate or Subsidiary as if it
were not performing the duties specified herein, and may accept fees and other
consideration from the Borrower and/or any of such other Persons for services in
connection with this Agreement and otherwise without having to account for the
same to Lenders.
Section 8.3 Representations and Warranties; No Responsibility for
----------- -----------------------------------------------------
Appraisal of Creditworthiness. Each Lender represents and warrants that it has
- -----------------------------
made its own independent investigation of the financial condition and affairs of
the Borrower and any Subsidiaries of any of them in connection with the making
of the Loans hereunder and has made and shall continue to make its own appraisal
of the creditworthiness of the Borrower and the Subsidiaries. The Agent shall
not have any duty or responsibility, either initially or on a continuing basis,
to make any such investigation or any such appraisal on behalf of Lenders or to
provide any Lender with any credit or other information with respect thereto
whether coming into its possession before the making of any Loan or any time or
times thereafter (except
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for information received by the Agent under Section 5.25 hereof which the Agent
will promptly forward to the Lenders), and the Agent shall further not have any
responsibility with respect to the accuracy of or the completeness of the
information provided to any of the Lenders.
Section 8.4 Right to Indemnity. Each Lender severally agrees to
----------- ------------------
indemnify the Agent proportionately to its Pro Rata Share of the Loans, to the
extent the Agent shall not have been reimbursed by or on behalf of the Borrower,
for and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses (including, without
limitation, counsel fees and disbursements) or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against the
Agent in performing its duties hereunder or in any way relating to or arising
out of this Agreement and/or any of the other Financing Documents; provided that
--------
no Lender shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Agent's gross negligence or willful misconduct.
If any indemnity furnished to the Agent for any purpose shall, in the opinion of
the Agent, be insufficient or become impaired, the Agent may call for additional
indemnity and cease, or not commence, to do the acts indemnified against until
such additional indemnity is furnished.
Section 8.5 Payee of Note Treated as Owner. The Agent may deem and
----------- ------------------------------
treat the payee of any Note as the owner thereof for all purposes hereof unless
and until a written notice of the assignment or transfer thereof shall have been
filed with the Agent. Any request, authority or consent of any person or entity
who, at the time of making such request or giving such authority or consent, is
the holder of any Note shall be conclusive and binding on any subsequent holder,
transferee or assignee of that Note or of any Note or Notes issued in exchange
for such Note.
Section 8.6 Resignation by Agent.
----------- --------------------
(a) The Agent may resign from the performance of all its functions and
duties under the Financing Documents at any time by giving 30 days' prior
written notice to the Borrower and each of the Lenders. Such resignation shall
take effect upon the acceptance by a successor Agent, of appointment pursuant to
Sections 8.6(b) and 8.6(c) below or as otherwise provided below.
(b) Upon any such notice of resignation, the Majority Lenders shall
appoint a successor Agent, who shall be a Lender and, so long as no Default or
Event of Default exists and is continuing, who shall be reasonably satisfactory
to the Borrower and in any event shall be an incorporated bank or trust company
with a combined surplus and undivided capital of at least Five Hundred Million
Dollars ($500,000,000).
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(c) If a successor Agent shall not have been so appointed within said
30 day period, the resigning Agent, with the consent of the Borrower, which
shall not be unreasonably withheld or delayed, shall then appoint a successor
Agent, who shall be a Lender and who shall serve as the Agent, until such time,
if any, as the Majority Lenders, and so long as no Default or Event of Default
exists and is continuing, with the consent of the Borrower, which shall not be
unreasonably withheld or delayed, appoint a successor Agent as provided above.
(d) If no successor Agent has been appointed pursuant to Sections 8.6b
or 8.6(c) by the 40th day after the date such notice of resignation was given by
the resigning Agent, the resigning Agent's resignation shall become effective
and the Majority Lenders shall thereafter perform all the duties of the
resigning Agent under the Financing Documents including without limitation
directing the Borrower on how to submit Borrowing Requests and otherwise on
administration of the Agent's duties under the Financing Documents and the
Borrower shall comply therewith so long as such directions do not have a
Material Adverse Effect on the Borrower or any Subsidiary until such time, if
any, as the Majority Lenders, and so long as no Default or Event of Default
exists and is continuing, with the consent of the Borrower, which shall not be
unreasonably withheld or delayed, appoint a successor Agent, as provided above.
Section 8.7 Successor Agent. Upon the acceptance of any appointment
----------- ---------------
as the Agent hereunder by a successor Agent, that successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent and the retiring Agent, shall be discharged
from its duties and obligations as the Agent under the Financing Documents.
After any retiring Agent's resignation hereunder as the Agent the provisions of
this Article 8 shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was the Agent under the Financing Documents.
ARTICLE 9
MISCELLANEOUS
Section 9.1 Consent to Jurisdiction and Service of Process. Except
----------- ----------------------------------------------
to the extent prohibited by applicable law, the Borrower irrevocably:
(a) agrees that any suit, action, or other legal proceeding arising
out of any of the Financing Documents or any of the Loans may be brought in the
courts of record of the Commonwealth of Massachusetts or any other state(s) in
which any of the Borrower's assets are located or the courts of the United
States located in the Commonwealth of Massachusetts or any other state(s) in
which any of the Borrower's assets are located;
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(b) consents to the jurisdiction of each such court in any such suit,
action or proceeding; and
(c) waives any objection which it may have to the laying of venue of
such suit, action or proceeding in any of such courts.
For such time as any of the Indebtedness of the Borrower to any Lender
and/or the Agent shall be unpaid in whole or in part and/or the Commitment is in
effect, and if the Borrower is not conducting business in the Commonwealth of
Massachusetts, the Borrower irrevocably designates the registered agent or agent
for service of process of the Borrower as reflected in the records of the
Secretary of State of the Commonwealth of Massachusetts as its registered agent,
and, in the absence thereof, the Secretary of State of the Commonwealth of
Massachusetts as its agent to accept and acknowledge on its behalf service of
any and all process in any such suit, action or proceeding brought in any such
court and agrees and consents that any such service of process upon such agent
and written notice of such service to the Borrower by registered or certified
mail shall be taken and held to be valid personal service upon the Borrower
regardless of where the Borrower shall then be doing business and that any such
service of process shall be of the same force and validity as if service were
made upon it according to the laws governing the validity and requirements of
such service in each such state and waives any claim of lack of personal service
or other error by reason of any such service. Any notice, process, pleadings
or other papers served upon the aforesaid designated agent shall, within three
(3) Business Days after such service, be sent by the method provided therefor
under Section 9.6 to the Borrower at its address set forth in this Agreement.
EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT
OF ANY DISPUTE BETWEEN THE BORROWER AND THE AGENT AND/OR THE LENDERS WITH
RESPECT TO THE FINANCING DOCUMENTS AND/OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREBY.
Section 9.2 Rights and Remedies Cumulative. No right or remedy
----------- ------------------------------
conferred upon or reserved to the Agent and/or the Lenders in any of the
Financing Documents is intended to be exclusive of any other right or remedy,
and every right and remedy shall, to the extent permitted by law, be cumulative
and in addition to every other right and remedy given under any of the Financing
Documents or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy under any of the Financing
Documents, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
Section 9.3 Delay or Omission not Waiver. No delay in exercising or
----------- ----------------------------
failure to exercise by the Agent and/or the Lenders of any right or remedy
accruing upon any Default or Event of Default shall impair any such right or
remedy or constitute a waiver of any such Default or Event of Default or an
acquiescence therein. Every
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right and remedy given by any of the Financing Documents or by law to the Agent
and/or any of the Lenders may be exercised from time to time, and as often as
may be deemed expedient, by the Agent and/or any of the Lenders.
Section 9.4 Waiver of Stay or Extension Laws. The Borrower covenants
----------- --------------------------------
(to the extent that it may lawfully do so) that it will not at any time insist
upon, or plead or in any manner whatsoever claim or take the benefit or
advantage of, any stay or extension law wherever enacted, now or at any time
hereafter in force, which may affect the covenants or the performance of any of
the Financing Documents; and the Borrower (to the extent that it may lawfully do
so) hereby expressly waives all benefit and advantage of any such law and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Agent and/or any of the Lenders, but will suffer and
permit the execution of every such power as though no such law had been enacted,
except to the extent the Agent or any Lender is guilty of willful misconduct or
gross negligence.
Section 9.5 Amendments, etc. No amendment, modification,
----------- ---------------
termination, or waiver of any provision of any of the Financing Documents nor
consent to any departure by the Borrower therefrom shall in any event be
effective unless the same shall be in a written notice given to the Borrower by
the Agent and consented to in writing by the Majority Lenders (or by the Agent
acting alone if any specific provision of this Agreement provides that the
Agent, acting alone, may grant such amendment, modification, termination, waiver
or departure) and the Agent shall give any such notice if the Majority Lenders
so consent or direct the Agent to do so; provided, however, that any such
amendment, modification, termination, waiver or consent shall require a written
notice given to the Borrower by the Agent and consented to in writing by all of
the Lenders if the effect thereof is to (i) change any of the provisions
affecting the interest rate on the Loans, (ii) extend or modify the Commitment,
(iii) discharge or release the Borrower from its obligation to repay all
principal due under the Loans or release any collateral or guaranty for the
Loans, (iv) change any Lender's Pro Rata Share of the Commitment or the Loans,
(v) modify this Section 9.5, (vi) change the definition of Majority Lenders,
(vii) extend any scheduled maturity of principal, interest or fees or (viii)
permit the Borrower to assign any of its rights under or interest in this
Agreement, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. Any amendment
or modification of this Agreement must be signed by the Borrower, the Agent and
at least all of the Lenders consenting thereto who shall then hold the Pro Rata
Shares of the Loans required for such amendment or modification under this
Section 9.5 and the Agent shall sign any such amendment if such Lenders so
consent or direct the Agent to do so provided that any Lender dissenting
therefrom shall be given an opportunity to sign any such amendment or
modification. Any amendment of any of the Security Documents must be signed by
each of the parties thereto. No notice to
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or demand on the Borrower and no consent, waiver or departure from the terms of
this Agreement granted by the Agent and/or the Lenders in any case shall entitle
the Borrower to any other or further notice or demand in similar or other
circumstances.
Section 9.6 Notices. All notices, requests, demands and other
----------- -------
communications provided for hereunder (other than those which, under the terms
of this Agreement, may be given by telephone, which shall be effective when
received verbally) shall be in writing (including telecopied communication) and
mailed (provided that in the case of items referred to in the next-to-last
sentence of Section 9.1 and the items set forth below as requiring a copy to
legal counsel for the Borrower, the Agent or a Lender, such items shall be
mailed by overnight courier for delivery the next Business Day), telecopied or
delivered to the applicable party at the addresses indicated below:
If to the Borrower:
The International Cornerstone Group, Inc.
415 Congress Street, Suite 600
Portland, Maine 04101
Attention: Mark Fasold, Chief Financial Officer
Telephone: (207) 780-6585
Telecopy: (207) 780-1940
With a copy to:
Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, MA 02108
Attention: Nicolas A. Kensington, Esquire
Telephone: (617) 482-1360
Telecopy: (617) 556-3889
If to Fleet as the Agent and/or a Lender:
Fleet National Bank
Middle Market Banking
One Federal Street
Boston, MA 02110, MA OF D04H
Attention: Michael A. Palmer, Vice President
Telephone: (617) 346-4378
Telecopy: (617) 346-0797
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With a copy to:
Burns & Levinson LLP
125 Summer Street
Boston, MA 02110
Attention: Frank A. Segall, Esquire
Telephone: (617) 345-3684
Telecopy: (617) 345-3299
If to any other Lender, to the address set forth on Annex I
or, as to each party, at such other address as shall be designated by such party
in a written notice to each other party complying as to the delivery with the
terms of this Section. All such notices, requests, demands and other
communications shall be effective when received. Requests, certificates, other
items provided pursuant to Section 5.25 and other routine mailings or notices
need not be accompanied by a copy to legal counsel for the Lenders or the
Borrower.
Section 9.7 Costs, Expenses and Taxes. The Borrower agrees to pay on
----------- -------------------------
demand the reasonable fees and out-of-pocket expenses of Messrs. Burns &
Levinson LLP, counsel for the Agent and of any local counsel retained by the
Agent in connection with the preparation, execution, delivery and administration
(excluding expenses of any Lender's sale of a participation in or sale or
assignment of all or a portion of such Lender's Commitment or Loans other than
any such sale pursuant to Sections 2.2(c) or 2.12(g)).. The Borrower agrees to
pay on demand all reasonable costs and expenses (including without limitation
reasonable attorneys' fees) incurred by the Agent and/or any Lender, upon or
after the occurrence and during the continuance of any Default or Event of
Default, if any, in connection with the enforcement of any of the Financing
Documents and any amendments, waivers, or consents with respect thereto. In
addition, the Borrower shall pay on demand any and all stamp and other taxes and
fees payable or determined to be payable in connection with the execution and
delivery of the Financing Documents, and agrees to save the Lenders and the
Agent harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes or fees, except
those resulting from the Lenders' or Agent's gross negligence or willful
misconduct.
Section 9.8 Participations. Subject to compliance with the proviso
----------- --------------
in the first sentence of Section 9.11, any Lender may sell participations in all
or part of the Loans made by it and/or its Pro Rata Share of the Commitment or
any other interest herein to a financial institution having at least
$500,000,000 of assets, in which event the participant shall not have any rights
under any of the Financing Documents (the participant's rights against such
Lender in respect of that participation to be those set forth in the Agreement
executed by such Lender in favor of the participant relating thereto) and all
amounts payable by the Borrower hereunder or thereunder shall
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be determined as if such Lender had not sold such participation. Such Lender may
furnish any information concerning the Borrower and any Subsidiary in the
possession of such Lender from time to time to participants (including
prospective participants); provided that such Lender and any participant comply
with the proviso in Section 9.11(g) as if any such participant was a Substituted
Lender.
Section 9.9 Binding Effect; Assignment. This Agreement shall be
----------- --------------------------
binding upon and inure to the benefit of the Borrower, the Agent and the Lenders
and their respective successors and assigns, except that the Borrower shall not
have the right to assign its rights hereunder or any interest herein without the
prior written consent of the Agent and the Lenders. This Agreement and all
covenants, representations and warranties made herein and/or in any of the other
Financing Documents shall survive the making of the Loans, the execution and
delivery of the Financing Documents and shall continue in effect so long as any
amounts payable under or in connection with any of the Financing Documents or
any other Indebtedness of the Borrower to the Agent and/or any Lender remains
unpaid or the Commitment remains outstanding; provided, however, that Sections
2.2(c) and 9.7 shall, except to the extent agreed to in a pay-off letter by the
Agent and the Lenders in their complete discretion, survive and remain in full
force and effect for 90 days following repayment in full of all amounts payable
under or in connection with all of the Financing Documents and any other such
Indebtedness.
Section 9.10 Actual Knowledge. For purposes of this Agreement,
------------ ----------------
neither the Agent nor any Lender shall be deemed to have actual knowledge of any
fact or state of facts unless the senior loan officer or any other officer
responsible for the Borrower's account established pursuant to this Agreement at
the Agent or such Lender, shall, in fact, have actual knowledge of such fact or
state of facts or unless written notice of such fact shall have been received by
the Agent or such Lender in accordance with Section 9.6.
Section 9.11 Substitutions and Assignments. Upon the request of any
------------ -----------------------------
Lender, the Agent and such Lender may assign all or any portion of its Pro Rata
Share of the Commitment and the Loans to a Federal Reserve Bank and may, subject
to the terms and conditions hereinafter set forth, take the actions set forth
below to substitute one or more Eligible Assignees (a "Substituted Lender") as a
Lender or Lenders hereunder having an amount of the Loans as specified in the
relevant Substitution Agreement executed in connection therewith.
(a) In connection with any such substitution the Substituted Lender
and the Agent shall enter into a Substitution Agreement in the form of Exhibit D
hereto (a "Substitution Agreement") pursuant to which such Substituted Lender
shall be substituted for the Lender requesting the substitution in question (any
such Lender being hereinafter referred to as a "Selling Lender") to the extent
of the reduction in the Selling Lender's portion of the Loans specified
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therein. In addition, such Substituted Lender shall assume such of the
obligations of each Selling Lender under the Financing Documents as may be
specified in such Substitution Agreement and this Agreement shall be amended by
execution and delivery of each Substitution Agreement to include such
Substituted Lender as a Lender for all purposes under the Financing Documents
and to substitute for the then existing Annex I to this Agreement a new Annex I
-------
in the form of Schedule A to such Substitution Agreement setting forth the
portion of the Loans belonging to each Lender following execution thereof. Each
Lender and the Borrower hereby appoint the Agent as Agent on its behalf to
countersign and accept delivery of each Substitution Agreement and, to the
extent applicable, the provisions of Article 8 hereof shall apply mutatis
-------
mutandis with respect to such appointment and anything done or omitted to be
- --------
done by the Agent in pursuance thereof.
(b) Without prejudice to any other provision of this Agreement, each
Substituted Lender shall, by its execution of a Substitution Agreement, agree
that neither the Agent nor any Lender is any way responsible for or makes any
representation or warranty as to: (a) the accuracy and/or completeness of any
information supplied to such Substituted Lender in connection therewith, (b) the
financial condition, creditworthiness, affairs, status or nature of the Borrower
and/or any of the Subsidiaries or the observance by the Borrower, or any other
party of any of its obligations under this Agreement or any of the other
Financing Documents or (c) the legality, validity, effectiveness, adequacy or
enforceability of any of the Financing Documents.
(c) The Agent shall be entitled to rely on any Substitution Agreement
delivered to it pursuant to this Section 9.11 which is complete and regular on
its face as to its contents and appears to be signed on behalf of the
Substituted Lender which is a party thereto, and the Agent shall have no
liability or responsibility to any party as a consequence of relying thereon and
acting in accordance with and countersigning any such Substitution Agreement.
The effective date of each Substitution Agreement shall be the date specified as
such therein and each Lender prior to such effective date shall, for all
purposes hereunder, be deemed to have and possess all of their respective rights
and obligations hereunder up to 12:00 o'clock Noon on the effective date
thereof.
(d) Upon delivery to the Agent of any Substitution Agreement pursuant
to and in accordance with this Section 9.11 and acceptance thereof by the Agent
(which delivery shall be evidenced and accepted exclusively and conclusively by
the Agent's countersignature thereon pursuant to the terms hereof without which
such Substitution Agreement shall be ineffective): (i) except as provided
hereunder and in Section 9.11(e), the respective rights of each Selling Lender
and the Borrower against each other under the Financing Documents with respect
to the portion of the Loans being assigned or delegated shall be terminated
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and each Selling Lender and the Borrower shall each be released from all further
obligations to the other hereunder with respect thereto (all such rights and
obligations to be so terminated or released being referred to in this Section
9.11 as "Discharged Rights and Obligations"); and (ii) the Borrower and the
Substituted Lender shall each acquire rights against each other and assume
obligations towards each other which differ from the Discharged Rights and
Obligations only in so far as the Borrower and the Substituted Lender have
assumed and/or acquired the same in place of the Selling Lender in question; and
(iii) the Agent, the Substituted Lender and the other Lenders shall acquire the
same rights and assume the same obligations between themselves as they would
have acquired and assumed had such Substituted Lender been an original party to
this Agreement as a Lender possessing the Discharged Rights and Obligations
acquired and/or assumed by it in consequence of the delivery of such
Substitution Agreement to the Agent.
(e) Discharged Rights and Obligations shall not include, and there
shall be no termination or release pursuant to this Section 9.11 of (i) any
rights or obligations arising pursuant to any of the Financing Documents in
respect of the period or in respect of payments hereunder made during the period
prior to the effective date of the relevant Substitution Agreement or, (ii) any
rights or obligations relating to the payment of any amount which has fallen due
and not been paid hereunder prior to such effective date or rights or
obligations for the payment of interest, damages or other amounts becoming due
hereunder as a result of such nonpayment.
(f) With respect to any substitution of a Substituted Lender taking
place after the Closing Date, the Borrower shall issue to such Substituted
Lender and to such Selling Lender new Notes reflecting the inclusion of such
Substituted Lender as a Lender and the reduction in the Loans of such Selling
Lender, such new Notes to be issued against receipt by the Borrower of the
existing Note of such Selling Lender. The Selling Lender or the Substituted
Lender shall pay to the Agent for its own account an assignment fee in the
amount of $3,000 for each assignment hereunder, which shall be payable at or
before the effective date of the assignment.
(g) Each Lender may furnish to any Eligible Assignee which such
Lender proposes to make a Substituted Lender or to a Substituted Lender any
information concerning such Lender, the Borrower and any Subsidiary in the
possession of that Lender from time to time; provided that any Lender providing
any confidential information about the Borrower and/or any Subsidiary to any
such Eligible Assignee shall first obtain such financial institution's agreement
to keep confidential any such confidential information in a manner satisfactory
to the Borrower.
Section 9.12 Payments Pro Rata. The Agent agrees that promptly after
------------ -----------------
its receipt of each payment from or on behalf of the
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Borrower in respect of any obligations of the Borrower hereunder it shall
distribute such payment to the Lenders pro rata based upon their respective Pro
Rata Shares, unless payment is for a Swing Loan in which event such payment
shall be distributed to Fleet pursuant to Section 2.16 herein, if any, of the
obligations with respect to which such payment was received. Each of the Lenders
agrees that, if it should receive any amount hereunder (whether by voluntary
payment, by realization upon security, by the exercise of the right of setoff
under Section 2.5(b) or otherwise or banker's lien, by counterclaim or cross
action, by the enforcement of any right under the Financing Documents, or
otherwise), which is applicable to the payment of the Obligations of a sum which
with respect to the related sum or sums received by other Lenders is in a
greater proportion than the total amount of such Obligation then owed and due to
such Lender bears to the total amount of such Obligation then owed and due to
all of the Lenders immediately prior to such receipt, except for any amounts
received pursuant to Section 2.2(c), then such Lender receiving such excess
payment shall purchase for cash without recourse or warranty from the other
Lenders an interest in the Obligations of the Borrower to such Lenders in such
amount as shall result in a proportional participation by all the Lenders in
such amount; provided further, however, that if all or any portion of such
excess amount is thereafter recovered from such Lender, such purchase shall be
rescinded and the purchase price restored to the extent of such recovery, but
without interest.
Section 9.13 Indemnification. The Borrower irrevocably agrees to and
------------ ---------------
does hereby indemnify and hold harmless Agent and each of the Lenders, their
agents or employees and each Person, if any, who controls any of the Agent and
the Lenders within the meaning of Section 15 of the Securities Act of 1933, as
amended, and each and all and any of them (the "Indemnified Parties"), against
any and all losses, claims, actions, causes of action, damages or liabilities
(including any amount paid in settlement of any action, commenced or threatened
and any amount described in Section 8.4) (collectively, the "Damages"), joint or
several, to which they, or any of them, may become subject under statutory law
or at common law, and to reimburse the Indemnified Parties for any legal or
other out-of-pocket expenses reasonably incurred by it or them in connection
with investigating, preparing for or defending against any of the Indemnified
Parties, insofar as such losses, claims, damages, liabilities or actions arise
out of or are related to any act or omission of the Borrower and/or any
Subsidiary with respect to this Agreement, any of the Notes, any of the Loans
and/or any offering of securities by the Borrower and/or any Subsidiary after
the date hereof and/or in connection with the Securities and Exchange Act of
1933 and/or failure to comply with any applicable federal, state or foreign
governmental law, rule, regulation, order or decree, including without
limitation, any Damages which arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact with respect to
matters relative to any of the foregoing contained in any document distributed
in
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connection therewith, or the omission or alleged omission to state in any of the
foregoing a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, but excluding
any Damages to the extent arising from or due to the gross negligence or willful
misconduct of any of the Indemnified Parties.
Promptly upon receipt of notice of the commencement of any action, or
information as to any threatened action against any of the Indemnified Parties
in respect of which indemnity or reimbursement may be sought from the Borrower
on account of the agreement contained in this Section 9.13, notice shall be
given to the Borrower in writing of the commencement or threatening thereof,
together with a copy of all papers served, but the omission so to notify the
Borrower of any such action shall not release the Borrower from any liability
which it may have to such Indemnified Parties unless, and only to the extent
that, such omission materially prejudiced Borrower's ability to defend against
such action.
In case any such action shall be brought against any of the
Indemnified Parties, the Borrower shall be entitled to participate in (and, to
the extent that it shall wish, to select counsel and to direct) the defense
thereof at its own expense. Any of the Indemnified Parties shall have the right
to employ its or their own counsel in any case, but the fees and expenses of
such counsel shall be at the expense of such Indemnified Party unless the
employment of such counsel shall have been authorized in writing by the Borrower
in connection with the defense of such action or the Borrower shall not have
employed counsel to have charge of the defense of such action or such
Indemnified Party shall have received an opinion from an independent counsel
that there may be defenses available to it which are different from or
additional to those available to the Borrower (in which case the Borrower shall
not have the right to direct the defense of such action on behalf of such
Indemnified Party), in any of which events the same shall be borne by the
Borrower. If any Indemnified Party settles any claim or action with respect to
which the Borrower has agreed to indemnify such Indemnified Party pursuant to
the terms hereof, the Borrower shall have no liability pursuant to this Section
9.13 to such Indemnified Party with respect to such claim or action unless the
Borrower shall have consented in writing to the terms of such settlement.
The provisions of Section 9.13 shall be effective only to the fullest
extent permitted by law.
Section 9.14 Governing Law. This Agreement and each Note shall be
------------ -------------
governed by, and construed in accordance with, the laws of the Commonwealth of
Massachusetts without regard to its conflict of laws rules.
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Section 9.15 Severability of Provisions. Any provision of this
------------ --------------------------
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 9.16 Headings. Article and Section headings in this
------------ --------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 9.17 Counterparts. This Agreement may be executed and
------------ ------------
delivered in any number of counterparts each of which shall be deemed an
original, and this Agreement shall be effective when at least one counterpart
hereof has been executed by each of the parties hereto.
Section 9.18 Release. Upon the payment in full of all obligations
------------ -------
and liabilities under this Agreement and the Loan Documents, this Agreement
shall be terminated and the Lender shall release its security in any property of
the Borrower or its Subsidiaries.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as a sealed instrument by their respective officers thereunto duly
authorized, as of August 24, 1998.
In the presence of: THE INTERNATIONAL CORNERSTONE
GROUP, INC.
[SIGNATURE ILLEGIBLE] By: /s/ Mark Fasold
- ------------------------- ------------------------------
Mark Fasold, Executive Officer
and Chief Financial Officer
In the presence of: FLEET NATIONAL BANK, as Agent for
itself and other Lenders and as a
Lender
/s/ Leslie Muldowney By: /s/ Michael A. Palmer
- ------------------------- ------------------------------
Michael A. Palmer, Vice President
STAR BANK, N.A.
/s/ Leslie Muldowney By: [SIGNATURE ILLEGIBLE]
- ------------------------- ------------------------------
Its: Assistant Vice President
NATIONSBANK
By: [SIGNATURE ILLEGIBLE]
- ------------------------- ------------------------------
Its: Senior Vice President
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AMENDMENT NO. 1 TO
THIRD AMENDED AND RESTATED LOAN AGREEMENT
This Amendment No. 1 to Third Amended and Restated Loan Agreement is
entered into as of September 29, 1998, by and among THE CORNERSTONE BRANDS
GROUP, INC., f/k/a The International Cornerstone Group, Inc., a Delaware
corporation ("TCBGI") and CORNERSTONE BRANDS, INC. ("CB") (TCBGI and CB are
-----
collectively, the "Borrower"), the financial institutions from time to time
--------
party to this Agreement (the "Lenders"), and FLEET NATIONAL BANK, a national
-------
banking association organized under the laws of the United States, as agent for
itself and the other Lenders (the "Agent," or, in its individual capacity,
-----
"Fleet").
- ------
WHEREAS, the Borrower, the Lenders, and the Agent entered into that
certain Third Amended and Restated Loan Agreement dated as of August 24, 1998,
(as the same may be amended from time to time, the "Loan Agreement").
--------------
Capitalized terms used herein and not otherwise defined shall have the meanings
specified in the Loan Agreement.
WHEREAS, The International Cornerstone Group, Inc. changed its name to The
Cornerstone Brands Group, Inc.;
WHEREAS, TCBGI effected a reorganization in which TCBGI became a wholly-
owned subsidiary of Cornerstone Brands, Inc., and all of the stockholders of
TCBGI exchanged their stock for an equal number of shares of CB stock, and CB
became the sole member of Smith & Noble,LLC, a Delaware limited liability
company (the "Reorganization").
WHEREAS, as a result of CB now owning all of the stock of TCBGI, and being
the sole member of Smith & Noble, LLC, the Lender has required that CB join the
Loan Agreement as a Co-Borrower with TCBGI.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree that the Loan Agreement is
hereby amended as follows:
1. The term "Borrower" as used in and throughout the Loan Agreement shall mean,
collectively and separately, The Cornerstone Brands Group, Inc., f/k/a The
International Cornerstone Group, Inc. and Cornerstone Brands, Inc., each a
Delaware corporation with a mailing address at 415 Congress Street, Suite 600,
Portland, Maine 04101.
2. For any notice purposes required under the Loan Agreement, notice to the
Borrower shall be addressed and delivered to each Borrowing entity at:
415 Congress Street, Suite 600
Portland, Maine 04101
Attention: Mark Fasold, Chief Financial Officer
Telephone: (207) 780-6585
Telecopy: (207) 780-1940
1
<PAGE>
3. This Amendment shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts. All parts of the Loan Agreement not
affected by this Amendment are hereby ratified and affirmed in all respects,
provided that if any provision of the Loan Agreement shall conflict or be
- -------- ----
inconsistent with this Amendment, the terms of this Amendment shall supersede
and prevail. Upon and after the date of this Amendment all references to the
Loan Agreement in that document, or in any Financing Document, shall mean the
Loan Agreement as amended by this Amendment. Except as expressly provided in
this Amendment, the execution and delivery of this Amendment does not and will
not amend, modify or supplement any provision of, or constitute a consent to or
a waiver of any noncompliance with the provisions of the Loan Agreement; except
that noncomplaince, if any, with theterms of the Loan Agreement that has arisen
solely in connection with the Reorganization is hereby consented to, and any
rights or remedies arising in connection with and limitd to such noncomplilance
is hereby waived provided, and, except as specifically provided in this
amendment, the Loan Agreement shall remain in full force and effect. This
waiver is limited to the above-referenced covenant defaults only and is notk nor
shall it be construed as, a waiver of any other default under the Credit
Agreement, now existing or hereafater occurring, nor shall anything herein or
Fleet's actions hereunder be construed so as to imply that Fleet has agreed, or
is obligated, to grant any future waivers under the Credit Agreement. This
Amendment does not revoke or otherwise affect any waiver or consent previously
granted by the Lender with respect to the obligations of the Borrower or the
Eligible Subsidiaries under the Financing Documents.
4. This Amendment may be executed in one or more counterparts, each of which
when so executed and delivered shall be deemed to be an original and all of
which taken together shall constitute but one and the same agreement. Delivery
of an executed counterpart of a signature page to this Amendment by telecopier
shall be effective as delivery of a manually executed counterpart of this
Amendment.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as a sealed instrument by their respective officers thereunto duly
authorized, as of September 29, 1998
In the presence of: THE CORNERSTONE BRANDS GROUP, INC.
f/k/a The International Cornerstone
Group, Inc.
/s/ Kelly Prucnal /s/ Mark Fasold
_________________________ By: _______________________________________
Name: Mark Fasold
Title: Executive Officer and Chief Financial
Officer
In the presence of: CORNERSTONE BRANDS, INC.
/s/ Kelly Prucnal /s/ Mark Fasold
_________________________ By: ______________________________________
Name: Mark Fasold
Title: Executive Vice Presidsent, Chief
Financial Officer, Treasurer
and Secretary
In the presence of: FLEET NATIONAL BANK, as Agent for
itself and other Lenders and as a Lender
/s/ Luanne Smith /s/ Michael A. Palmer
_________________________ By: ______________________________________
Name: Michael A. Palmer
Title: Vice President
STAR BANK, N.A.
/s/ Luanne Smith [signature illegible]
_________________________ By: ______________________________________
Name:
Title: Vice President
NATIONSBANK
/s/ Luanne Smith [signature illegible]
___________________________ By:___________________________________
Name:
Title: Senior Vice President
3
<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 Wholly-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
October 27, 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
October 27, 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
October 27, 1998
