<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1998
REGISTRATION NO. 333-65029
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM SB-2
ON
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
U.S. REMODELERS, INC.
(Exact name of registrant as specified in its charter)
---------------
1798 75-2686765
DELAWARE (Primary Standard Industrial (I.R.S. Employer
(State of incorporation) Classification Code Number) Identification No.)
---------------
1341 W. MOCKINGBIRD MURRAY H. GROSS
LANE, SUITE 900E U.S. REMODELERS, INC.
DALLAS, TEXAS 75247 1341 W. MOCKINGBIRD, SUITE 900E
(214) 267-2000 DALLAS, TEXAS 75247
(Address and telephone number of (214) 267-2000
registrant's principal executive (Name, address and telephone number
offices) of agent for service)
---------------
Copies of communications to:
CHARLES D. MAGUIRE, JR., ESQ. JAKES JORDAAN, ESQ.
JACKSON WALKER L.L.P. JORDAAN & PENNINGTON, PLLC
901 MAIN STREET, SUITE 6000 300 CRESCENT COURT, SUITE 1605
DALLAS, TEXAS 75202 DALLAS, TEXAS 75201
PHONE NO. (214) 953-5850 PHONE NO. (214) 871-6550
FAX NO. (214) 953-5822 FAX NO. (214) 871-6560
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
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, please check the following box. [ ]
---------------
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==============================================================================================================
PROPOSED PROPOSED
TITLE OF EACH MAXIMUM MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED BE REGISTERED PER SECURITY(1) OFFERING PRICE(1) FEE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units(2)............................ 1,610,000 $5.125 $ 8,251,250 $2,500.13
- --------------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share(3)................... 1,610,000 $ 5.00 $ 8,050,000 (3)
- --------------------------------------------------------------------------------------------------------------
Redeemable Common Stock
Purchase Warrants(3)(9)............. 1,610,000 $0.125 $ 201,250 (3)
- --------------------------------------------------------------------------------------------------------------
Common Stock, issuable under
Redeemable Common Stock Purchase
Warrants(4)(9)...................... 1,610,000 $ 6.25 $10,062,500 $3,048.94
- --------------------------------------------------------------------------------------------------------------
Representative's
Warrants(5)(9)...................... 140,000 $.0007 $ 100 $ 0.03
- --------------------------------------------------------------------------------------------------------------
Units underlying
Representative's Warrants........... 140,000 $ 6.15 $ 861,000 $ 260.91
- --------------------------------------------------------------------------------------------------------------
Common Stock included in Units
issuable under the Representative's
Warrants(6)......................... 140,000 (6) (6) (6)
- --------------------------------------------------------------------------------------------------------------
Redeemable Common Stock
Purchase Warrants included in the
Units issuable under the
Representative's Warrants(7)........ 140,000 (7) (7) (7)
- --------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
exercise of the Redeemable
Common Stock Purchase Warrants
included in the Units issuable
under the Representative's
Warrants(8)......................... 140,000 $ 6.25 $ 875,000 $ 265.15
- --------------------------------------------------------------------------------------------------------------
Total..................................................................................... $6,075.16(10)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purposes of calculating the amount of the
registration fee pursuant to Rule 457 under the Securities Act of 1933, as
amended.
(2) Includes an aggregate of 1,610,000 shares of Common Stock and 1,610,000
Redeemable Common Stock Purchase Warrants (the "Warrants") to be offered to
the public in 1,610,000 units (the "Units"), and includes 210,000 Units
which may be purchased by the Underwriters to cover over-allotments, if
any.
(3) Included in the Units. No additional registration fee is required.
(4) Represents shares of Common Stock issuable upon exercise of the Warrants
registered hereby together with such additional indeterminate number of
shares as may be issued upon exercise of such Warrants by reason of the
anti-dilution provisions contained therein.
(5) Representative's Warrants to purchase up to 140,000 Units consisting of an
aggregate of 140,000 shares of Common Stock and 140,000 Warrants.
(6) Represents shares of Common Stock included in the Units issuable upon
exercise of the Representative's Warrants, together with such additional
indeterminate number of shares of Common Stock as may be issued upon
exercise of such Representative's Warrants by reason of the anti-dilution
provisions contained therein.
(7) Represents Warrants to purchase 140,000 shares of Common Stock included in
the Units issuable upon exercise of the Representative's Warrants.
(8) Represents 140,000 shares of Common Stock issuable upon exercise of the
Warrants included in the Units issuable upon exercise of the
Representative's Warrants.
(9) Pursuant to Rule 416 of the Securities Act of 1933, as amended, no separate
registration fee is required as the Common Stock underlying the Warrants is
being registered in the same registration statement.
(10) The amount of $6,075.16 was previously paid.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
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 NOVEMBER 12, 1998
U.S. REMODELERS, INC.
1,400,000 UNITS
EACH UNIT COMPRISED OF ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
U.S. Remodelers, Inc., a Delaware corporation (the "Company"), hereby
offers 1,400,000 units (the "Units"), with each Unit consisting of one share of
common stock, $.01 par value per share (the "Common Stock"), and one Redeemable
Common Stock Purchase Warrant (the "Warrants") (the "Offering"). The Units, the
shares of Common Stock and the Warrants offered hereby are sometimes hereinafter
collectively referred to as the "Securities". The shares of Common Stock and
the Warrants included in the Units may not be traded separately until
_______________, 199__ (90 days from the date of this Prospectus), or on such
earlier date (the "Separation Date"), as may be determined by First London
Securities Corporation, as representative (the "Representative") of the
companies underwriting this Offering (the "Underwriters"). The Warrants will
not be detachable from the Units and may not be traded separately until the
Separation Date. The Company anticipates the Units will be offered to the
public at approximately $5.125 per Unit or $5.00 per share of Common Stock and
$0.125 per Warrant. Each Warrant entitles the holder thereof to purchase one
share of Common Stock at a price of $6.25 per share during the five year period
commencing on the date of this Prospectus. The Warrants are redeemable by the
Company for $.05 per Warrant on not less than 30 nor more than 60 days written
notice if the closing price of the Common Stock for seven trading days during a
10 consecutive trading day period ending not more than 15 days prior to the date
that the notice of redemption is mailed equals or exceeds $8.75 per share. Any
redemption of the Warrants during the one-year period commencing on the date of
this Prospectus shall require the written consent of the Representative. See
"Description of Securities."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE SECURITIES OFFERED HEREBY, INCLUDING, WITHOUT LIMITATION, A
RISK THAT THIS PROSPECTUS MAY NOT BE CURRENT DURING THE EXERCISE PERIOD OF THE
WARRANTS.
------------------------------
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.
==============================================================================
PRICE UNDERWRITING DISCOUNTS PROCEEDS TO
TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------
Per Unit.......... $__________ $__________ $__________
- ------------------------------------------------------------------------------
Total(3).......... $__________ $__________ $__________
==============================================================================
(1) Does not include compensation to the Representative in the form of (i) a 3%
non-accountable expense allowance, $60,000 of which has previously been
paid, and (ii) warrants to purchase up to 140,000 Units exercisable at 120%
of the price per Unit offered hereby (the "Representative's Warrants"). The
Representative's Warrants are exercisable for a four-year period commencing
one year from the date of closing of the Offering. In addition, the Company
has granted certain registration rights with respect to the registration of
the shares of Common Stock and the Warrants underlying the Representative's
Warrants (the "Underlying Warrants") and the shares of Common Stock issuable
upon exercise of the Underlying Warrants. The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Description of Securities -- Representative's Warrants" and
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $473,200, including the non-accountable expense allowance.
(3) The Company has granted the Underwriters a 45-day over-allotment option to
purchase up to 210,000 additional Units on the same terms and conditions as
set forth above. If all such additional Units are purchased by the
Underwriters, the total Price to Public will be $_______________, the total
Underwriting Discounts and Commissions will be $_______________ and the
total Proceeds to the Company will be $_______________. See "Underwriting."
The Securities offered by this Prospectus are being offered by the
Underwriters named herein on a "firm commitment" basis subject to prior sale,
when, as and if accepted by the Underwriters, approval of certain legal matters
by counsel for the Underwriters and certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer without notice and
reject any order in whole or in part. It is expected that delivery of the
certificates representing the Securities will be made at the offices of First
London Securities Corporation, Dallas, Texas on or about ____________________,
199__.
FIRST LONDON SECURITIES CORPORATION
The Date of this Prospectus is , 1998
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a registration statement on Form SB-2, as amended
on Form S-1 (the "Registration Statement"), pursuant to the Securities Act with
respect to the Securities offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. THE STATEMENTS CONTAINED IN THIS PROSPECTUS AS TO THE
CONTENTS OF ANY CONTRACT OR OTHER DOCUMENT IDENTIFIED AS EXHIBITS IN THIS
PROSPECTUS ARE NOT NECESSARILY COMPLETE, AND IN EACH INSTANCE, REFERENCE IS MADE
TO A COPY OF SUCH CONTRACT OR DOCUMENT FILED AS AN EXHIBIT TO THE REGISTRATION
STATEMENT, EACH STATEMENT BEING QUALIFIED IN ANY AND ALL RESPECTS BY SUCH
REFERENCE. For information with respect to the Company and the Securities
offered hereby, reference is made to the Registration Statement and exhibits
which may be inspected without charge at the Commission's principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Upon consummation of this Offering, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934 (the "Exchange
Act") and in accordance therewith will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copies made at the public reference facilities
of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549; and at its
New York Regional Office, Room 1300, 7 World Trade Center, New York, New York
10048; and at its Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at prescribed rates. The Company's Registration Statement as well as
any reports to be filed under the Exchange Act can also be obtained
electronically after the Company has filed such documents with the Commission
through a variety of databases, including among others, the Commission's
Electronic Data Gathering, Analysis And Retrieval ("EDGAR") program, Knight-
Ridder Information, Inc., Federal Filings/Dow Jones and Lexis/Nexis.
Additionally, the Commission maintains a Website (at http://www.sec.gov) that
contains such information regarding the Company.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as the Company
deems appropriate or as may be required by law. Such requests may be directed
to Murray H. Gross, Chief Executive Officer, U.S. Remodelers, Inc., 1341 W.
Mockingbird Lane, Suite 900E, Dallas, Texas 75247, telephone number (214) 267-
2000.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE SECURITIES ON NASDAQ IN ACCORDANCE WITH RULE 103 OF
REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."
-2-
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated herein, the
financial, business activities, management and other pertinent information
herein relates on a consolidated basis to the Company and its predecessors.
Each prospective investor is urged to read this Prospectus in its entirety and
to particularly consider the information set forth under the heading "RISK
FACTORS." Unless otherwise indicated, all Common Stock share and per share data
and information in this Prospectus (i) have been adjusted to give effect to a
10-for-one stock split of the Company's Common Stock effective June 15, 1998,
effected in the form of a nine-for-one stock dividend, (ii) assume no exercise
of either the Warrants offered hereby or the Representative's Warrants, and
(iii) assume no exercise of the Underwriters' over-allotment option.
THE COMPANY
GENERAL. U.S. Remodelers, Inc. (the "Company") is engaged, through direct
consumer marketing, in the design, sale, manufacture and installation of kitchen
cabinet refacing products utilized in kitchen remodeling. Refacing is a kitchen
remodeling technique in which existing cabinetry framework is retained but all
exposed surfaces are changed. The Company presently operates in 13 major
metropolitan areas in the United States. The Company conducts a substantial
portion of its direct consumer marketing under the trademark and service mark
"CENTURY 21 Cabinet Refacing" under license agreements with TM Acquisition Corp.
("TM") and HFS Licensing Inc. ("HFS") pursuant to a master license agreement
between Century 21 Real Estate Corporation and each of TM and HFS. Both
agreements give the Company the right to market, sell and install kitchen
cabinet refacing products in specific territories under the trademark and
service mark "CENTURY 21 Cabinet Refacing." The Company also conducts its
business under the name "Facelifters." In addition to marketing, selling and
installing cabinet refacing, the Company has plans to market, sell and install
replacement kitchens. To satisfy the demands of its customers, the Company
anticipates developing, marketing and selling additional home improvement
products and services, including but not limited to, replacement windows and
other home improvement products. See "Business."
INDUSTRY. According to industry publications, spending for kitchen
remodeling is expected to exceed $30 billion in 1998 -- an increase from $25
billion in 1997 and $18 billion in 1991 -- with approximately 4.65 million
kitchens expected to be remodeled in 1998, an 8.1% increase over 1997. Of the
expected $30 billion in kitchen remodeling spending, approximately $14.4 billion
is expected to be spent on remodeling jobs costing under $5,000 and
approximately $11.5 billion is expected to be spent on remodeling jobs costing
between $5,000 and $15,000. Based upon industry publications, the Company
believes the continued projected growth of kitchen remodeling is principally due
to three factors: (1) an expected consistent rate of existing home sales, (2)
an aging baby boomer market and (3) kitchen remodeling continues to offer the
homeowner a significantly better cost recoupment upon sale than other home
improvement projects. Households in which the homeowners are age 40 or older
account for approximately 60% of kitchen remodeling projects.
MARKET POSITIONING. The Company operates in a niche segment of the kitchen
remodeling industry known as cabinet refacing, and the Company believes that it
is the largest single seller of cabinet refacing in the United States. The
Company has sales and installation centers located in 13 of the 20 largest
metropolitan areas in the United States. The Company provides its customers with
a full range of services including in-home design, product installation, access
to third-party financing and after sale service. The Company also manufactures
almost all of the components used in its kitchen refacing business in its own
factory. The Company intends to expand its existing business lines to become a
full service kitchen updating business by also offering replacement kitchens to
primarily middle market customers who intend to spend between $5,000 and $15,000
on updating their kitchen.
BUSINESS STRATEGY. The Company's business objective is to become a leader
in the replacement kitchen market, primarily in the mid-range price level. To
achieve this objective, the Company intends to implement a business strategy
comprised of the following elements (see "Business -- Business Strategy"):
. Provide Superior Customer Service
. Leverage Existing Expertise and Infrastructure
. Increase Customer Penetration and Product Offerings
. Enter into New Geographic Markets
. Develop and Incorporate New Technology
. Implement Internet Initiatives
. Pursue Acquisition Opportunities
-3-
<PAGE>
BACKGROUND. The Company was organized on January 23, 1997 under the laws
of the State of Delaware. On January 27, 1997, the Company entered into an
interim operating agreement (the "Operating Agreement") with AMRE, Inc. and
Facelifters Home Systems, Inc. ("Facelifters"), a wholly-owned subsidiary of
AMRE, Inc. (collectively, "AMRE"), subsequent to the date that AMRE filed for
protection under Chapter 11 of the United States Bankruptcy Code ("Chapter 11").
Under the terms of the Operating Agreement, the Company (i) leased certain
operating facilities and equipment and purchased certain raw materials for the
purpose of establishing the business of the Company and (ii) received from AMRE
a prospective customer list which included certain of AMRE's customers who had
entered into contracts with AMRE for kitchen cabinet refacing services that
could not be completed because of the Chapter 11 proceeding. The Operating
Agreement obligated the Company to pay a fee to AMRE for any revenues it derived
from use of the customer list. On February 12, 1997, AMRE and the Company
entered into an agreement for the purchase of certain selected operating assets
related to AMRE's kitchen cabinet refacing business (the "Purchase Agreement").
Effective April 3, 1997, the Company consummated the transaction contemplated by
the Purchase Agreement by acquiring selected operating assets from approximately
11 of AMRE's former sales offices and by assuming certain other agreements and
lease obligations related to machinery, equipment, facilities and real property
related to the Company's business operations.
Effective November 23, 1997, the Company also purchased certain assets of
Reunion Home Services, Inc. and Kitchen Master, Inc. (collectively "Reunion"),
manufacturers, marketers and installers of kitchen cabinet refacing products and
kitchen cabinet doors. Similar to the Company, but in separate transactions
from those between the Company and AMRE, Reunion, prior to completing its
transaction with the Company, entered into an interim operating agreement with
AMRE, after AMRE filed for protection under Chapter 11, with terms similar to
those found in the Operating Agreement. Effective April 3, 1997, Reunion also
acquired certain selected operating assets of AMRE. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
The principal executive offices of the Company are located at 1341 W.
Mockingbird Lane, Suite 900E, Dallas, Texas, 75247, telephone number (214) 267-
2000.
THE OFFERING
SECURITIES OFFERED
Units.................. 1,400,000 Units, each Unit consisting of one share
of Common Stock and one Warrant to purchase one
share of Common Stock. See"Description of
Securities -- Units."
Common Stock........... 1,400,000 shares, par value $.01 per share
(included in the Units). See "Description of
Securities -- Common Stock."
Warrants............... 1,400,000 Warrants (included in the Units). Each
Warrant entitles the holder thereof to purchase,
after the Separation Date, one share of Common
Stock at a price of $6.25 per share, subject to
certain adjustments, until ____________________,
200__ (60 months from the date of this Prospectus).
The Company is entitled to redeem the Warrants for
$.05 per Warrant upon not less than 30 nor more
than 60 days written notice if the closing price of
the Common Stock for seven trading days during a 10
consecutive trading day period ending not more than
15 days prior to the date that the notice of
redemption is mailed equals or exceeds $8.75 per
share. Any redemption of the Warrants during the
one-year period commencing on the date of this
Prospectus shall require the written consent of the
Representative. Warrant holders may exercise their
Warrants
-4-
<PAGE>
between the date of the notice of redemption and
the redemption date. See "Description of
Securities --Redeemable Common Stock Purchase
Warrants."
OUTSTANDING SECURITIES(1)
Securities to be
Securities Outstanding
Presently Upon Completion
Outstanding of the Offering
----------- ----------------
Units..................... -0- 1,400,000
Common Stock.............. 2,500,000 3,900,000
Series A Preferred Stock.. 80,000 80,000
Warrants.................. -0- 1,400,000
ESTIMATED NET PROCEEDS TO
COMPANY..................... Approximately $5,984,300 if the 1,400,000 Units are
sold, and $6,920,637 if the over-allotment option
is fully exercised. See "Use of Proceeds."
USE OF PROCEEDS............. To implement the Company's business strategy, for
acquisitions and for working capital purposes. See
"Use of Proceeds" and "Business."
RISK FACTORS................ Purchasers of the Units offered hereby should
consider carefully the risk factors under the
heading "Risk Factors."
PROPOSED TRADING SYMBOLS(2) Nasdaq Boston
SmallCap Stock
Market Exchange
------ --------
Units....................... USRIU URMU
Common Stock................ USRI URM
Warrants.................... USRIW URMW
- ------------------
(1) Unless otherwise indicated herein, the information contained in this
Prospectus regarding the Company's outstanding securities does not include:
(i) 210,000 Units to be issued upon exercise of the Underwriter's over-
allotment option or the 210,000 shares of Common Stock and 210,000 Warrants
included in such Units; (ii) the 140,000 Units issuable upon exercise of the
Representative's Warrants and the 140,000 shares of Common Stock and 140,000
Underlying Warrants reserved for issuance and constituting a part of the
Units issuable upon exercise of the Representative's Warrants; or (iii) the
remaining 1,500,000 shares of Common Stock reserved for issuance under the
1998 Stock Option Plan. See "Management," "Principal Stockholders,"
"Description of Securities" and "Underwriting."
(2) The Company has made application to list the Securities on the Nasdaq
SmallCap Market and the Boston Stock Exchange. The inclusion of the
proposed trading symbols in this Prospectus Summary is not meant to imply
that a trading market may someday exist for the Securities offered hereby or
that the aforementioned symbols will be assigned to such Securities.
-5-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary financial data of the Company on a
consolidated basis as of December 31, 1997 and September 30, 1998 and 1997,
respectively. This information has been derived from the Company's audited
financial statements for the periods ended December 31, 1997 and September 30,
1998, and its unaudited financial statements for the period ended September 30,
1997, respectively, included elsewhere in this Prospectus. The Company's
unaudited proforma financial information for the periods ended December 31, 1997
and September 30, 1997 reflects the acquisition of selected assets from Reunion
as if it had occurred at the beginning of the period. The unaudited proforma
financial results are not necessarily indicative of the actual results of
operations that would have occurred had the purchase actually been made at the
beginning of the period, nor is it necessarily indicative of future results of
operations of the combined enterprises. The summary financial information should
be read in conjunction with "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the notes
thereto appearing elsewhere in this Prospectus. This financial information does
not purport to be indicative of the financial position or results of operations
that may be obtained in the future. See "Prospectus Summary -- Background."
<TABLE>
<CAPTION>
(Unaudited)
(Unaudited) Proforma
Nine Months Nine Months Nine Months
Period Ended Ended Ended Period Ended Ended
December 31, September 30, September 30, December 31, September 30,
SELECTED STATEMENT OF OPERATIONS DATA: 1997 1998 1997(1) 1997 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Contract revenues, net......................... $16,158,745 $21,146,566 $11,371,441 $23,395,301 $16,895,909
Cost of goods sold............................. 6,453,597 8,844,059 4,089,872 8,609,945 5,754,143
Operating expenses............................. 11,003,391 12,581,491 7,511,744 16,168,940 6,179,813
Loss from operations........................... (1,298,243) (278,984) (230,175) (1,383,584) (425,670)
Other expenses, net............................ 144,132 (71,271) (87,718) 144,132 (87,718)
Provision for income taxes..................... 5,000 5,000 -- 5,000 --
Net loss....................................... (1,447,375) (355,255) (317,893) (1,532,716) (513,388)
Net loss per weighted-average share of common
stock outstanding -- basic and diluted........ $(.76) $(.19) $(.18) $(.80) $(.29)
Number of weighted-average shares of common
stock outstanding............................ 1,911,040 2,484,686 1,782,680 1,911,040 1,782,680
</TABLE>
<TABLE>
<CAPTION>
September 30,
December 31, September 30, 1998
SELECTED BALANCE SHEET DATA: 1997 1998 (As adjusted)(2)
------------ ------------- ----------------
<S> <C> <C> <C>
Current assets.......................... $1,981,750 $3,219,521 $ 9,203,821
Total assets............................ 4,708,424 5,929,567 11,913,867
Current liabilities..................... 2,190,501 3,294,257 3,294,257
Total liabilities....................... 4,297,094 5,917,166 5,917,166
Series A Preferred Stock (Redeemable)... 689,967 742,425 742,425
Stockholders' equity or (deficit)....... (278,637) (730,024) 5,254,276
Working capital (deficit)............... (208,751) (74,736) 5,909,564
</TABLE>
- ------------------------------
(1) The Company commenced operations on January 23, 1997. Tabular information
reflects statement of operations data for the period from inception through
September 30, 1997.
(2) Adjusted to give effect to the sale of 1,400,000 Units at an assumed initial
public offering price of $5.125 per Unit and the application of the net
proceeds therefrom. See "Use of Proceeds." No effect has been given to the
exercise of (i) the Warrants offered hereby or the Representative's Warrants
or (ii) the Underwriters' over-allotment option. See "Description of
Securities" and "Underwriting."
-6-
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. IN ANALYZING THE OFFERING MADE HEREBY, PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY, AMONG OTHER FACTORS, THE FOLLOWING ELEMENTS OF RISK
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
NEW BUSINESS ENTERPRISE. The Company's operations are subject to many of
the risks inherent in establishing a new business enterprise. The Company's
potential for success must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with
a new business. No assurances can be given that the Company will be successful.
If the Company is not successful, any investment in the Company may be
lost.
RISKS RELATING TO GROWTH AND EXPANSION. Although the Company believes that
the net proceeds from this Offering will allow the Company to achieve
implementation of its business strategies, there can be no assurance that the
Company will have sufficient funds or successfully achieve its plans to a level
that will have a positive effect on its results of operations or financial
condition. The ability of the Company to execute its growth strategy is
contingent upon sufficient capital as well as other factors, including market
acceptance of the Company's products, its ability to further increase consumer
awareness of its products by advertising, its ability to consummate acquisitions
of complimentary businesses, general economic and industry conditions, its
ability to recruit, train and retain a qualified sales staff, and other factors,
many of which are beyond the control of the Company. Even if the Company's
revenues and earnings grow rapidly, such growth may significantly strain the
Company's management and its operational and technical resources. If the Company
is successful in obtaining greater market penetration with its products, the
Company will be required to deliver increasing volumes of its products to its
customers on a timely basis at a reasonable cost to the Company. No assurance
can be given that the Company can meet increased product demand or that the
Company will be able to satisfy increased production demands on a timely and
cost-effective basis. There can be no assurance that the Company's growth
strategy will be successful, and if one or more of the component parts of the
Company's growth strategy is unsuccessful, there can be no assurance that such
lack of success will not have a material adverse effect on the Company's results
of operations or financial condition. See "Use of Proceeds" and "Business --
Business Strategy."
RISKS RELATING TO FUTURE ACQUISITIONS. One element of the Company's growth
strategy involves growth through the acquisition of other companies, assets or
product lines that would complement or expand the Company's business. The
Company's ability to grow by acquisition is dependent upon, and may be limited
by, the availability of suitable acquisition candidates and capital. Future
acquisitions by the Company could result in potentially dilutive issuances of
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and other intangible assets, which could materially
affect the Company's profitability. In addition, acquisitions involve risks
that could adversely affect the Company's operating results, including the
assimilation of the operations and personnel of acquired companies, and the
potential loss of key employees of acquired companies. There can be no
assurance that the Company will be able to consummate any acquisitions on
suitable terms. No commitments or binding agreements have been entered into to
date and there can be no assurance that acquisitions, if any, can be completed.
Other than as required by the Company's Certificate of Incorporation, Bylaws and
applicable laws, stockholders of the Company generally will not be entitled to
vote upon such acquisitions. See "Use of Proceeds" and "Business -- Business
Strategy."
MATERIAL CONTRACTS -- DEPENDENCE ON CENTURY 21 LICENSE AGREEMENT; CUSTOMER
FINANCING. The Company primarily markets its products directly to consumers
under license agreements with TM and HFS pursuant to the master license
agreement between Century 21 Real Estate Corporation and each of TM and HFS.
These license agreements provide for terms of 10 years ending in 2007 and give
the Company the right to market, sell and install kitchen cabinet refacing
products in specific territories under the trademark and service mark "CENTURY
21 Cabinet Refacing." In the event the license agreements were terminated,
management believes that these products could be independently marketed by the
Company in these territories; however, the cancellation of the license
agreements could have an adverse effect on the business of the Company,
including its financial condition and results of operations. See "Business."
The Company has an agreement with a financial institution which makes
financing available to the Company's customers. Approximately 65% of the
Company's customers finance their home improvement projects. There
-7-
<PAGE>
can be no assurance that the Company can continually offer customer financing
under the agreement or provide a suitable replacement program with similar
terms. Deterioration of consumer credit markets generally will likely result in
a tightening of the availability of consumer credit and the ability of customers
to obtain financing. The inability of customers to obtain financing or the
Company to provide comparable customer financing could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
ADDITIONAL FINANCING OPPORTUNITIES. In the event the Company should
require additional financing to satisfy working capital requirements or
implement its business strategy, there can be no assurance that additional
financing will be available, or if available, that such financing will be on
favorable terms. Any such failure to secure additional financing, if needed, or
otherwise maintain adequate liquidity could have a material adverse effect upon
the financial condition and results of operations of the Company. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Business Strategy."
SUBSTANTIAL INDEBTEDNESS; DEBT SERVICE CAPABILITY. The Company has a
substantial amount of long-term and short-term debt under its credit facilities
and its capitalized leases. There can be no assurance that the operations of
the Company will generate sufficient net income to service such debt. The
Company's leverage poses substantial risk in that it could limit the Company's
ability to respond to industry changes or economic downturns, as well as its
ability to satisfy its funding needs for operations or to raise debt or equity
capital. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RECRUITING SALES AND INSTALLATION PERSONNEL. In order to fulfill the
Company's growth expectations, the Company must recruit, hire, train and retain
qualified sales and installation personnel. Historically, during periods of
strong economic growth and low unemployment, the Company experiences greater
difficulty in fulfilling its personnel needs. In particular, when new
construction and remodeling are on the rise, recruiting of independent
contractors ("Contractors") to perform the Company's installations becomes more
difficult. There can be no assurance that the Company will have sufficient
Contractors to fulfill its installation requirements. The inability of the
Company to fulfill its personnel needs could have a material adverse effect on
the Company's ability to meet its growth expectations.
SEASONALITY. The Company's business is subject to seasonal fluctuations.
Extreme winter weather conditions can have an adverse effect on appointments and
installations. In addition, sales and revenues decline in the fourth quarter due
to the holiday season. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend to a large
degree on its ability to retain the services of its existing management and to
attract and retain qualified personnel as necessary in the future. To provide
for continuity of management, the Company has entered into employment agreements
with key management personnel. The loss of the services of any key management
personnel or the inability to recruit and retain qualified personnel in the
future could have a material adverse effect on the Company's business and
results of operations. The Company has purchased a key man life insurance
policy on the life of Murray H. Gross, the Company's President and Chief
Executive Officer. The policy has a death benefit of $2,000,000, with the
Company being entitled to receive $750,000 of the death benefit. The balance of
the death benefit is allocated $500,000 to a creditor of the Company and
$750,000 to a trust established by Mr. Gross. See "Management -- Executive
Compensation" and "Certain Relationships and Related Transactions."
COMPETITION. The Company operates in a highly fragmented industry.
Although the Company believes it is one of the largest enterprises engaged in
the direct marketing of in-home sales and installation of kitchen cabinet
refacing products, the Company competes with numerous contractors in each of the
territories in which it operates, with reputation, price, workmanship and
services being the principal competitive factors. The Company also competes
against retail chains, including Sears, Builders Square, Sams Warehouse Club and
other stores, which offer similar products and services through licensees. The
Company competes, to a lesser extent, with small home improvement contractors
and with large "home center" retailers such as Home Depot and Lowes. As a
result of the implementation of the Company's business strategy, the Company
anticipates that it will compete to a greater degree with large "home center"
retailers. See "Business -- Competition."
-8-
<PAGE>
GOVERNMENT REGULATIONS. The Company's operations are subject to a Federal
Trade Commission rule which provides for a "cooling off" period for in-home
sales. This rule requires an in-home seller to inform the buyer of his right to
cancel the transaction at any time prior to midnight of the third business day
after the date of the sales transaction. Many states have (but the states in
which the Company currently conducts business have not) supplemented this rule
by extending the time period in which the buyer may cancel. Generally, the
Company's activities and the activities of its direct sellers and contractors
are subject to various federal and state laws and regulations and municipal
ordinances relating to, among other things, in-home sales, consumer financing,
advertising, the licensing of home improvement contractors, and zoning
regulations. The Company has procedures designed to comply with such laws and
regulations; however, there can be no assurance that the Company's contractual
agreements or operations will not be successfully challenged for noncompliance
with such regulations and ordinances, and if successfully challenged, that such
challenge would not adversely effect the Company's business, financial condition
and results of operations. See "Business -- Government Regulations."
THE YEAR 2000 ISSUE. The year 2000 issue is the result of computer
programs using two digits rather than four to define the applicable year. Date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations, causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities. The Company does not believe that the year 2000 issue will have a
material effect on its network, computer systems or operations, however, it will
continue to assess the potential impact of the year 2000 issue. Any failure of
the Company to become year 2000 compliant on a timely basis could have a
material adverse effect on the Company's business, financial condition and
results of operations, including, without limitation, a complete failure or
degradation of the performance of the Company's network or other systems. To
the extent that the Company relies on external vendors and network providers
with year 2000 exposure, any failure by such third-party providers to resolve
any year 2000 issues on a timely basis or in a manner that is compatible with
the Company's systems could have a material adverse effect on the Company. The
Company is evaluating such providers in relation to the year 2000 issue, and
furthermore, the Company has no control over whether its third-party providers
are, or will be, year 2000 compliant. Any failure on the part of such third-
party providers to become year 2000 compliant on a timely basis or in a manner
that is compatible with the Company's systems could have a material adverse
effect on the Company. In the event the Company encounters year 2000 problems,
it would expect to take all necessary measures to address such problems. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
BROAD DISCRETION OVER USE OF PROCEEDS. After payment of the expenses of
this Offering, the Company intends to use approximately $3,500,000 for
implementation of its business strategy (58.5% of net proceeds), $1,000,000 for
acquisitions (16.7% of net proceeds) and $1,484,300 for working capital (24.8%
of net proceeds). Management will have broad discretion in allocating and
applying such proceeds and the Company's stockholders will not have an
opportunity to review or vote upon the terms of these unspecified expenditures.
See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchase price of the Common Stock
included in the Units substantially exceeds the net tangible book value of the
Common Stock presently outstanding. Purchasers of the Common Stock will
experience an immediate substantial dilution in the net tangible book value per
share of the Common Stock after this Offering in the amount of $3.69 per share
or 74% of the price per share of Common Stock paid by the investors in this
Offering (assuming an offering price of $5.00 per share of Common Stock). See
"Dilution."
RETENTION OF CONTROL. The Company's officers, directors and principal
stockholders beneficially will own approximately 55% of the outstanding shares
of the Company's Common Stock at the completion of the Offering. As a result,
the officers, directors and principal stockholders of the Company will have the
ability to control the day-to-day affairs and the fundamental policies of the
Company. Voting together, such stockholders, including the officers and
directors of the Company, could possibly block any major corporate transactions,
such as a merger or sale of substantially all of the Company's assets, that
under Delaware law requires the affirmative vote of holders of a majority of the
outstanding shares of Common Stock of the Company. See "Management" and
"Principal Stockholders."
ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation and
Bylaws contain provisions that may have the effect of discouraging certain
transactions involving an actual or threatened change of control of the Company.
In addition, the Board of Directors of the Company has the authority to issue up
to 100,000 shares of
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<PAGE>
preferred stock in one or more series and to fix the preferences, rights and
limitations of any such series without stockholder approval. The ability to
issue preferred stock could have the effect of discouraging unsolicited
acquisition proposals or making it more difficult for a third party to gain
control of the Company, or otherwise could adversely affect the market price of
the Common Stock. The Company does not currently have any plans, arrangements,
commitments or understandings to issue any additional shares of preferred stock.
See "Description of Securities."
DIVIDEND POLICY. The Company has not paid cash dividends with respect to
its Common Stock, and does not anticipate any such payments or declarations in
the foreseeable future. Any future dividends will be declared at the discretion
of the Board of Directors of the Company and will depend, among other things, on
the Company's earnings, if any, its financial requirements for future operations
and growth, restrictive covenants under the Company's credit agreements and such
other factors as the Company may then deem appropriate. Investors should not
rely on the receipt of dividends in the near future or at any time in the future
when evaluating the merits of an investment in the Securities. See "Dividend
Policy, "Description of Securities -- Preferred Stock" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market following the completion of the Offering could have
an adverse effect on the market price of the Common Stock. There will be
approximately 3,900,000 shares of Common Stock outstanding immediately after the
Offering. Upon completion of the Offering, all of the shares of Common Stock
offered hereby will be eligible for public sale without restrictions, except for
shares purchased by affiliates (those controlling or controlled by or under
common control with the Company and generally deemed to include officers and
directors) of the Company. The remaining approximately 2,500,000 shares of the
Company's Common Stock are "restricted securities" as that term is defined under
Rule 144 promulgated under the Securities Act. Subject to the volume and
holding period limitations of Rule 144, approximately 2,100,750 outstanding
shares of Common Stock are eligible for sale under Rule 144 after the completion
of the Offering. None of the Company's currently outstanding restricted
securities are eligible for sale under Rule 144(k). No prediction can be made
as to the effect, if any, that future sales of additional shares of Common Stock
or the availability of such shares for sale under Rule 144, other applicable
exemptions or otherwise will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market, or the perception that such sales could occur, could
adversely affect prevailing market prices of the Common Stock. See "Principal
Stockholders" and "Shares Eligible for Future Sale."
EXERCISE OF REPRESENTATIVE'S WARRANTS. In connection with this Offering,
the Company will sell to the Representative, for nominal consideration, warrants
(the "Representative's Warrants") to purchase an aggregate of 140,000 Units.
The Representative's Warrants will be exercisable commencing one year after the
closing date of this Offering and ending four years after such date at an
exercise price of 120% of the price per Unit. The terms of the Underlying
Warrants shall be the same as those Warrants offered to the public. The holders
of the Representative's Warrants will have the opportunity to profit from a rise
in the market price of the Securities, if any, without assuming the risk of
ownership. At any time when the holders of the Representative's Warrants might
be expected to exercise them, the Company may be able to obtain additional
equity capital on terms more favorable than those provided by the
Representative's Warrants. The Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Representative's Warrants are outstanding. To the extent that any of
the Representative's Warrants are exercised, the ownership interest of the
Company's stockholders may be diluted. The Company also has granted
registration rights to the Representative with respect to the 140,000 shares of
the Common Stock, the 140,000 Underlying Warrants and the 140,000 shares of
Common Stock issuable upon exercise of the 140,000 Underlying Warrants. See
"Description of Securities -- Representative's Warrants" and "Underwriting."
IMPACT ON MARKET OF WARRANT EXERCISE. In the event of the exercise of a
substantial number of the Warrants offered hereby, within a reasonably short
period of time after the right to exercise commences, the resulting increase in
the number of shares of Common Stock of the Company in the trading market could
substantially affect the market price of the Common Stock. See "Description of
Securities -- Redeemable Common Stock Purchase Warrants."
ADJUSTMENTS TO OUTSTANDING WARRANTS EXERCISE PRICE AND EXERCISE DATE. The
Company, in its sole discretion, may reduce the exercise price of the Warrants
offered hereby, and/or extend the time within which such Warrants may first be
exercised. Further, in the event the Company issues certain securities or makes
certain distributions to holders of its Common Stock, the exercise price of such
Warrants may be reduced. Any such price reduction in the exercise price of
outstanding Warrants will provide less money for the Company and possibly
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<PAGE>
adversely affect the market price of the Securities. See "Description of
Securities -- Redeemable Common Stock Purchase Warrants."
REDEMPTION OF WARRANTS. Any redemption of the Warrants during the one-year
period commencing on the date of this Prospectus shall require the written
consent of the Representative. Warrant holders may exercise their Warrants
between the date of the notice of redemption and the redemption date. In the
event a current prospectus is not available, the Warrants may not be exercised
and the Company will be precluded from redeeming the Warrants. If holders of the
Warrants elect not to exercise them upon notice of redemption thereof, and the
Warrants are subsequently redeemed prior to exercise, the holders thereof will
lose the benefit, if any, of the difference between the market price of the
underlying Common Stock as of such date and the exercise price of such Warrants,
as well as any possible future price appreciation in the Common Stock. As the
result of an exercise of the Warrants, existing stockholders would be diluted
and the market price of the Common Stock may be adversely affected. If a
Warrant holder fails to exercise his rights under the Warrants prior to the date
set for redemption, then the Warrant holder will be entitled to receive only the
redemption price, $0.05 per Warrant. See "Description of Securities --
Redeemable Common Stock Purchase Warrants" and "Shares Eligible for Future
Sale."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION WITH THE
EXERCISE OF THE WARRANTS. The Company will be able to issue shares of its Common
Stock upon the exercise of the Warrants only if (i) there is a current
prospectus relating to the Common Stock issuable upon exercise of the Warrants
under an effective registration statement filed with the Commission and (ii)
such Common Stock is then qualified for sale or exempt therefrom under
applicable state securities laws of the jurisdiction in which the various
holders of Warrants reside. Although the Company has undertaken to use its best
efforts to maintain the effectiveness of a current prospectus covering the
Common Stock subject to the Warrants offered hereby, there can be no assurance
that the Company will be successful in doing so. After a registration statement
becomes effective, it may require continuous updating by the filing of post-
effective amendments. A post-effective amendment is required (i) when, for a
prospectus that is used more than nine months after the effective date of the
registration statement, the information contained therein (including the
certified financial statements) is as of a date more than 16 months prior to the
use of the prospectus, (ii) when facts or events have occurred which represent a
fundamental change in the information contained in the registration statement,
or (iii) when any material change occurs in the information relating to the plan
of distribution of the securities registered by such registration statement.
The Company anticipates that this Registration Statement will remain effective
for a least nine months following the date of this Prospectus, assuming a post-
effective amendment is not filed by the Company. The Company intends to qualify
the sale of the Securities in a limited number of states, although certain
exemptions under certain state securities laws may permit the Warrants to be
transferred to purchasers in states other than those in which the Warrants were
initially qualified. The Company will be prevented, however, from issuing
Common Stock upon exercise of the Warrants in those states where exemptions are
unavailable and the Company has failed to qualify the Common Stock issuable upon
exercise of the Warrants. The Company may decide not to seek, or may not be
able to obtain qualification of the issuance of such Common Stock in all of the
states in which the ultimate purchasers of the Warrants reside. In such case,
the Warrants of those purchasers will expire and have no value if such Warrants
cannot be exercised or sold. Accordingly, the market for the Warrants may be
limited because of the foregoing requirements. See "Description of Securities -
- - Redeemable Common Stock Purchase Warrants."
NO ASSURANCE OF ACTIVE PUBLIC MARKET; POSSIBLE VOLATILITY OF UNITS.
Although the Company has made application to list the Units, Common Stock and
Warrants on the Nasdaq SmallCap Market and the Boston Stock Exchange, there can
be no assurance that an active public market for the Units, Common Stock or the
Warrants will develop or be sustained after the Offering. The offering price of
the Securities offered hereby has been determined by negotiations between the
Company and the Representative. The trading price of the Securities could be
subject to wide fluctuations in response to quarter to quarter variations in
operating results, announcements of innovations or new products by the Company
or its competitors, and other events or factors. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations which
affects the market price of securities of publicly traded companies and which
have often been unrelated to the operating performance of these companies.
Broad market fluctuations may adversely affect the market price of the
Securities. See "Description of Securities," "Shares Eligible for Future Sale"
and "Underwriting".
POSSIBLE APPLICABILITY OF RULES RELATING TO LOW-PRICED OR "PENNY" STOCKS:
POSSIBLE FAILURE TO QUALIFY FOR BOSTON STOCK EXCHANGE OR NASDAQ SMALLCAP MARKET
LISTING. The Commission has adopted regulations which generally define a "penny
stock" to be any equity security that has a market price (as defined) of less
than $5.00 per
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<PAGE>
share, subject to certain exceptions. While the price at which the shares of
Common Stock offered to the public pursuant to this Offering will be equal to
$5.00, the Warrants offered hereby will initially be "penny stocks" and become
subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors, unless the Securities are listed on the
Boston Stock Exchange. There can be no assurance that the Company will be able
to satisfy the listing criteria of the Boston Stock Exchange or that the Common
Stock or the Warrants will trade for $5.00 or more per security after the
Offering. Consequently, the "penny stock" rules may restrict the ability of
broker/dealers to sell the Company's Securities and may affect the ability of
purchasers in this Offering to sell the Company's Securities in a secondary
market.
Although the Company has applied for listing of the Securities on the
Boston Stock Exchange and the Nasdaq SmallCap Market, there can be no assurance
that such applications will be approved or that a trading market for the
Securities will develop or, if developed, will be sustained. Furthermore, there
can be no assurance that the Securities purchased by the public hereunder may be
resold at the original offering price or at any other price.
In order to qualify for initial listing on the Boston Stock Exchange, a
company must, among other things, have at least $3.0 million in total assets,
$2.0 million in tangible assets, 750,000 shares in "public float," $1.5 million
market value of "public float," and a minimum bid price for its securities of
$2.00 per share. For continued listing on the Boston Stock Exchange, a company
must maintain $1.0 million in total assets, 150,000 shares in "public float," a
$500,000 market value of the "public float," and $500,000 in stockholders
equity. The failure to meet these maintenance criteria in the future may result
in the discontinuance of the listing of the Securities on the Boston Stock
Exchange.
In order to qualify for initial listing on the Nasdaq SmallCap Market, a
company must, among other things, have at least (i) $4,000,000 in net tangible
assets, $50.0 million market capitalization or $750,000 net income in its latest
fiscal year or two of its last three fiscal years, (ii) $5.0 million market
value of "public float," (iii) 300 "round lot" stockholders and (iv) a minimum
bid price for its securities of $4.00 per share. For continued listing on the
Nasdaq SmallCap Market, a company must maintain a $1.0 million market value of
the "public float" and $2.0 million in total net tangible assets. In addition,
continued inclusion requires two market-makers and a minimum bid price of $1.00
per share. The failure to meet these maintenance criteria in the future may
result in the discontinuance of the listing of the Securities on the Nasdaq
SmallCap Market.
If the Company is or becomes unable to meet the listing criteria (either
initially or on a continued basis) of the Boston Stock Exchange or the Nasdaq
SmallCap Market and is never traded or becomes delisted therefrom, trading, if
any, in the Securities would thereafter be conducted in the over-the-counter
market in the so-called "pink sheets" or, if then available, the "Electronic
Bulletin Board" administered by the National Association of Securities Dealers,
Inc. (the "NASD"). In such an event, the market price of the Securities may be
adversely impacted. As a result, an investor may find it difficult to dispose
of or to obtain accurate quotations as to the market value of the Securities.
CONTINUING RELATIONSHIP WITH REPRESENTATIVE; POTENTIAL INFLUENCE. In
connection with this Offering, the Company will have certain continuing
relationships with the Representative, some of which may adversely affect the
Company's results of operations. The Company has agreed with the Representative
that (i) it will sell to the Representative Representative's Warrants (including
the grant of "piggyback" and demand registration rights), (ii) it will pay,
under certain conditions, to the Representative a warrant solicitation fee equal
to 5% of the exercise price of the Warrants exercised which are solicited by the
Representative, and (iii) for a period of two years it will use its best efforts
to cause the election to its Board of Directors one non-voting advisory designee
of the Representative. Any of the foregoing relationships may adversely impact
the Company's business, operating results or financial condition, or its ability
to raise additional capital for its business should the need arise during the
term of the above agreements. See "Use of Proceeds" and "Underwriting."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK. Management believes that
this Prospectus contains forward-looking statements, including statements
regarding, among other items, the Company's future plans and growth strategies
and anticipated trends in the industry in which the Company operates. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from these forward-
looking statements as a result of the factors described herein, including, among
others, regulatory or economic influences. In
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<PAGE>
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Prospectus will in fact transpire
or prove to be accurate.
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<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,400,000 Units offered hereby are estimated to be approximately $5,984,300
(based on an assumed public offering price of $5.00 per share of Common Stock
and $0.125 per Warrant) or approximately $6,920,637 if the Underwriters' over-
allotment option is exercised in full, after deducting Underwriters' discounts
and commission and estimated offering expenses. The Company intends to use the
net proceeds from the sale of the Securities offered hereby (assuming no
exercise of the Underwriters' over-allotment option) for the purposes and in the
approximate percentages as set forth in the following table:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage
Application of Proceeds(1) Dollar Amount of Net Proceeds
------------- ----------------
<S> <C> <C>
Implementation of Business Strategy (excluding acquisitions)(2)...... $3,500,000 58.5%
Acquisitions......................................................... 1,000,000 16.7
Working capital(3)................................................... 1,484,300 24.8
---------- -----
Total $5,984,300 100.0%
========== =====
</TABLE>
- ------------------------------
(1) Proceeds, if any, received upon the exercise of the Underwriters' over-
allotment option will be used for working capital and general corporate
purposes.
(2) Includes the acquisition and implementation of (i) new technology,
including, but not limited to, enhanced information and computer systems,
(ii) expansion of telemarketing operations, (iii) marketing and promotional
activities, (iv) entry into new markets and related infrastructure costs,
and (v) development of retail showrooms and sales centers. See "Business --
Business Strategy."
(3) Working capital will be increased to $2,420,637 if the Underwriters' over-
allotment option is exercised. Working capital includes, but is not limited
to, carrying additional receivables associated with increased sales, costs
for expansion of existing facilities, personnel costs related to expansion
of the Company's business and increased sales and other general and
administrative expenses. Management may also use working capital of
approximately $800,000 for the redemption of the Company's outstanding
Series A Preferred Stock and the repayment of loans to the Company by
certain stockholders in the aggregate amount of up to approximately
$1,090,000. See "Certain Relationships and Related Transactions" and
"Description of Securities -- Preferred Stock."
The Company may find it necessary or advisable to reallocate the net
proceeds within the categories described above if its assumptions regarding
present plans and future revenues and expenditures prove inaccurate. Any change
in the allocation of funds will be at the discretion of the Company's Board of
Directors. Proceeds, if any, from the exercise of the Warrants are currently
intended to be used for working capital and general corporate purposes. The
Company also reserves the right to allocate a portion of the net proceeds for
acquisitions and the payment of legal, accounting and other expenses associated
with acquisitions. No commitments or binding agreements have been entered into
by the Company for any such acquisitions. Until the proceeds of this Offering
are used for the purposes stated above, the Company may invest them temporarily
in interest-bearing securities such as certificates of deposit, United States
governmental obligations or money market funds or instruments.
DIVIDEND POLICY
The Company has not paid cash dividends with respect to its Common Stock,
and does not anticipate paying any cash dividends or other distributions on its
Common Stock in the foreseeable future. Any future dividends will be declared
at the discretion of the Board of Directors of the Company and will depend,
among other things, on the Company's earnings, if any, its financial
requirements for future operations and growth, restrictive covenants under the
Company's credit agreements and such other facts as the Company may then deem
appropriate. See "Description of Securities -- Preferred Stock."
-14-
<PAGE>
DILUTION
At September 30, 1998, the Company had a net tangible book value of
approximately ($870,000) or approximately ($.35) per share of Common Stock. Net
tangible book value (deficit) per share of Common Stock equals the tangible
assets of the Company, less all liabilities, divided by the total number of
shares of Common Stock outstanding, without giving effect to the possible
exercise of outstanding stock options and warrants. After giving effect to the
sale of the 1,400,000 shares of Common Stock offered hereby (at an assumed
offering price of $5.00 per share) and the 1,400,000 Warrants offered hereby (at
an assumed offering price of $0.125 per Warrant) and the receipt of the
estimated net proceeds therefrom, the proforma net tangible book value of the
Company as of September 30, 1998 would have been approximately $5,114,300 or
approximately $1.31 per share, representing an immediate increase in net
tangible book value of $1.66 per share to existing stockholders, and an
immediate dilution in net tangible book value of $3.69 per share to purchasers
of the Securities offered hereby. The following table illustrates the resulting
dilution with respect to the Common Stock offered hereby:
<TABLE>
<S> <C> <C>
Public offering price (per share of Common Stock)(1)....................... $5.00
Net tangible book value (deficit) per share as of September 30, 1998.. ($0.35)
Increase per share attributable to new investors...................... 1.66
------
Proforma net tangible book value per share after the Offering(2)........... 1.31
-----
Dilution of net tangible book value per share to new investors
attributable to purchase of Common Stock by new investors............. $3.69
=====
</TABLE>
- ------------------------------
(1) Represents the anticipated public offering price per share of Common Stock
(excluding Warrants) before deduction of underwriting discounts and
commissions and estimated expenses of the Offering.
(2) Assuming no exercise of the Warrants offered hereby and the Representative's
Warrants or the exercise of the Underwriters' over-allotment option. See
"Description of Securities" and "Underwriting."
The following table sets forth the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price per share by existing stockholders and new investors purchasing
shares of Common Stock in this Offering:
<TABLE>
<CAPTION>
Shares Purchase Total Consideration Average Price
-------------------- --------------------- -------------
Amount Percent Amount Percent Per Share
--------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 2,500,000 64% $1,194,234 15% $0.48
New investors............. 1,400,000 36 7,000,000 85 $5.00
--------- --- ---------- ---
Total.................. 3,900,000 100% $8,194,234 100%
========= === ========== ===
</TABLE>
The foregoing table gives effect to the sale of the shares of Common Stock
offered hereby (assuming an offering price of $5.00 per share and without giving
effect to the underwriting discount and expenses of the Offering) and does not
give effect to the exercise of the Warrants offered hereby or the exercise of
the Underwriters' over-allotment option. See "Management," "Principal
Stockholders" and "Description of Securities."
-15-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 and is adjusted to reflect (i) the issuance and sale by the
Company of the 1,400,000 Units offered hereby and (ii) the application of the
estimated net proceeds of the Offering. This table has not been adjusted to
give effect to the exercise of the Underwriter's over-allotment option, exercise
of the Warrants offered hereby or exercise of the Representative's Warrants.
The table 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, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1998
Actual Adjustments(1) As Adjusted
----------- -------------- ------------
<S> <C> <C> <C>
Short-term debt:
Current portion of capital lease obligation................... $ 173,519 $ -- $ 173,519
Current portion of long-term debt............................. 336,935 -- 336,935
----------- -------------- ------------
Total short-term debt....................................... $ 510,454 $ -- $ 510,454
----------- -------------- ------------
Long-term debt, net of current portion(2)....................... $ 2,622,909 $ -- $ 2,622,909
Series A Preferred Stock (Redeemable); 80,000 shares issued and
outstanding (liquidation preference of $10.00 per share)...... $ 742,425 $ -- $ 742,425
Stockholders' equity:
Preferred Stock, par value $.01 per share; 100,000 shares
authorized; 80,000 shares of Series A Preferred Stock
(Redeemable) issued and outstanding (liquidation
preference of $10.00 per share)............................. -- -- --
Common Stock, par value $.01 per share; 15,000,000 shares
authorized; 2,500,000 shares issued and outstanding;
3,900,000 shares issued and outstanding, as adjusted........ 25,000 14,000 39,000
Redeemable Common Stock Purchase Warrants; 1,400,000
issued and outstanding, as adjusted......................... -- 175,000 175,000
Additional paid-in capital.................................... 1,047,606 5,795,300 6,842,906
Retained earnings............................................. (1,802,630) -- (1,802,630)
----------- -------------- ------------
Total stockholders' equity (deficit)........................ (730,024) 5,984,300 5,254,276
----------- -------------- ------------
Total capitalization.......................................... $ 3,145,764 $ 5,984,300 $ 9,130,064
=========== ============== ============
</TABLE>
- ------------------------------
(1) To reflect the net proceeds from the sale and issuance of 1,400,000 Units
offered hereunder. See "Description of Securities" and "Underwriting."
(2) Includes long-term debt, capital lease obligations and notes payable to
related parties. See "Certain Relationships and Related Transactions."
-16-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected financial data of the Company on a
consolidated basis as of December 31, 1997 and September 30, 1998 and 1997,
respectively. This information has been derived from the Company's audited
financial statements for the periods ended December 31, 1997 and September 30,
1998, and its unaudited financial statements for the period ended September 30,
1997, respectively, included elsewhere in this Prospectus. The Company's
unaudited proforma financial information for the periods ended December 31, 1997
and September 30, 1997 reflects the acquisition of selected assets from Reunion
as if it had occurred at the beginning of the period. The unaudited proforma
financial results are not necessarily indicative of the actual results of
operations that would have occurred had the purchase actually been made at the
beginning of the period, nor is it necessarily indicative of future results of
operations of the combined enterprises. The selected financial information
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 and the notes thereto appearing elsewhere in this
Prospectus. This financial information does not purport to be indicative of the
financial position or results of operations that may be obtained in the future.
See "Prospectus Summary -- Background. "
<TABLE>
<CAPTION>
(Unaudited)
(Unaudited) Proforma
Nine Months Nine Months Nine Months
Period Ended Ended Ended Period Ended Ended
December 31, September 30, September 30, December 31, September 30,
SELECTED STATEMENT OF OPERATIONS DATA: 1997 1998 1997(1) 1997 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Contract revenues, net......................... $16,158,745 $21,146,566 $11,371,441 $23,395,301 $16,895,909
Cost of goods sold............................. 6,453,597 8,844,059 4,089,872 8,609,945 5,754,143
Operating expenses............................. 11,003,391 12,581,491 7,511,744 16,168,940 6,179,813
Loss from operations........................... (1,298,243) (278,984) (230,175) (1,383,584) (425,670)
Other expenses, net............................ 144,132 (71,271) (87,718) 144,132 (87,718)
Provision for income taxes..................... 5,000 5,000 -- 5,000 --
Net loss....................................... (1,447,375) (355,255) (317,893) (1,532,716) (513,388)
Net loss per weighted-average share of common
stock outstanding -- basic and diluted........ $(.76) $(.19) $(.18) $(.80) $(.29)
Number of weighted-average shares of common
stock outstanding............................ 1,911,040 2,484,686 1,782,680 1,911,040 1,782,680
</TABLE>
<TABLE>
<CAPTION>
September 30,
December 31, September 30, 1998
SELECTED BALANCE SHEET DATA: 1997 1998 (As adjusted)(2)
------------ ------------- ----------------
<S> <C> <C> <C>
Current assets.......................... $1,981,750 $3,219,521 $ 9,203,821
Total assets............................ 4,708,424 5,929,567 11,913,867
Current liabilities..................... 2,190,501 3,294,257 3,294,257
Total liabilities....................... 4,297,094 5,917,166 5,917,166
Series A Preferred Stock (Redeemable)... 689,967 742,425 742,425
Stockholders' equity or (deficit)....... (278,637) (730,024) 5,254,276
Working capital (deficit)............... (208,751) (74,736) 5,909,564
</TABLE>
- ------------------------------
(1) The Company commenced operations on January 23, 1997. Tabular information
reflects statement of operations data for the period from inception through
September 30, 1997.
(2) Adjusted to give effect to the sale of 1,400,000 Units at an assumed initial
public offering price of $5.125 per Unit and the application of the net
proceeds therefrom. See "Use of Proceeds." No effect has been given to the
exercise of (i) the Warrants offered hereby or the Representative's Warrants
or (ii) the Underwriters' over-allotment option. See "Description of
Securities" and "Underwriting."
-17-
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of the Company for
the period ended December 31, 1997 has been derived from the audited
consolidated financial statements of the Company for the period ended December
31, 1997 and the audited financial statements of Reunion for the period ended
November 23, 1997, all included herein. The unaudited pro forma financial
information for the Company reflects the acquisition of Reunion
as if it had taken place on January 23, 1997. On November 23, 1997, the Company
acquired certain assets of Reunion. The Company effected the purchase through
the issuance of 371,480 shares of Common Stock valued at $125,405 and 80,000
shares of Series A Preferred Stock with a fair value of $683,300. The
acquisition was accounted for as a purchase and accordingly, the purchased
assets and liabilities have been recorded at their estimated fair value at the
date of acquisition.
The information set forth below should be read in conjunction with the
other information contained in "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements of the Company and the
financial statements of Reunion for the period ended November 23, 1997 and Notes
thereto included elsewhere in this Prospectus. The unaudited pro forma
information reflects pro forma adjustments which eliminate Reunion's operations
that were not acquired by the Company. Prior to the acquisition of the assets of
Reunion, Reunion had 14 sales and installation branch locations, a telemarketing
center, a manufacturing facility, and its corporate administrative offices. The
Company acquired selected assets of Reunion, including the assets at seven of
the 14 sales and installation branch locations. Therefore, the pro forma
information reflects only the ongoing operations of Reunion which were acquired
by the Company on a historical cost basis. This information is unaudited and
does not purport to represent the actual operating results had the acquisition
of Reunion taken place on January 23, 1997 nor does it purport to be indicative
of the results that may be obtained in the future.
<TABLE>
<CAPTION>
Period Ended December 31, 1997
----------------------------------------------------------------------------
Reunion Historical
Historical Pro Forma Operations U.S.
Reunion Adjustment Acquired Remodelers Combined
------------ ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues, net............... $11,519,504 $(4,282,948) $7,236,556 $16,158,745 $23,395,301
Cost of goods sold.......... 3,454,870 (1,298,522) 2,156,348 6,453,597 8,609,945
Operating expenses.......... 10,309,980 (5,144,431) 5,165,549 11,003,391 16,168,940
Loss from operations........ (2,245,346) 2,160,005 (85,341) (1,298,243) (1,383,584)
Other expenses, net......... (1,645) 1,645 -- 144,132 144,132
Income taxes (income), net.. 3,326 (3,326) -- 5,000 5,000
----------- ----------- ---------- ----------- -----------
Net (loss).................. $(2,247,027) $(2,161,686) $ (85,341) $(1,447,375) $(1,532,716)
=========== =========== ========== =========== ===========
<CAPTION>
Period Ended September 30, 1997
--------------------------------------------------------------------------
Reunion Historical
Historical Pro Forma Operations U.S.
Reunion Adjustment Acquired Remodelers Combined
------------ ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues, net............... $ 9,288,005 $(3,763,537) $5,524,468 $11,371,441 $16,895,909
Cost of goods sold.......... 2,825,605 (1,161,334) 1,664,271 4,089,872 5,754,143
Operating expenses.......... 8,450,060 (4,394,368) 4,055,692 7,511,744 11,567,436
Loss from operations........ (1,987,660) 1,792,165 (195,495) (230,175) (425,670)
Other expenses, net......... (10,063) 10,063 -- (87,718) (87,718)
Income taxes (income), net.. -- -- -- -- --
----------- ----------- ---------- ----------- -----------
Net (loss).................. $(1,977,597) $(1,782,102) $ (195,495) $ (317,893) $ (513,388)
=========== =========== ========== =========== ===========
</TABLE>
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial condition and
results of operations of the Company and should be read in conjunction with the
financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
This section includes forward-looking statements which reflect Management's
current views with respect to future operating performance and ongoing cash
requirements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or those anticipated. Factors that could cause or contribute
to such differences include, but are not specifically limited to: the Company's
ability to generate a sufficient quantity of prospective customer leads; the
Company's ability to retain its sales staffing levels; the Company's ability to
recruit Contractors to complete installations of sales orders; changes in the
economic conditions of the various markets served by the Company; and the
Company's ability to effectively manage growth and expand its product offerings
to include other home improvement products. Readers are cautioned not to place
undue reliance on these forward-looking statements.
OVERVIEW
The Company is engaged, through direct consumer marketing, in the design,
sale, manufacture and installation of kitchen cabinet refacing products utilized
in kitchen remodeling. The Company presently operates in 13 major metropolitan
markets in the United States. The Company conducts a substantial portion of its
direct consumer marketing under the trademark and service mark "CENTURY 21
Cabinet Refacing." The Company also markets under the name "FaceliftersTM."
The Company was organized on January 23, 1997 under the laws of the State of
Delaware. On January 27, 1997, the Company entered into an interim operating
agreement (the "Operating Agreement") with AMRE, Inc and Facelifters Home
Systems, Inc. ("Facelifters"), a wholly-owned subsidiary of AMRE, Inc.
(collectively, "AMRE"), subsequent to the date that AMRE filed for protection
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). Under the
terms of the Operating Agreement, the Company (i) leased certain operating
facilities and equipment and purchased raw materials for the purpose of
establishing the business of the Company and (ii) received from AMRE a
prospective customer list which included certain of AMRE's customers who had
entered into contracts with AMRE for kitchen cabinet refacing services that
could not be completed because of the Chapter 11 proceeding. The Operating
Agreement also obligated the Company to pay a fee to AMRE for revenues derived
from the customer list. On February 12, 1997 the Company entered into an
agreement with AMRE (the "Purchase Agreement") for the purchase of selected
operating assets related to the kitchen cabinet refacing business of AMRE.
Effective April 3, 1997, the Company consummated the transaction contemplated by
the Purchase Agreement by acquiring the selected operating assets from
approximately 11 of AMRE's former sales offices and by assuming certain other
agreements and lease obligations related to machinery, equipment, facilities and
real property related to the Company's business operations.
Effective November 23, 1997, the Company also purchased certain assets of
Reunion Home Services, Inc. and Kitchen Masters, Inc. (collectively, "Reunion"),
manufacturers, marketers and installers of kitchen cabinet refacing products and
kitchen cabinet doors. Similar to the Company, but in separate transactions from
those between the Company and AMRE, Reunion, prior to completing its transaction
with the Company, entered into an interim operating agreement with AMRE, after
AMRE filed for protection under Chapter 11, with terms similar to those found in
the Operating Agreement. Effective April 3, 1997, Reunion also acquired certain
selected operating assets of AMRE.
-19-
<PAGE>
The Company recognizes revenue upon completion of each home improvement
contract. In the Company's customary installation cycle, new sales orders are
completed in approximately 60 days from the date of sale. Approximately 65% of
the Company's customers finance their home improvement project with third party
lenders. Ordinarily, in connection with sales that are financed, the Company
receives payment approximately five to ten days after the completion of
installation.
The Company manufactures new cabinet doors, drawer fronts, counter tops, and
replacement cabinets. In connection with the purchase of assets from Reunion,
the Company's manufacturing operations were disrupted in December 1997 and in
the first quarter of 1998 as a result of integrating the newly acquired
manufacturing equipment into the Company's Charles City, Virginia manufacturing
facility. The disruption was greater than the Company originally anticipated and
as a result, contract revenues were adversely effected in December 1997 and in
January and February of 1998.
To assist in understanding the Company's operating results, the following table
indicates the percentage relationship of various income and expense items
included in the Statement of Operations for the three-month and nine-month
periods ended September 30, 1998, the three-month period ended September 30,
1997, from January 23 through September 30, 1997, and from January 23, 1997
through December 31, 1997. The business of the Company is characterized by the
need to continuously generate prospective customer leads, and in that respect,
marketing and selling expenses constitute a substantial portion of the overall
expense of the Company.
<TABLE>
<CAPTION>
January 23 January 23
Three-month period Nine-month period through through
ended September 30, ended September 30 September 30, December 31,
-------------------- ------------------- -------------- -------------
1998 1997 1998 1997 1997
------- ------ ------------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Contract revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 42.2 38.2 41.8 36.0 39.9
Gross profit 57.8 61.8 58.2 64.0 60.1
Operating expenses:
Branch operating 4.7 5.0 5.8 5.4 5.9
Sales and marketing 37.0 43.7 42.6 46.7 46.7
License fees 1.6 1.5 1.5 1.5 1.5
General and
administrative 8.7 10.6 9.6 12.4 14.0
Operating income (loss) 5.8 1.0 (1.3) (2.0) (8.0)
Other income
(expense), net (.2) (.9) (.4) (.8) (1.0)
Income (loss) before
income taxes 5.6 .1 (1.7) (2.8) (9.0)
Income tax - - - - -
Net income (loss) 5.6 .1 (1.7) (2.8) (9.0)
</TABLE>
-20-
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 TO THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1997- New sales orders were approximately $7,647,000 during
the three-month period ended September 30, 1998 as compared to $4,774,000 in the
three-month period ended September 30, 1997. The increase in new sales orders is
primarily due to growth in the number of markets served by the Company
(principally resulting from the purchase of the Reunion assets), and improved
sales efficiencies in the comparative operating markets. In April and July 1998,
the Company implemented pricing level changes in certain of the markets in which
the Company operates. Management believes these changes contributed to improved
sales efficiencies as compared to the prior year period.
Contract revenues were $8,250,000 as compared to $4,892,000 in the prior year
period. The increase in contract revenues reflects the higher level of new sales
orders and production backlog at the beginning of the period. The number of
installations increased 80% over the prior year, and average selling price,
which is affected not only by price levels but also by the mix and size of jobs
installed, declined approximately 6% from the prior year period.
As a result of the higher level of new sales orders backlog increased from
$3,778,000 at December 31, 1997 to $5,067,000 at September 30, 1998. Backlog at
September 30, 1997 was $3,050,000.
Gross profit for the period ended September 30, 1998 was approximately
$4,769,000 or 57.8% of contract revenues as compared to $3,025,000 or 61.8% of
contract revenues in the prior year period. The decline in gross profit margin
is primarily due to pricing level changes. In addition, gross profit margin was
adversely effected by higher manufacturing and installation labor costs. The
Company utilizes Contractors to complete installations. The Company has
experienced increases in Contractor labor rates resulting from competitive
pressures which management attributes to strong economic conditions and low
unemployment levels in the markets in which the Company operates. In addition,
the Company's manufacturing costs increased over the prior year period due to
lower material yields.
Branch operating expenses declined from 5.0% of contract revenues in the prior
year period to 4.7% in the current year. Branch operating expenses, which
include costs associated with each of the Company's local branch facilities
including rent, telecommunications, branch administration and supplies, are
primarily fixed in nature, and, as such, decreased as a percentage of contract
revenues due to higher volume of installations during the period. However, the
dollar amount of branch operating expenses increased from $246,000 in the prior
year period to $391,000 in the current period principally due to the growth of
the Company's operations.
The business of the Company is characterized by the need to continuously
generate prospective customer leads, and in this respect, marketing and selling
expenses constitute a substantial portion of the overall expense of the Company.
In the Company's normal operating cycle, marketing costs, which are expensed as
incurred, can precede the completion of sales orders by up to three months.
Consequently, during periods of increasing backlog, marketing expenses as a
percentage of contract revenues will generally be higher, and during periods of
decreasing backlog, marketing expenses as a percentage of contract revenues will
generally be lower. However, the securing of sales orders is generally
concurrent with marketing expenditures. In this respect, marketing expenses were
19.5% of contract revenues for the period ended September 30, 1998 as compared
to 26.4% in the prior year period, and were 21.1% and 27.1% of new sales orders
respectively. The reduction of marketing expenses as a percentage of new sales
orders is due to increases in sales efficiencies and reduced marketing costs per
customer appointment resulting largely from media mix adjustments.
-21-
<PAGE>
Sales expenses, which consist primarily of commissions, sales manager salaries,
travel and recruiting expenses, were $1,443,000, or 17.5% of contract revenues
in the period ended September 30, 1998, as compared to $845,000 or 17.3% of
contract revenues in the prior year period. The increase in the dollar amount of
sales expenses is largely the result of commissions on higher revenues, higher
sales recruiting expenses, and the growth of the Company's operations.
License fees increased from 1.5% of contract revenues in the prior year period
to 1.6% in the current period. The increase in license fees as a percentage of
contract revenues is due to the mix of the Company's business sold under the
Century 21-license agreement as compared to that sold under the Facelifters
brand name.
General and administrative expenses were approximately $715,000 or 8.7% of
contract revenues as compared to $518,000 or 10.6% of contact revenues in the
prior year period. General and administrative expenses declined as a percentage
of contract revenues due to higher volume in the current year period. The
increase in the dollar amount of general and administrative expenses is due to
the growth of the Company's infrastructure over the prior year. The Company
expects to continue its efforts in the overall expansion of its business base
and will continue to emphasize control of operating expenses, as well as a
reduction of these expenses as a percentage of revenue.
COMPARISON OF NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 TO JANUARY 23, 1997
THROUGH SEPTEMBER 30, 1997-The Company commenced operations on January 23, 1997
and, as a result, the period from January 23, 1997 through September 30, 1997 is
a shorter period compared to the nine-month period ended September 30, 1998. In
addition to the length of the different periods, the period ended September 30,
1997 reflects the start up of the Company's operations. As a result, comparisons
of the results of operations for the period ended September 30, 1998 to the
period ended September 30, 1997 may be less meaningful than comparisons in
future periods.
New sales orders were approximately $22,435,000 during the nine-month period
ended September 30, 1998 as compared to $14,422,000 in the prior year period.
The increase in new sales orders is due to growth in the number of markets
served by the Company (principally resulting from the purchase of the Reunion
assets), and improved sales staffing and sales efficiencies in the comparative
operating markets, as well as the shorter prior year period. In April and July
1998, the Company implemented pricing level changes in certain of the markets in
which the Company operates. Management believes these changes have contributed
to the higher sales efficiencies as compared to the prior year period.
Contract revenues were $21,147,000 as compared to $11,371,000 in the prior year
period. The increase in contract revenues reflects the higher level of new sales
orders and production backlog at the beginning of the period as well as the
shorter period in 1997. The number of installations increased 89% over the prior
year and average selling price, which is affected not only by price levels but
also by the mix and size of jobs installed, decreased approximately 2% from the
prior year period. During the nine-month period ended September 30, 1998, the
Company has had difficulty completing new sales orders within its customary
installation cycle time. In the first quarter of 1998 the Company experienced
manufacturing delays associated with the purchase of the Reunion assets, and in
the second quarter of 1998 the Company experienced shortages of Contractors to
complete installations. The Company, which utilizes Contractors to complete
installations, has experienced difficulty in hiring a sufficient quantity of
Contractors which management attributes to the strong economic conditions and
low unemployment levels in the markets in which the Company operates. However,
the Company had attained its desired Contractor level during the third quarter
of 1998. Additionally, the Company was required to increase its manufacturing
employee base to meet the increased demands. The Company was successful in
achieving its desired manufacturing staffing late in the period and has attained
appropriate production volumes.
-22-
<PAGE>
Backlog as of September 30, 1998 was approximately $5,067,000 as compared to
$3,778,000 at December 31, 1997 and $3,050,000 at September 30, 1997.
(In Millions)
Period ended September 30,
1998 1997
---- ----
Net New Sales Orders $22.4 $14.4
Contract Revenues (installed sales) $21.1 $11.4
Ending Production Backlog $ 5.1 $ 3.0
Gross profit was approximately $12,303,000 or 58.2% of contract revenues as
compared to $7,282,000 or 64.0% of contract revenues in the prior year period.
The decline in gross profit margin is principally due to the combination of
increased manufacturing and installation labor costs, as well as pricing level
changes. As noted above, the Company utilizes Contractors to complete
installations. The Company has experienced increases in Contractor labor rates
resulting from competitive pressures and the shortage of Contractors. In
addition, the Company's manufacturing costs increased due to difficulties with
the start up of manufacturing operations with the newly acquired assets from
Reunion, lower material yields and higher labor costs from overtime rates.
Branch operating expenses increased from $616,000, or 5.4% of contract revenues
in the prior year period, to $1,226,000 or 5.8% in the current year. Branch
operating expenses, which include costs associated with each of the Company's
local branch facilities including rent, telecommunications, branch
administration and supplies, are primarily fixed in nature. The increase in the
dollar amount of branch operating expenses is principally due to the growth of
the Company's operations as compared to the prior year period.
The business of the Company is characterized by the need to continuously
generate prospective customer leads, and in this respect, marketing and selling
expenses constitute a substantial portion of the overall expense of the Company.
In the Company's normal operating cycle, marketing costs, which are expensed as
incurred, can precede the completion of sales orders by up to three months.
Consequently, during periods of increasing backlog, marketing expenses as a
percentage of contract revenues will generally be higher, and during periods of
decreasing backlog, marketing expenses as a percentage of contract revenues will
generally be lower. However, the securing of sales orders is generally
concurrent with marketing expenditures. In this respect, marketing expenses were
24.4% of contract revenues for the period ended September 30, 1998 as compared
to 28.6% in the prior year period, and were 22.9% and 22.5% of new sales orders
respectively. In the prior year period, the Company received from AMRE a
prospective customer list which included certain of AMRE's customers who had
entered into contracts with AMRE for kitchen cabinet refacing services that
could not be completed because of AMRE's Chapter 11 proceeding. The Company was
required to pay a 4% fee to AMRE for revenues derived from the customer list.
If the Company was to have generated these sales orders at its marketing rate,
marketing costs in the prior year period would have been significantly higher.
Consequently, excluding the affects of these revenues and expenses, management
believes that marketing expenses as both a percentage of contract revenues and
new sales orders has improved over the prior year period and attributes the
improvement to increases in sales efficiencies and reduced marketing costs per
customer appointment resulting largely from media mix adjustments.
Sales expenses, which consist primarily of commissions, sales manager salaries,
travel and recruiting expenses, were $3,855,000, or 18.2% of contract revenues
in the period ended September 30, 1998, as compared to $2,064,000 or 18.1% of
contract revenues in the prior year period. The increase in the dollar amount of
sales expenses is due to sales commissions on higher revenues, increased
recruiting expenses, and growth in the operations of the Company.
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<PAGE>
General and administrative expenses were approximately $2,030,000 or 9.6% of
contract revenues as compared to $1,412,000 or 12.4% of contact revenues in the
prior year period. General and administrative declined as a percentage of
contract revenues as a result of the higher volume level. The increase in the
dollar amount of general and administrative expenses is due to the growth of the
Company's infrastructure over the prior year. The Company expects to continue
its efforts in the overall expansion of its business base and will continue to
emphasize control of operating expenses as well as a reduction of these expenses
as a percentage of revenue.
Other income (expense) consists primarily of interest expense associated with
the Company's debt and capital leases partially offset by income derived from
its arrangement with its third party lender who provides financing for certain
of the Company's customers.
Income tax expense was $5,000 for the period ended September 30, 1998. The
Company has provided a valuation allowance to reflect the uncertainties
associated with the ultimate realization of its deferred tax asset, in
accordance with SAS No. 109, "Accounting for Income Taxes". A valuation
allowance is required when it is more likely than not that the deferred tax
asset will not be realized. Principally, since the Company has no historical
taxable income record, there can be no assurance that the deferred tax asset
will ultimately be realized.
In the first and second quarters of 1998, the Company was unable to generate
sufficient contract revenues commensurate with its increased infrastructure and
higher production costs resulting in a net loss in the period. Contract revenues
were not only effected by the seasonal lower levels of new sales orders in
December through February, but also by unsatisfactory sales performance in
certain of its markets (principally in the first quarter) and increased cycle
times of production as previously stated. Management continues to evaluate the
performance of each of the markets in which it operates and in August 1998
closed two under performing markets. Management has also undertaken certain cost
reduction measures and the Company is currently planning the expansion of its
product offering to include replacement windows.
PERIOD JANUARY 27, 1997 THROUGH DECEMBER 31, 1997
During the period, new sales orders were approximately $19,937,000. Contract
revenues for the period were approximately $16,159,000. Backlog as of December
31, 1997 was approximately $3,778,000.
Branch operating expenses were approximately $946,000 or 5.9% of contract
revenues for the period ended December 31, 1997. Branch operating expenses are
primarily fixed in nature and include costs associated with each of the
Company's local branch facilities including rent, telecommunications, branch
administration and supplies.
Marketing and selling expenses were approximately $7,546,000 or 46.7% of
contract revenues for the period, but were 39.7% of new sales orders for the
period. Marketing costs are expenses as incurred. In the Company's normal
operating cycle, marketing costs can precede the completion of installation of
sales orders by up to three months depending upon the type of marketing media as
well as the cycle time of production. Consequently, during period of increasing
backlog, marketing expenses will be a high percentage of contract revenues.
Selling expenses primarily consists of commission, bonus, sales management
salaries, training and recruiting expenses and sales personnel benefit costs.
During periods of low sales closing rates, selling expenses will be a higher
percentage of contract revenues. During the first six months of operations, as
compared to the remainder of the period, sales closing rates (the ratio of sales
to leads generated) were lower as the Company recruited and trained its sales
staff.
-24-
<PAGE>
License fees were approximately $238,000 or 1.5% of contract revenues. The
Company conducts a substantial proportion of its direct consumer marketing under
license agreements with TM Acquisition Corp. and HFS Licensing Inc. pursuant to
a master license agreement with Century 21 Real Estate Corporation. The license
agreements provide the Company with the right to market, sell and install
kitchen cabinet refacing products under the trademark and service mark "CENTURY
21 Cabinet Refacing" in certain territories. The license agreements provide for
license fees to the licensor equal to 2% of the associated contract revenues in
1997, and 2% to 6% over the remainder of the term of the agreement subject to
certain adjustments based upon contract revenue levels and minimum fees in
certain of its territories.
General and administrative expenses were approximately $2,273,000 or 14% of
contract revenues. The Company attributes the high percentage of contract
revenues to its first year of operations.
Other income (expense) consists primarily of interest expense associated with
the Company's debt and capital leases.
Income tax expense was $5,000 for the period ended December 31, 1997. The
Company has provided a valuation allowance to reflect the uncertainties
associated with the ultimate realization of its deferred tax asset, in
accordance with SAS No. 109, "Accounting for Income Taxes". A valuation
allowance is required when it is more likely than not that the deferred tax
asset will not be realized. Principally, since this is the Company's first year
of operation and it has no historical taxable income record, there can be no
assurance that the deferred tax asset will ultimately be realized.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its liquidity needs in 1997 primarily from its initial
capitalization through sale of its stock and loans from its stockholders, which
in the aggregate was $2,140,000. Net cash used in operations was approximately
$1,173,000 for the period ended September 30, 1997 and $1,475,000 for the period
ended December 31, 1997.
In the period ended September 30, 1998 net cash provided by operations was
approximately $112,000. In January 1998 the Company received $350,000 in
proceeds from the issuance of promissory notes to certain of the Company's
stockholders (the "Short-Term Notes"). In April 1998, the Company received a
$700,000 secured term loan from a financial institution. The proceeds of the
term loan were used to retire the Short-Term Notes and the balance was used for
working capital purposes. In addition, in June 1998, the Company entered into a
$1.0 million secured revolving credit facility with the same financial
institution. The Company borrowed approximately $147,000 against the revolving
credit facility, and at September 30, 1998, based on the terms of the agreement,
the Company had additional borrowing capacity of approximately $710,000.
Borrowings and required payments under the revolving credit facility are based
upon an asset formula involving accounts receivable and inventory. Both loans
are secured by substantially all of the assets of the Company. Approximately
$850,000 of the obligation to the financial institution has been guaranteed by
Murry H. Gross, President and Chief Executive Officer of the Company. Certain
stockholders of the Company have entered into an agreement with Mr. Gross
indemnifying him against amounts paid as a result of such guaranty in an amount
in excess of his pro rata stock ownership in the Company. See "Certain
Relationships and Related Transactions."
-25-
<PAGE>
During the period ended December 31, 1997, capital expenditures, which included
the acquisition of selected assets from AMRE, as well as capital leases, totaled
approximately $1,983,000. Effective as of November 23, 1997, the Company
acquired certain assets of Reunion. The Company effected the purchase of the
Reunion assets through the issuance of 371,480 shares of common stock and 80,000
shares of Series A Preferred Stock. Capital expenditures, which included a
capital lease for certain telemarketing telecommunications equipment, totaled
approximately $257,000 in the period ended September 30, 1998. Capital
expenditures for 1998 are expected to approximate $300,000. See "Certain
Relationships and Related Transactions."
At September 30, 1998, the Company had cash of approximately $896,000 and a
negative working capital of $74,000. The Company anticipates a seasonal
reduction in the amount of new sales orders for the fourth quarter of 1998.
However, based upon current financial resources, including existing lines of
credit, the Company believes that it will have sufficient reserves to meet its
anticipated working capital needs for the business as currently conducted.
However, the Company anticipates that it will need additional working capital to
fund its business strategy including expansion into the full service kitchen
remodeling business and has therefore undertaken the Offering. Upon consummation
of the Offering, the Company believes that it will have sufficient reserves to
meet its anticipated working capital needs. However, no assurance can be given
that the Company will successfully complete the Offering or any financing
transaction or otherwise maintain adequate liquidity, and any such failure could
have a material adverse effect on the Company's overall financial condition. See
"Risk Factors--Risks Relating to Growth and Expansion."
YEAR 2000
The year 2000 date change is believed to affect virtually all computers and
organizations. The Company has undertaken a comprehensive review of its
information systems including its main computer hardware and software, its
personal computers hardware and software and associated peripheral devises its
telemarketing telecommunications systems and general telecommunication systems.
In addition, the Company has held discussions with certain of its software
suppliers with respect to the year 2000 date change. While the Company has not
completed its detailed review, as a preliminary assessment, the Company believes
that it will not be required to modify or replace significant portions of its
software and any such modifications or replacements are, or will be, readily
available. The Company anticipates it will complete its detailed review by
December 31, 1998.
The Company is planning to conduct a comprehensive review of its manufacturing
equipment, as well as other equipment and communication systems for potential
year 2000 issues. In addition, the Company is planning to hold further
discussions with its significant suppliers, shippers and other external business
partners. The Company had completed a cursory review of it manufacturing
equipment in the first quarter of 1998 and had determined that the year 2000
date change would not pose any operational problems. This second phase review is
expected to be completed by February 1999.
The Company does not expect the costs associated with the Year 2000 compliance
to have a material effect on its financial position or its results of
operations. There can be no assurance until the year 2000, however, that all of
the Company's systems, and the systems of its suppliers, shippers and other
business partners will function adequately.
-26-
<PAGE>
BUSINESS
GENERAL
The Company is engaged, through direct consumer marketing, in the design,
sales, manufacture and installation of kitchen cabinet refacing products
utilized in kitchen remodeling. The Company presently operates in 13 major
metropolitan areas markets in the United States. The Company conducts a
substantial portion of its direct consumer marketing under the trademark and
service mark "CENTURY 21 Cabinet Refacing" under license agreements with TM and
HFS pursuant to a master license agreement between Century 21 Real Estate
Corporation and each of TM and HFS. The license agreements with TM and HFS
provide for terms of 10 years ending in 2007. Both agreements give the Company
the right to market, sell and install kitchen cabinet refacing products in
specific territories under the trademark and service mark "CENTURY 21 Cabinet
Refacing." The license agreements provide for license fees to the licensor
equal to 2% of the associated contract revenues in 1997, and 2% to 6% over the
remainder of the term of the agreement subject to certain adjustments based upon
contract revenue levels and minimum fees in certain of its territories. The
Company also conducts its business under the name "Facelifters." In addition to
marketing, selling and installing cabinet refacing, the Company has plans to
market, sell and install replacement kitchens. To satisfy the demands of its
customers, the Company anticipates developing, marketing and selling additional
home improvement products and services, including, but not limited to,
replacement windows. See "Risk Factors -- Material Contracts -- Dependence on
Century 21 License Agreement; Customer Financing."
The Company's principal marketing activities are conducted through
telemarketing and television advertising. A telemarketing solicitation is made
to homeowners whose demographic profile and homes fall within certain criteria,
including age and income of the homeowner, home value, age of home and length of
residency. The Company's telemarketing personnel conduct "outbound"
telemarketing to generate customer leads and answer "in-bound" inquiries
generated by advertising activities to schedule in-home sales presentations for
the Company's cabinet refacing products.
Refacing is a kitchen remodeling technique in which existing cabinetry
framework is retained but all exposed surfaces are changed. Under the Company's
cabinet refacing system, doors, drawers, and drawer fronts are replaced, and all
exposed cabinet surfaces are covered with matching laminate. In addition,
matching valances and molding, replacement sinks, faucets, counter tops, cabinet
drawer boxes, additional replacement cabinets, space organizers, lazy susans and
slide-out shelving can be provided by the Company. The Company provides
homeowners with a wide selection of styles and colors to renovate their kitchens
at a lower cost and more quickly and conveniently than through traditional
remodeling methods. Installation is usually completed within three to five days
as compared to between two to four weeks for traditional remodeling methods, and
is usually commenced within approximately 60 days after an agreement is entered
into between the Company and its customer.
INDUSTRY OVERVIEW
According to industry publications, spending for kitchen remodeling is
expected to exceed $30 billion in 1998 -- an increase from $25 billion in 1997
and $18 billion in 1991 -- with approximately 4.65 million kitchens expected to
be remodeled in 1998, an 8.1% increase over 1997. Of the expected $30 billion
in kitchen remodeling spending, approximately $14.4 billion is expected to be
spent on remodeling jobs costing under $5,000 and approximately $11.5 billion
is expected to be spent on remodeling jobs costing between $5,000 and $15,000.
Based upon industry publications, the Company believes that the continued
projected growth of kitchen remodeling is principally due to three factors: (1)
an expected consistent rate of existing home sales, (2) an aging baby boomer
market and (3) kitchen remodeling continues to offer the homeowner a
significantly better cost recoupment upon sale than other home improvement
projects. Households in which the homeowners are age 40 or older account for
approximately 60% of kitchen remodeling projects.
MARKET POSITIONING
The Company operates in a niche segment of the kitchen remodeling industry
known as cabinet refacing, and the Company believes that it is the largest
single seller of cabinet refacing in the United States. The Company has sales
and installation centers located in 13 of the 20 largest metropolitan areas in
the United States. The Company provides its customers with a full range of
services including in-home design, product installation, access to third-party
financing and after sale service. The Company also manufactures almost all of
the components used in its kitchen refacing business in its own factory.
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<PAGE>
The Company intends, however, to expand its existing business lines to also
become a full service kitchen updating business. The Company will then be able
to offer replacement kitchens to its target group of middle market customers who
customarily spend between $5,000 and $15,000 on updating their kitchen. The
Company believes that a significant market opportunity exists in the kitchen
replacement business for middle market consumers. The middle market kitchen
updating business is presently serviced by small home improvement contractors
who typically do not offer in-home design or access to financing, or large "home
center" retailers such as Home Depot or Lowes, which retailers do not offer in-
home design, installation or after sale service. The Company believes that
Sears, through its Great Indoors prototype retail operation, recognized this
significant market opportunity and is currently test marketing kitchen updating
to the middle market consumer. The Company believes that by leveraging its
marketing and sales expertise it can become the leading full service kitchen
updating enterprise focused upon middle market customers.
BUSINESS STRATEGY
The Company's business objective is to become a leader in the replacement
kitchen market primarily in the mid-range price level. To achieve this
objective, the Company's strategy is as follows:
. PROVIDE SUPERIOR CUSTOMER SERVICE. The Company believes that its
emphasis on providing a full range of services will provide it with an
advantage in its pursuit of middle market consumers seeking to update
their kitchen. The ability of the Company to provide in-home design,
product installation, access to third-party financing and its after
sale service distinguishes the Company from its principal competitors.
. LEVERAGE EXISTING EXPERTISE AND INFRASTRUCTURE. The Company plans to
leverage its existing marketing and sales expertise as well as its
existing warehousing, installation, distribution and financing
capabilities to broaden its offerings to include replacement kitchens
and related products and to increase the volume of kitchen cabinet
refacing sales.
. INCREASE CUSTOMER PENETRATION AND PRODUCT OFFERINGS. The Company
believes that by building a base of satisfied kitchen remodeling
customers, the Company will be able to build a database of customers
that will be targets for other remodeling products. By building this
database and using its sales and marketing expertise to maintain
closer contact with its customers the Company believes it will be able
to lower its current marketing costs and provide additional remodeling
products to existing customers. The foregoing will permit the Company
to increase its "share of the customer" as well as its "share of the
market." To further facilitate this element of its business strategy,
the Company also intends to develop a "do-it-yourself" cabinet
refacing kit.
. ENTER INTO NEW GEOGRAPHIC MARKETS. The Company intends to establish
sales offices in approximately 10 new geographic markets over the next
36 months. The decision to enter into a particular market will be
based in part upon (i) the target population of the target market,
(ii) the demographic make-up within the target market, (iii) existing
competition, (iv) availability of suitable sales and showroom
facilities, and (v) the availability of sales personnel and
Contractors.
. USE OF NEW TECHNOLOGY. The Company intends to enhance its in-home
design capabilities by acquiring new, state of the art computer
software and hardware. Available technology, including digital
cameras, CAD/CAM design software and laptop computers will ultimately
permit the Company's in-home sales personnel to provide computer
imaging of the desired updated kitchen features to the customer while
in the customer's home.
. INTERNET INITIATIVE. The Company intends to pursue development of an
Internet site for the purpose of (i) permitting customers to do
preliminary in-home design by viewing the Company's products and in
turn allowing them to electronically place orders with the Company for
its "do-it-yourself" cabinet refacing kits; (ii) affording customers
the opportunity to obtain credit pre-approval; (iii) generating
customer leads for the Company's sales force; (iv) establishing a
listing of employment opportunities; and (v) creating a general
information site for the Company's customers and investors.
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<PAGE>
. PURSUE ACQUISITION OPPORTUNITIES. The Company intends to selectively
explore the acquisition of related or complimentary businesses.
DIRECT MARKETING AND SALES
The Company's principal marketing activities are conducted through
telemarketing and television advertising. A telemarketing solicitation is made
to homeowners whose demographic profiles and homes fall within certain criteria,
including age and income of the homeowner, home value, age of home and length of
residency. To maintain the efficiency of its marketing, the Company uses its
internally developed computer software to monitor responses and sales. The
Company's telemarketing personnel follow prepared scripts, conduct outbound
telemarketing, answer in-bound inquiries generated by advertising activities and
schedule in-home sales presentations.
Direct sellers are used as sales representatives. Direct sellers utilize
the Company's in-home sales presentation and sales kit, which includes a
presentation book, photos, video materials, sample products and other sales
materials. Most sales result from the initial in-home presentation. Results of
in-home presentations are tabulated on a daily basis. Such information provides
data upon which the Company may evaluate each direct seller's performance with
respect to sales as it relates to a percentage of in-home presentations,
cancellation rates and average dollar amounts of sales and commissions earned.
Generally, within one week after a sales agreement is entered into, the
customer's kitchen is measured pursuant to the Company's specified procedures.
Measurements are entered on systematized forms to facilitate manufacturing at
which time the order is forwarded to the Company's manufacturing facility in
Charles City, Virginia. Products are usually ready for shipment within three
weeks after receipt of an order. If necessary, replacement or service parts are
usually shipped within five working days after the Company receives a request.
Installation, which generally occurs approximately 60 days after the agreement
is signed, is performed by Contractors skilled in cabinet refacing and kitchen
cabinet installation and is usually completed within three to five days.
PURCHASING, MATERIAL AND INSTALLATION
KITCHEN CABINET REFACING, CUSTOM COUNTERTOPS AND CABINETS. The Company
manufactures cabinet fronts, countertops, and cabinets which are faced with high
pressure laminate or thermofoil in its manufacturing facility in Charles City,
Virginia. The Company has acquired "state of the art" equipment enabling the
Company to manufacture thermofoil cabinet doors and drawer fronts. Raw
materials used in the manufacturing and installation process are purchased from
several suppliers at prices which are negotiated periodically. Management
believes such materials are available from numerous suppliers at competitive
prices.
INSTALLATIONS. Except for some warranty and other service work,
Contractors perform all of the Company's installations. Contractors employ
their own crafts persons and are required to maintain their own vehicles,
equipment, tools, licenses, workers compensation coverage and general liability
insurance. Contractors assume full financial risk in their performance of an
installation and enter into a written agreement with the Company upon meeting
the Company's qualifications. Contractors obtain a work order, which specifies
all work to be performed pursuant to the sales agreement, and materials at the
Company's branch office. Installations are generally completed within three to
five work days, at which time the Contractor obtains a certificate of completion
from the customer and returns all documentation and excess materials to the
Company. The Contractor is paid by the Company upon satisfactory completion of
each job, at which time the Company receives an invoice for services from the
Contractor and a customer signed completion certificate. Fees paid by the
Company to the Contractor for an installation are based upon an amount
negotiated between the Company and the Contractor. When new construction and
remodeling is on the rise, recruiting of Contractors becomes more challenging.
The Company believes it can stay competitive in its recruiting efforts and that
there are an adequate number of qualified Contractors available to the Company
to satisfy anticipated needs.
CONSUMER LOAN FINANCING AND NEW BUSINESS SEGMENT
The Company's customers pay for their home improvement products and
services upon completion of the work. Payments are made in cash, on MasterCard,
Visa or Discovery cards, or by third party financing, primarily a revolving
unsecured line of credit, arranged by the Company. Third party financing pays
for approximately 65% of the Company's business. In most third-party lender
transactions, the customer executes a revolving credit agreement
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<PAGE>
with the lender and the lender pays the Company on completion of the
installation. In some of these transactions, the third-party lender discounts
the contract price to the Company to offset the lenders credit risk. The
Company's risk is limited to its normal representations and warranties regarding
material and workmanship. See "Risk Factors -- Material Contracts -- Dependence
on Century 21 License Agreement; Customer Financing."
EMPLOYEES
At October 31, 1998, the Company either employed or had representing its
products, on a full or part-time basis, approximately 400 associates, including
200 telemarketing, 80 direct sellers, 55 manufacturing employees, and 65
management and administrative personnel. In addition, the Company has working
arrangements with approximately 105 independent contracting companies. The
Company believes that labor relations with its employees have been good in the
past and does not expect this assessment to change.
WARRANTIES
The Company provides each customer with a 12-month limited warranty
covering defective materials and workmanship and an extended limited warranty of
between two to five years on its materials. The Company requires its
Contractors to correct defective workmanship for a 12-month period. To date,
the Company has not experienced significant warranty claims.
COMPETITION
The Company operates in a highly fragmented industry. Although the Company
believes it is one of the largest enterprises engaged in the direct marketing of
in-home sales and installation of kitchen cabinet refacing products, the Company
competes with numerous contractors in each of the territories in which it
operates, with reputation, price, workmanship and services being the principal
competitive factors. The Company also competes against retail chains, including
Sears, Builders Square, Sams Warehouse Club and other stores, which offer
similar products and services through licensees. The Company also competes,
less directly, with small home improvement contractors, who typically do not
provide in-home design or access to financing, and with large "home center"
retailers such as Home Depot and Lowes, who do not offer in-home design,
installation or after sale service. It is anticipated that the Company will
compete to a greater extent with "home center" retailers upon implementation of
its business strategy. See "Risk Factors -- Competition."
SEASONALITY
The Company's business is subject to seasonal fluctuations and extreme
winter weather conditions. In addition, recruiting of Contractors to perform
the Company's installation becomes more difficult when new construction and
remodeling is on the rise. See "Risk Factors -- Seasonality."
GOVERNMENT REGULATIONS
Generally, the Company's activities and the activities of its direct
sellers and Contractors are subject to various federal and state laws and
regulations and municipal ordinances relating to, among other things, in-home
sales, consumer financing, advertising, the licensing of home improvement
contractors, and zoning regulations. The Company's operations are also subject
to a Federal Trade Commission rule which provides for a "cooling off" period for
in-home sales. This rule requires an in-home seller to inform the buyer of his
right to cancel the transaction at any time prior to midnight of the third
business day after the date of the sales transaction. Many states have (but the
states in which the Company currently conducts retail business have not)
supplemented this rule by extending the time period in which the buyer may
cancel. The Company has procedures designed to comply with such laws and
regulations. See "Risk Factors -- Government Regulations."
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<PAGE>
PROPERTIES
All of the Company's facilities are leased, and in most cases, management
expects that leases currently in effect will be renewed or replaced by other
leases of a similar nature and term. At October 31, 1998, the Company had under
lease 13 sales offices, two telemarketing facilities and its corporate
headquarters. The Company's manufacturing facility at Charles City, Virginia is
under a capital lease with a 15-year lease term and an option to purchase the
property at the end of the lease term for nominal consideration. Pursuant to
the terms of this lease, the Company also has a right of first refusal to
purchase certain adjacent land. All of the Company's leases, other than the
Charles City, Virginia facility, are for terms of five years or less.
The Company's leased properties are:
<TABLE>
<CAPTION>
Location Square feet Purpose
-------- ----------- -------
<S> <C> <C>
Dallas, TX 5,570 Corporate Headquarters
Baltimore, MD 3,900 Sales office and warehouse
Boston, MA 4,400 Sales office and warehouse
Chicago, IL 6,349 Sales office and warehouse
Dallas, TX 4,021 Sales office and warehouse
Cinnaminson, NJ 3,600 Sales office and warehouse
Denver, CO 2,912 Sales office and warehouse
Detroit MI 5,240 Sales office and warehouse
Lanham, MD 3,500 Sales office and warehouse
Long Island, NY 6,500 Sales office and warehouse
Los Angeles, CA 10,378 Sales office and warehouse
Minneapolis, MN 4,762 Sales office and warehouse
College Point, NY 7,480 Sales office and warehouse
Phoenix, AZ 5,025 Sales office and warehouse
Boca Raton, FL 6,710 Telemarketing
Fort Lauderdale, FL 4,560 Telemarketing
Charles City, VA 71,810 Manufacturing
</TABLE>
LEGAL PROCEEDINGS
The Company may, from time to time, become involved in lawsuits in the
ordinary course of business. There are no lawsuits currently pending or
threatened against the Company.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, current ages and positions of the executive officers and
directors of the Company are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David A. Moore 42 Chairman of the Board and Director
Murray H. Gross 60 President and Chief Executive Officer
and Director
Peter T. Bulger 39 Vice President and Chief Operating
Officer
Steven S. Gross 35 Vice President -- Marketing
Malcolm R. Harris 52 Vice President -- Operations
Robert A. DeFronzo 43 Chief Financial Officer, Secretary and
Treasurer
David A. Yoho 70 Director
Gregory Kiernan 41 Director
Marc W. Beresin 63 Director
Ronald I. Wagner 52 Director
Charles D. Maguire, Jr. 40 Director
</TABLE>
The Company may employ such additional management personnel as the Board of
Directors of the Company deems necessary. The Company has not identified or
reached an agreement or understanding with any other individuals to serve in
such management positions, but does not anticipate any difficulty in employing
qualified individuals.
Directors of the Company are elected by the stockholders at each annual
meeting and serve until the next annual meeting of stockholders or until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed or their earlier resignation or removal from office.
The business experience, principal occupations and employment of each of
the directors and executive officers of the Company during at least the past
five years, together with their periods of service as directors and executive
officers of the Company are set forth below.
DAVID A. MOORE has served as Chairman of the Board and as a director of the
Company since shortly after its inception in January 1997. Mr. Moore is
Chairman and Chief Executive Officer of Garden State Brickface, Windows and
Siding, Inc., a leading New York City area commercial and residential remodeling
company. Mr. Moore is also Chairman of Paradigm Direct, Inc., a direct
marketing services company. In addition, Mr. Moore is a member of the Board of
Directors of Lumen Technologies, Inc., a New York Stock Exchange listed company,
and Bolle, Inc., a Nasdaq listed company. He is also Chairman of Sonostar
Ventures, L.L.C., a private consulting and investment firm. Mr. Moore holds a BA
degree from Amherst College, Magna Cum Laude, and an MBA degree from Harvard
University.
MURRAY H. GROSS has been President, Chief Executive Officer, and Director
since he founded the Company in January 1997. He has been in the home
improvement industry for over 38 years. In 1963, Mr. Gross founded Busy Beaver
Remodelers, a subsidiary of Busy Beaver Home Centers, a Pittsburgh, Pennsylvania
home center chain. He served as Executive Vice President at Busy Beaver
Remodelers from 1963 until 1979 and as President from 1979 until 1981. From
August 1981 to September 1983, Mr. Gross was employed at Home Craftsman Company
in Dallas,
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<PAGE>
Texas; and from September 1983 to January 1987, he served as Executive Vice
President, Chief Operating Officer and Director. Mr. Gross joined Facelifters in
April 1987 as Vice President and Director. He became President and Chief
Operating Officer in January 1990. Facelifters was acquired by AMRE in April
1996 where Mr. Gross was a Vice President and Director. During the period that
Mr. Gross served as an officer and director of AMRE, AMRE sought protection
under federal bankruptcy laws. Mr. Gross attended the University of Pittsburgh
from 1957 to 1960. Mr. Gross is the father of Steven S. Gross.
PETER T. BULGER has been Vice President of Sales since the Company was
founded in January 1997. He has been in the home improvement industry for over
16 years. Mr. Bulger began his sales management career with a division of
Reynolds Aluminum where he became a Branch Manager in 1984. In November 1991,
he joined Facelifters as a Sales Representative and in March 1992, he became a
Branch Sales Manager. Mr. Bulger was promoted to Regional Sales Manager in June
1993, and in December 1993, he was promoted to Vice President of Sales. He held
that position until Facelifters was acquired by AMRE in April 1996. At that
time, he became Vice President Sales of the Cabinet Division, a position he held
until January 1997. Mr. Bulger earned a B.S. degree in 1982 from Russell Sage
College, Troy, New York.
STEVEN S. GROSS has been Vice President of Marketing since the Company was
founded in January 1997. He has been in the home improvement industry for over
15 years. Mr. Gross began his career at Home Craftsman Company in 1985 as
Director of Telemarketing. In 1987, he took a position as a salesperson with
Diamond Window Systems. Mr. Gross joined Facelifters in 1989 to become Director
of Marketing. In April 1993, he was promoted to Vice President of Marketing.
After the acquisition of Facelifters by AMRE in April 1996, Mr. Gross became
Director of Telemarketing. Steven Gross is the son of Murray H. Gross.
MALCOLM R. "MAC" HARRIS has been Vice President of Operations since the
Company's founding in January 1997. He has been in the home improvement
industry for nearly 30 years. Mr. Harris began his career in 1970 with Keller
Industries in Miami, Florida and until 1978 served as General Manager of the
manufacturing facility in Butler, Missouri. From 1979 through 1984, Mr. Harris
was Supervisor for Noranda Building Products of Cleveland, Ohio. He joined Home
Craftsman Company in Dallas, Texas in November 1984 as General Manager of
Manufacturing and worked there through March 1987. From April 1987 to May 1988,
Mr. Harris relocated to Millen, Georgia to work for Remington Building Products.
He joined Facelifters in May 1988 to become Plant Manager and was promoted to
Vice President of Manufacturing in January 1990. In January 1993, he was
promoted to Vice President of Operations. In April 1996 when Facelifters was
acquired by AMRE, Mr. Harris continued in his same capacity until January 1997.
Mr. Harris attended Stephen F. Austin College, Nacogdoches, Texas.
ROBERT A. DEFRONZO joined the Company in December 1997 after the
acquisition of Reunion Home Services, Inc. where he was Chief Financial Officer.
He has been in the home improvement industry since 1990. Mr. DeFronzo began his
career in 1976 as an auditor. In 1979, he joined General Instrument Corporation
as Components Group Financial Analyst and held several financial positions
during his tenure. In January 1989, after a leveraged buyout of the Clare
Division of General Instrument Corp., Mr. DeFronzo became Treasurer and
Assistant Controller of C. P. Clare Corporation. In November 1990, he joined
AMRE as Cabinet Division Controller. Mr. DeFronzo was promoted in 1992 to
Corporate Controller and remained in that capacity until January 1997. He
became Chief Financial Officer of Reunion Home Services, Inc. at its inception
in January 1997. Mr. DeFronzo holds an accounting degree from Illinois State
University and an MBA in Finance from Roosevelt University, Chicago, Illinois.
DAVID A. YOHO has served as a director of the Company since shortly after
its inception in January 1997. Mr. Yoho is a motivational consultant to most
Fortune 500 companies, an award winning lecturer and best selling author. He is
President of Dave Yoho Associates, a major consulting firm active in
turnarounds, mergers and acquisitions. He holds multiple degrees from Temple
University.
GREGORY KIERNAN has served as a director of the Company since shortly after
its inception in January 1997. Mr. Kiernan is President and Chief Executive
Officer of Sonostar Ventures, L.L.C. Mr. Kiernan previously spent 15 years on
Wall Street with Lehman Brothers, Salomon Brothers, and at Paine Webber, where
he served as a Managing Director. Mr. Kiernan was previously an attorney with
Cravath, Swaine and Moore, and holds a BA degree from Amherst College, Magna Cum
Laude, Phi Beta Kappa, and a J.D. degree from Harvard Law School.
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<PAGE>
MARC W. BERESIN has served as a director of the Company since shortly after
its inception in January 1997. Mr. Beresin is a private investor who was a major
entrepreneur in the home improvement business for 20 years. Mr. Beresin was
President and chief marketing officer of Eljo Products, Inc. and Magne Seal
Doors, Inc., companies that manufactured and marketed custom residential steel
replacement doors. Mr. Beresin was also employed by the Consumer Plastics
Division of Mobil Oil in marketing intensive positions such as New Product
Development Manager and Group Marketing Manager. Mr. Beresin holds a bachelors
degree from Wharton School, University of Pennsylvania.
RONALD I. WAGNER has served as a director of the Company since December
1997. Mr. Wagner has been in the home improvement industry for 25 years. In
1975, Mr. Wagner founded Save-A-Kitchen, and in 1980 founded a related company,
Cabinet Magic, Inc., both kitchen cabinet refacing companies. In 1988, following
the sale of the operations of Cabinet Magic, Inc. to AMRE, Mr. Wagner joined
that company as President - Cabinet Division and Senior Vice President. Mr.
Wagner was promoted to Chairman and Chief Executive Officer in 1990, and
remained in this capacity until his retirement in December 1995. In January
1997, Mr. Wagner came out of retirement and founded Reunion.
CHARLES D. MAGUIRE, JR. has served on the Board of Directors since May 1998
and is a partner in the Dallas, Texas office of the law firm of Jackson Walker
L.L.P. Mr. Maguire has practiced with Jackson Walker L.L.P. since 1983. See
"Legal Matters."
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued for services,
including salary and bonus amounts, rendered in all capacities for the Company
to its Chief Executive Officer and all other executive officers who received or
are entitled to receive remuneration in excess of $100,000 during the referenced
periods. Remuneration received during calendar year 1997 represents the period
beginning January 23, 1997 and ending December 31, 1997. All other compensation
related tables required to be reported have been omitted as there has been no
applicable compensation awarded to, earned by or paid to any of the Company's
executive officers in any fiscal year to be covered by such tables. See "--
Employment Agreements."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Other Annual
Name/Title Year Salary/Bonus Compensation(1)
----------------------------------------- ----- ------------ -------------------
<S> <C> <C>
Murray H. Gross, President and Chief 1997 $184,865
Executive Officer
Peter T. Bulger, Vice President and Chief 1997 $138,706
Operating Officer
Steven S. Gross, Vice President -- Marketing 1997 $ 92,511
Malcolm R. Harris, Vice President -- 1997 $ 81,607
Operations
Robert A. DeFronzo, Chief Financial Officer, 1997 $ -0-
Secretary and Treasurer
</TABLE>
- -----------------------------
(1) The referenced individuals received personal benefits in addition to salary
and bonuses. The aggregate amount of such personal benefits, however, did
not exceed the lessor of $50,000 or 10% of their total annual salary and
bonus.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Murray H. Gross, Peter
T. Bulger, Steven S. Gross, Malcolm R. Harris and Robert A. DeFronzo.
The Company's employment agreement with Murray H. Gross is for a one year
initial term with an annual salary of $200,000; provided, that 30 days prior to
the first anniversary of the employment agreement, and each anniversary
thereafter, the employment agreement will automatically be extended for an
additional year unless the
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<PAGE>
Company notifies Mr. Gross of its intent not to extend the agreement. In the
event that Mr. Gross' employment agreement is terminated by the Company for
cause or by Mr. Gross without good reason (as defined therein), Mr. Gross will
not be entitled to severance pay. In the event the Company terminates Mr. Gross
without cause (as defined therein), Mr. Gross will be entitled to severance pay
equal to one year's salary. Notwithstanding the foregoing, if Mr. Gross'
employment with the Company is terminated following a change in control of the
Company (as defined therein) (i) by the Company for any reason within five years
of such change in control or (ii) by Mr. Gross within one year of such change in
control, then Mr. Gross is entitled to severance pay equal to one year's salary.
Mr. Gross is entitled to receive bonuses and other incentive compensation made
generally available to the executive employees of the Company.
The Company's employment agreement with Peter T. Bulger is for a one year
initial term with an annual salary of $150,000; provided, that 30 days prior to
the first anniversary of the employment agreement, and each anniversary
thereafter, the employment agreement will automatically be extended for an
additional year unless the Company notifies Mr. Bulger of its intent not to
extend the agreement. In the event that Mr. Bulger's employment agreement is
terminated by the Company for cause or by Mr. Bulger without good reason (as
defined therein), Mr. Bulger will not be entitled to severance pay. In the
event the Company terminates Mr. Bulger without cause (as defined therein), Mr.
Bulger will be entitled to severance pay equal to one year's salary.
Notwithstanding the foregoing, if Mr. Bulger's employment with the Company is
terminated following a change in control of the Company (as defined therein) by
the Company for any reason within five years of such change in control, then Mr.
Bulger is entitled to severance pay equal to one year's salary. Mr. Bulger is
entitled to receive bonuses and other incentive compensation made generally
available to the executive employees of the Company.
The Company's employment agreement with Steven S. Gross is for a one year
initial term with an annual salary of $100,000; provided, that 30 days prior to
the first anniversary of the employment agreement, and each anniversary
thereafter, the employment agreement will automatically be extended for an
additional year unless the Company notifies Mr. Gross of its intent not to
extend the agreement. In the event that Mr. Gross' employment agreement is
terminated by the Company for cause or by Mr. Gross without good reason (as
defined therein), Mr. Gross will not be entitled to severance pay. In the event
the Company terminates Mr. Gross without cause (as defined therein), Mr. Gross
will be entitled to severance pay equal to one year's salary. Notwithstanding
the foregoing, if Mr. Gross' employment with the Company is terminated following
a change in control of the Company (as defined therein) by the Company for any
reason within five years of such change in control, then Mr. Gross is entitled
to severance pay equal to one year's salary. Mr. Gross is entitled to receive
bonuses and other incentive compensation made generally available to the
executive employees of the Company.
The Company's employment agreement with Malcolm R. Harris is for a one year
initial term with an annual salary of $90,000; provided, that 30 days prior to
the first anniversary of the employment agreement, and each anniversary
thereafter, the employment agreement will automatically be extended for an
additional year unless the Company notifies Mr. Harris of its intent not to
extend the agreement. In the event that Mr. Harris' employment agreement is
terminated by the Company for cause or by Mr. Harris without good reason (as
defined therein), Mr. Harris will not be entitled to severance pay. In the
event the Company terminates Mr. Harris without cause (as defined therein), Mr.
Harris will be entitled to severance pay equal to six month's salary.
Notwithstanding the foregoing, if Mr. Harris' employment with the Company is
terminated following a change in control of the Company (as defined therein) by
the Company for any reason within five years of such change in control, then
Malcolm Harris is entitled to severance pay equal to his annual salary. Mr.
Harris is entitled to receive bonuses and other incentive compensation made
generally available to the executive employees of the Company.
The Company's employment agreement with Robert A. DeFronzo is for a one
year initial term with an annual salary of $100,000; provided, that 30 days
prior to the first anniversary of the employment agreement, and each anniversary
thereafter, the employment agreement will automatically be extended for an
additional year unless the Company notifies Mr. DeFronzo of its intent not to
extend the agreement. In the event that Mr. DeFronzo's employment agreement is
terminated by the Company for cause or by Mr. DeFronzo without good reason (as
defined therein), Mr. DeFronzo will not be entitled to severance pay. In the
event the Company terminates Mr. DeFronzo without cause (as defined therein),
Mr. DeFronzo will be entitled to severance pay equal to six month's salary.
Notwithstanding the foregoing, if Mr. DeFronzo's employment with the Company is
terminated following a change in
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<PAGE>
control of the Company (as defined therein) by the Company for any reason within
five years of such change in control, then Mr. DeFronzo is entitled to severance
pay equal to his annual salary. Mr. DeFronzo is entitled to receive bonuses and
other incentive compensation made generally available to the executive employees
of the Company.
STOCK OPTION PLAN
In May 1998, the Board of Directors adopted, and the stockholders of the
Company approved the 1998 Stock Option Plan (the "1998 Plan"). The purpose of
the 1998 Plan is to provide employees, directors and advisors with additional
incentives by increasing the proprietary interest in the Company. The aggregate
number of shares of Common Stock with respect to which options may be granted is
250,000 which amount may be increased in the discretion of the Board of
Directors to an amount not to exceed 10% of the total outstanding shares of the
Company, from time to time, provided, however, the aggregate number of shares of
Common Stock with respect to which options may be granted may in no event,
exceed 1,500,000 shares.
The 1998 Plan provides for the grant of incentive stock options ("ISOs") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, and
nonqualified stock options ("NSOs") (collectively ISOs and NSOs are referred to
as "Awards"). The 1998 Plan will be administered by the Company's full Board of
Directors, although the 1998 Plan may be administered by a committee of not less
than two members of the Board of Directors (the "Committee"). The Board of
Directors or, if established, the Committee has, subject to the terms of the
1998 Plan, the sole authority to grant Awards under the 1998 Plan, to construe
and interpret the 1998 Plan to make all other determinations to take any and all
actions necessary and advisable for the administration of the 1998 Plan. All of
the Company's full-time, salaried employees, members of the Board of Directors
and certain advisors are eligible to receive Awards under the 1998 Plan.
Options will be exercisable during the period specified in each Option Agreement
and will generally be exercisable in installments pursuant to a vesting schedule
to be designed by the Board of Directors or the Committee. The provisions of
Option Agreements may provide for acceleration of exercisability in the event of
certain events including certain reorganizations and changes in control of the
Company. No option will remain exercisable later than 10 years after the date
of grant. The exercise prices for ISOs granted under the 1998 Plan may be no
less than the fair market value of the Common Stock on the date of grant. The
exercise prices of NSOs are set by the Board of Directors or the Committee.
Each non-employee director of the Company shall automatically be granted a NSO
to purchase 1,000 shares of Common Stock upon initial election or appointment to
the Board of Directors, and will be granted a NSO to purchase 1,000 shares of
Common Stock on the date of each subsequent annual meeting of the Board of
Directors.
No options have been granted under the 1998 Plan as of the date of this
Prospectus.
COMPENSATION OF DIRECTORS
No cash compensation has been paid by the Company to its directors prior to
the date of this Prospectus. Directors are reimbursed for their ordinary and
necessary expenses incurred in attending meetings of the Board of Directors or a
committee thereof. See "-- Stock Option Plan."
COMMITTEES
The Board of Directors intends to establish three committees: an Audit
Committee, a Compensation Committee and a Nominating Committee. Each of these
committees shall have one or more members who serve at the discretion of the
Board of Directors. The Audit Committee shall be responsible for reviewing the
Company's financial statements, audit reports, internal financial controls and
the services performed by the Company's independent public accountants, and for
making recommendations with respect to those matters to the Board of Directors.
The Compensation Committee shall be responsible for reviewing and making
recommendations to the Board of Directors with respect to compensation of
executive officers, other compensation matters and awards under the 1998 Plan or
other stock option plans that may be implemented by the Company. The Nominating
Committee shall be responsible for developing a strategy and criteria for new
board members and making recommendations to the Board of Directors that the
selection of future board members should be based upon.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS' AGREEMENT
The Company and each of the holders of the Company's Common Stock have
entered into a Stockholders' Agreement (the "Stockholders' Agreement") providing
restrictions on the transfer or sale of such stockholders' shares. The
Stockholders' Agreement provides that a holder of Common Stock must give the
Company and other holders of Common Stock the right of first refusal in the
event such holder receives a bona fide offer for the purchase of all, or any
part thereof, of his shares of Common Stock. The Stockholders' Agreement also
provides that the Company and holders of Common Stock shall have the right to
acquire the Common Stock from (i) a deceased holder of Common Stock, (ii) a
deceased spouse of a holder of Common Stock, and (iii) a former spouse of a
holder of Common Stock upon a divorce. During the term of the Stockholders'
Agreement, each holder of Common Stock has agreed to vote all of his shares in a
manner to ensure (a) that the Board of Directors will not consist of more than
seven directors and (b) that (i) three designees of About Face Limited, (ii) two
designees of Sonostar Ventures L.L.C., the Kiernan Family Trust (the "Kiernan
Trust") and Garden State Brickface Windows and Siding, Inc. ("Garden State"),
collectively, (iii) one designee of the David A. Yoho Revocable Trust, dated
January 19, 1995 (the "Yoho Trust"), and (iv) one individual designated by the
Board of Directors are elected to the Board of Directors of the Company. The
Stockholders' Agreement also provides that the Company shall have the option to
purchase any or all of the Common Stock from certain management investors (each
a "Management Investor") at purchase price equal to 120% of the book value per
share after the second anniversary of the Stockholders' Agreement.
Alternatively, each Management Investor also has the option to require the
Company to purchase any or all of his Common Stock at purchase price equal to
110% of the book value per share after the second anniversary of the
Stockholders' Agreement. The Stockholders' Agreement will terminate: (i) upon a
written agreement of the holders of at least 70% of the Common Stock subject to
the Stockholders' Agreement, (ii) upon the dissolution, bankruptcy or insolvency
of the Company, (iii) at such time as there is only one holder of Common Stock,
or (iv) immediately prior to the consummation of a public offering of the Common
Stock registered with the Commission.
ISSUANCE OF PREFERRED STOCK
Effective November 23, 1997, the Company entered into an agreement to
acquire certain assets of Reunion. The Company effected the purchase through the
issuance of 371,480 shares of Common Stock valued at $125,405 to Ronald I.
Wagner and 80,000 shares of Series A Preferred Stock valued at $683,300 to
Kitchen Masters, Inc. Ronald I. Wagner is a director of the Company. See
"Prospectus Summary -- Background" and "Description of Securities -- Preferred
Stock."
STOCKHOLDERS NOTES
On January 23, 1997, the Company's Board of Directors authorized and
approved the issuance of an aggregate of $2,092,500 in convertible promissory
notes (the "Convertible Notes"). The Convertible Notes were to mature on March
31, 2002 and the interest rate on the outstanding principal was 6.1% simple
interest. The Convertible Notes provided that the principal could be converted
into Common Stock at a conversion price of $.5880 per share at the election of
the Board of Directors or upon the consummation of an underwritten public
offering. On March 24, 1997, the Board of Directors authorized and approved a
conversion of the Convertible Notes into Common Stock for an aggregate
consideration of $1,052,500. As a result, the Company converted $150,000,
$225,000, $125,000 and $150,000 of principal on the Convertible Notes held by
each of About Face Limited, Sonostar Ventures L.L.C., the Kiernan Trust and the
Yoho Trust, respectively, and, after giving effect to the 10 for 1 stock split,
issued 255,000, 382,500, 212,500 and 255,000 shares of Common Stock to About
Face Limited, Sonostar Ventures L.L.C., the Kiernan Trust and the Yoho Trust,
respectively. In addition, the Company replaced the remaining Convertible Notes
with promissory notes (the "Promissory Notes") which are not convertible into
shares of Common Stock. The Promissory Notes provide for simple interest at the
rate of 10% per annum and that cash payments of interest are to be made in equal
semi-annual payments on each October 1 and April 1, until March 31, 2002, upon
which date the principal, together with all accrued but unpaid interest thereon,
shall mature and be due and payable. As of September 30, 1998, the outstanding
principle on all of the Promissory Notes was $1,040,000. Additionally, the
Company has separate outstanding indebtedness to Murray H. Gross in the amount
of $50,000.
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<PAGE>
In January 1998, the Company received $350,000 in proceeds from the
issuance of promissory notes to certain of the Company's stockholders (the
"Short-Term Notes"). A portion of the proceeds from the $700,000 secured
promissory term note referenced in the paragraph below were used to retire the
Short-Term Notes.
FINOVA FINANCING
Effective June 5, 1998, the Company entered into a loan and security
agreement with FINOVA Capital Corporation ("FINOVA") whereby the Company may
borrow up to $1,000,000 on a revolving basis. The obligation also incorporates
an existing term loan in the original principal amount not to exceed $700,000,
which is evidenced by a secured promissory term note executed by the Company on
April 6, 1998. The Short-Term Notes referenced in the preceding paragraph were
retired using a portion of the proceeds from the secured promissory term note.
Approximately $850,000 of the obligation to FINOVA has been guaranteed by Murray
H. Gross, President and Chief Executive Officer of the Company. This guaranty
amount will be reduced if the Company meets certain financial performance
objectives. Certain stockholders of the Company have entered into an agreement
with Mr. Gross indemnifying him against amounts paid as a result of such
guaranty in an amount in excess of his pro rata stock ownership in the Company.
OTHER BUSINESS RELATIONSHIPS
None of the officers of the Company are engaged in other businesses. Some
of the directors of the Company are engaged in other businesses and either
individually or through partnerships and corporations in which they have an
interest, hold an office or serve on the board of directors. Certain conflicts
of interest may arise between the Company and its directors. The Company will
attempt to resolve any such conflicts of interest in favor of the Company.
The officers and directors of the Company are accountable to it and its
stockholders as fiduciaries, which requires that such officers and directors
exercise good faith and integrity in handling the Company's affairs. A
stockholder of the Company may be able to institute legal action on behalf of
the Company or on behalf of itself and all similarly situated stockholders of
the Company to recover damages or for other relief in cases of the resolution of
conflicts in any manner prejudicial to the Company.
The Company will maintain at least two independent directors on its Board
of Directors at all times. All future material affiliated transactions and
loans will be made or entered into on terms no less favorable than could be
obtained from unaffiliated third parties. All future material affiliated
transactions and loans, and any forgiveness of loans, must be approved by a
majority of the Company's independent directors who do not have an interest in
the transactions and who had access, at the Company's expense, to the Company's
or independent legal counsel.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of October 31, 1998
regarding the beneficial ownership of Common Stock of (i) each person or group
known by the Company to beneficially own 5% or more of the outstanding shares of
the Common Stock, (ii) each of the directors and executive officers of the
Company, and (iii) all executive officers and directors of the Company as a
group. Unless otherwise noted, the persons named below have sole voting and
investment power with respect to the shares shown as beneficially owned by
them.
<TABLE>
<CAPTION>
Percentage of
Shares of Common Percentage of Shares Shares
Stock Beneficially of Common Stock of Common Stock
Owned Prior to and Beneficially Owned Beneficially Owned
Name of Beneficial Owner(1) After the Offering Prior to the Offering After the Offering
- --------------------------- ------------------ --------------------- --------------------
<S> <C> <C> <C>
About Face Limited.................................. 381,300 15.3 9.8
Murray H. Gross(2).................................. 381,300 15.3 9.8
Peter T. Bulger..................................... 169,200 6.8 4.3
Steven S. Gross(3).................................. 147,950 5.9 3.8
Malcolm R. Harris................................... 63,550 2.5 1.6
Kiernan Family Trust(4)............................. 212,500 8.5 5.4
Sonostar Ventures, L.L.C.(5)........................ 382,500 15.3 9.8
Gregory Kiernan(5).................................. 382,500 15.3 9.8
David A. Moore(6)................................... 477,500 19.1 12.2
David A. Yoho Revocable Trust dated January 19,
1995 or any successor trustee(7)................... 255,000 10.2 6.5
Marc Honigsfeld Revocable Living Trust dated
March 27, 1996..................................... 170,000 6.8 4.4
Lynne Tarnopol...................................... 170,000 6.8 4.4
Ronald I. Wagner.................................... 371,480 14.9 9.5
Marc W. Beresin..................................... 42,500 1.7 1.1
Robert A. DeFronzo.................................. 27,770 1.1 *
Charles D. Maguire, Jr.............................. - * *
Directors and Officers as a group (11 persons)(8)... 2,138,750 85.6 54.8
</TABLE>
- --------------------------------
* Less than 1%.
(1) Unless otherwise indicated, each person named in the table has sole voting
and investment power with respect to the shares beneficially owned. Also,
unless otherwise indicated, the address of the beneficial owner identified
below is: c/o U.S. Remodelers, Inc., 1341 W. Mockingbird Lane, Suite 900E,
Dallas, Texas 75247.
(2) Includes 381,300 shares of Common Stock held by About Face Limited, a family
limited partnership in which Murray H. Gross is the president of the general
partner.
(3) On July 16, 1998, Mr. Gross transferred his 147,950 shares of Common Stock
to the Gross Family Trust.
(4) Gregory Kiernan is grantor of this irrevocable trust. Mr. Kiernan is
neither a trustee nor a beneficiary of the trust. Mr. Kiernan disclaims any
beneficial interest in the Common Stock held by the trust.
(5) Includes 382,500 shares of Common Stock held by Sonostar Ventures L.L.C. of
which Mr. Kiernan is a partner.
(6) Includes 382,500 shares of Common Stock held by Sonostar Ventures L.L.C. of
which Mr. Moore is a partner and 85,000 shares of Common Stock held by
Garden State Brickface, Windows and Siding, Inc. of which Mr. Moore is
Chairman and Chief Executive Officer.
(7) Includes 255,000 shares of Common Stock held by the David A. Yoho Revocable
Trust dated January 19, 1995 (the "Yoho Trust") of which Mr. Yoho is the
trustee.
(8) Includes 381,300 shares of Common Stock held by About Face Limited, a family
limited partnership in which Murray H. Gross is the president of the general
partner, 382,500 shares of Common Stock held by Sonostar Ventures L.L.C. of
which each of Mr. Moore and Mr. Kiernan is a partner, 255,000 shares of
Common Stock held by the Yoho Trust of which Mr. Yoho is the trustee and
85,000 shares held by Garden State Brickface, Windows and Siding, Inc. of
which Mr. Moore is Chairman and Chief Executive Officer.
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<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Certificate of Incorporation of the Company authorizes the issuance of
15,000,000 shares of Common Stock, and 100,000 shares of preferred stock, par
value $.01 per share (the "Preferred Stock"), 80,000 shares of which have been
designated as Series A Preferred Stock (the "Series A Preferred Stock"). As of
October 31, 1998, 2,500,000 shares of Common Stock were issued and outstanding
and 80,000 shares of Series A Preferred Stock were issued and outstanding.
As provided in the Certificate of Incorporation, no stockholder is entitled
to preemptive rights or cumulative voting rights. The Board also has the
authority to fix or alter the powers, designations, preferences and relative,
participating, optional or other special rights of all classes of the capital
stock of the Company.
UNITS
The Units offered hereby consist of one share of Common Stock and one
Warrant to purchase one share of Common Stock. See "-- Common Stock" and "--
Redeemable Common Stock Purchase Warrants."
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record for the election of directors on all other matters submitted to the
stockholders. There are no cumulative voting or preemptive rights attributable
to any shares of Common Stock. The Common Stock does not have any conversion
rights and is not subject to redemption. After dividends have been declared and
set aside for payment or paid on any series of preferred stock, each holder of
Common Stock is entitled to receive and to share equally in, when, as and if
declared by the Board of Directors, dividends per share, out of the funds
legally available therefore, in such amounts as the Board may from time to time
fix and determine. Upon liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary of involuntary, after there has been paid or
set apart for the holders of any series of preferred stock having a preference
over the Common Stock, the holders of Common Stock are entitled to receive and
to share equally in all of the assets of the Company available for distribution
to the stockholders. All outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has designated 80,000 shares of Preferred Stock as
Series A Preferred Stock. The holders of Series A Preferred Stock have no
voting rights other than those expressly provided in the Certificate of
Incorporation or by applicable law. The holders of Series A Preferred Stock are
also entitled to receive dividends at the rate of $1.00 per annum commencing on
November 30, 1997, payable when and as declared by the Board of Directors, out
of funds at the time legally available therefor; provided however, that if all
of the outstanding shares of Series A Preferred Stock are redeemed in full by
the Company prior to June 30, 1999, no dividends will accrue on the Series A
Preferred Stock. The dividends on the Series A Preferred Stock are cumulative
and become due semiannually in arrears as of the last day of June and December
of each calender year, the first being due and payable on June 30, 1999.
Interest on accrued and unpaid dividends bear interest at annual rate of 10%.
The dividends on the Series A Preferred Stock are senior in right of dividend
payments to any other class or Series of Preferred Stock or Common Stock of the
Company unless the holders of at least two-thirds of the outstanding shares of
Series A Preferred Stock expressly consent to the contrary. In addition,
dividends on the Series A Preferred Stock must be paid prior to the purchase or
redemption of any class or series of stock ranking junior to the Series A
Preferred Stock and the Series A Preferred Stock shall have preference over
Common Stock in the event of any liquidation or winding up of the Company. The
Company may redeem all or a part of the Series A Preferred Stock outstanding at
any time; however, commencing on June 30, 1999, and on the last day of December
and June thereafter, the Company must redeem the lesser of 8,000 shares of
Series A Preferred Stock or the remaining shares of Series A Preferred Stock
outstanding at a price per share of $10.00 plus any accrued and unpaid
dividends. The Company may also convert and exchange all of the Series A
Preferred Stock into a promissory note payable to the holder of the shares of
Series A Preferred Stock in the original principal amount of the redemption
value of the outstanding shares, plus any accrued but unpaid dividends. The
promissory note shall bear interest at the rate of 10% percent interest
compounded annually. All outstanding shares of Series A Preferred Stock are
fully paid and nonassessable.
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<PAGE>
The Board of Directors may, without further action by the Company's
stockholders, authorize, from time to time, the issuance of up to 20,000 shares
of Preferred Stock in series and may, at the time of issuance, determine the
powers, rights, preferences and limitations of any such series. Satisfaction of
any dividend preferences on outstanding shares of Series A Preferred Stock or
any other issuance of Preferred Stock would reduce the amount of funds available
for the payment of dividends on Common Stock. Holders of Preferred Stock would
be entitled to receive a preference payment in the event of any liquidation,
dissolution or winding up of the Company before any payment is made to the
holders of Common Stock. Although there is no current intention to do so, the
Board of Directors may, without stockholder approval, issue shares of a class or
series of Preferred Stock with voting and conversion rights which could
adversely affect the voting power or dividend rights of the holders of Common
Stock and may have the effect of delaying, deferring or preventing a change in
control of the Company.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
The Warrants will be issued in registered form pursuant to an agreement
dated the date of this Prospectus (the "Warrant Agreement") between the Company
and Securities Transfer Corporation, a Texas corporation, as the Warrant Agent
(the "Warrant Agent"). The following discussion of certain terms and provisions
of the Warrants is qualified in its entirety by reference to the Warrant
Agreement. A form of the certificate representing the Warrants which form a
part of the Warrant Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
Each of the Warrants entitles the registered holder to purchase one share
of Common Stock. The Warrants are exercisable at a price equal to $6.25 (which
exercise price has been arbitrarily determined by the Company and the
Representative) subject to certain adjustments. The Warrants are entitled to
the benefit of adjustments in their exercise prices and in the number of shares
of Common Stock or other securities deliverable upon the exercise thereof in the
event of a stock dividend, stock split, reclassification, reorganization,
consolidation or merger.
The Warrants may be exercised at any time after the Separation Date and
continuing thereafter until the close of five years from the date hereof, unless
such period is extended by the Company. After the expiration date, Warrant
holders shall have no further rights. Warrants may be exercised by surrendering
the certificate evidencing such Warrant, with the form of election to purchase
on the reverse side of such certificate properly completed and executed,
together with payment of the exercise price and any transfer tax, to the Warrant
Agent. If less than all of the Warrants evidenced by a warrant certificate are
exercised, a new certificate will be issued for the remaining number of
Warrants. Payment of the exercise price may be made by cash, bank draft or
official bank or certified check equal to the exercise price.
Warrant holders do not have any voting or any other rights as stockholders
of the Company. The Company has the right from the date hereof to redeem the
Warrants, at a price of $.05 per Warrant, by written notice to the registered
holders thereof, mailed not less than 30 nor more than 60 days prior to the
proposed date of redemption (the "Redemption Date"). The Company may exercise
this right only if the closing price for the Common Stock for seven trading days
during a ten consecutive trading day period ending no more than 15 days prior to
the date that the notice of redemption is given, equals or exceeds $8.75 per
share, subject to adjustment. If the Company exercises its right to call
Warrants for redemption, such Warrants may still be exercised until the close of
business on the day immediately preceding the Redemption Date. If any Warrant
called for redemption is not exercised by such time, it will cease to be
exercisable, and the holder thereof will be entitled only to the repurchase
price. Notice of redemption will be mailed to all holders of Warrants of record
at least 30 days, but not more than 60 days, before the Redemption Date. The
foregoing notwithstanding, the Company may not call the Warrants at any time
that a current registration statement under the Securities Act is not then in
effect. Any redemption of the Warrants during the one-year period commencing on
the date of this Prospectus shall require the written consent of the
Representative. The Company has agreed to pay the Representative upon the
exercise or redemption of the Warrants a fee equal to 5% of the gross proceeds
received by the Company from the exercise of the Warrants actually solicited by
the Representative and 5% of the aggregate redemption price for Warrants
redeemed. Such fee will be paid to the Representative or its designee no sooner
than 12 months after the effective date of this Offering.
The Warrant Agreement permits the Company and the Warrant Agent without the
consent of Warrant holders, to supplement or amend the Warrant Agreement in
order to cure any ambiguity, manifest error or other mistake, or to address
other matters or questions arising thereafter that the Company and the Warrant
Agent deem necessary or desirable and that do not adversely affect the interest
of any Warrant holder. The Company and the Warrant Agent
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<PAGE>
may also supplement or amend the Warrant Agreement in any other respect with the
written consent of holders of not less than a majority in the number of Warrants
then outstanding; however, no such supplement or amendment may (i) make any
modification of the terms upon which the Warrants are exercisable or may be
redeemed; or (ii) reduce the percentage interest of the holders of the Warrants
without the consent of each Warrant holder affected thereby.
In order for the holder to exercise a Warrant, there must be an effective
registration statement, with a current prospectus on file with the Commission
covering the shares of Common Stock underlying the Warrants, and the issuance of
such shares to the holder must be registered, qualified or exempt under the laws
of the state in which the holder resides. If required, the Company will file a
new registration statement with the Commission with respect to the securities
underlying the Warrants prior to the exercise of such Warrants and will deliver
a prospectus with respect to such securities to all holders thereof as required
by Section 10(a)(3) of the Act. See "Risk Factors -- Current Prospectus and
State Blue Sky Registration in Connection with the Exercise of the Warrants."
REPRESENTATIVE'S WARRANTS
At the closing of this Offering, the Company will issue to the
Representative or its designees, for nominal consideration, Representative's
Warrants to purchase up to 140,000 Units. The Representative's Warrants are
exercisable for a four-year period commencing one year from the closing date of
this Offering at a purchase price of 120% of the initial public offering price
of the Units. The Representative's warrants may not be sold, transferred,
assigned or otherwise disposed of except under certain limited circumstances.
In addition, the Company has granted to the Representative certain registration
rights with respect to registration of the shares of Common Stock and the
Underlying Warrants constituting the Units issuable upon exercise of the
Representative's Warrants and the shares of Common Stock issuable upon exercise
of the Underlying Warrants. The Company has agreed to indemnify the Underwriter
against certain liabilities arising under the Securities Act. See "Risk Factors
- -- Exercise of Representative's Warrants" and "Underwriting."
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certification of Incorporation and Bylaws provide that any
action required or permitted to be taken by the stockholders of the Company may
be taken only at a duly called annual or special meeting of stockholders or by a
written consent signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted, and that special meetings of stockholders may be called only by the
Chairman of the Board, the President or the Board of Directors of the Company.
These 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. The Company's Certificate of
Incorporation also does not allow for cumulative voting for directors or for any
other purpose. Under cumulative voting, a minority stockholder holding a
sufficient percentage of a class of shares might be able to ensure the election
of one or more directors. These and other provisions contained in the
Certificate of Incorporation and the Company's Bylaws could delay or discourage
certain types of transactions involving an actual or potential change in control
of the Company or its management (including transactions in which stockholders
might otherwise receive a premium for their shares over the then current prices)
and may limit the ability of stockholders to remove current management of the
Company or approve transactions that stockholders may deem to be in their best
interests and, therefore, could adversely affect the price of the Company's
Common Stock.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, Section 203 of the DGCL 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 the
business combination is approved in a prescribed manner. 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. This provision could delay, discourage or prohibit
transactions not approved in advance by the Board of Directors, such as takeover
attempts that might result in a premium over the market price of the Common
Stock.
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<PAGE>
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation of the Company provides that a director of
the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except as
limited by the DGCL. If the DGCL is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Company, in addition to the limitation on personal liability
described above, shall be limited to the fullest extent permitted by the amended
DGCL. Further, any repeal or modification of such provision of the Certificate
of Incorporation by the stockholders of the Company shall be prospective only,
and shall not adversely affect any limitation on the personal liability of a
director of the Company existing at the time of such repeal or modification.
The Bylaws of the Company provide that the Company will indemnify its directors
to the fullest extent permitted by the DGCL and may, if and to the extent
authorized by the Board of Directors, so indemnify its officers and any other
person whom it has the power to indemnify against liability, reasonable expense
or other matter whatsoever.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Units, Common Stock and Warrants
is Securities Transfer Corporation, a Texas corporation.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the completion of the Offering could have an adverse effect on the market price
of the Common Stock. Upon completion of the Offering, there will be
approximately 3,900,000 (4,110,000 shares if the Underwriters' over-allotment
option is exercised in full) shares of Common Stock outstanding. The
Securities offered hereby will be eligible for public sale without restriction,
except for shares purchased by affiliates of the Company (those controlling or
controlled by or under common control with the Company and generally deemed to
include officers and directors). Of the 3,900,000 shares of Common Stock to be
outstanding after the Offering, 2,500,000 shares will be deemed "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act. Additionally, there will be outstanding as of the closing of
the Offering, Warrants to purchase an aggregate 1,400,000 shares of Common Stock
(1,610,000 Warrants if the Underwriters' over-allotment option is exercised in
full). See "Description of Securities."
Effective April 29, 1997, the Commission adopted amendments to Rule 144 to
shorten the holding period for restricted securities, generally being those
securities purchased in unregistered private placements. As a result of these
amendments, and subject to satisfaction of certain other conditions, a person,
including an affiliate of the Company (or persons whose shares are aggregated
into such affiliate), who has owned restricted shares of Common Stock
beneficially for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of one percent of
the total number of outstanding shares of the same class or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
sale. Subject to the volume and holding period limitations of Rule 144 and the
lock-up agreements described below, approximately 2,100,750 outstanding shares
of Common Stock are eligible for sale under Rule 144 after the completion of the
Offering. Holders of approximately 2,478,750 shares of Common Stock, including
officers, directors and holders of greater than 5% of the Common Stock of the
Company, will agree to "lock-up" their shares of Common Stock for periods
ranging from 12 to 24 months after the completion of the Offering. A person who
has not been an affiliate of the Company for at least the three months
immediately preceding the sale and who has beneficially owned shares of Common
Stock for at least two years is entitled to sell such shares under Rule 144(k)
without regard to any of the limitations described above. As of the
commencement of the Offering, no restricted shares of Common Stock would be
eligible for sale under the provisions of Rule 144(k). See "-- Lock-Up
Agreements."
The possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect the prevailing market price for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
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<PAGE>
REGISTRATION RIGHTS
The holders of the Representative's Warrants have been granted registration
rights to require the Company, at the Company's expense, to register under the
Securities Act the 140,000 Units issuable upon exercise of the Representative's
Warrants including the 140,000 shares of Common Stock and the 140,000 Underlying
Warrants, including the 140,000 shares of Common Stock issuable upon exercise of
the Underlying Warrants comprising the Units. See "Underwriting." Any exercise
of such registration rights by the holders of these securities may hinder the
Company's efforts to obtain future financing and may have an adverse effect on
the market price of the Common Stock. See "Risk Factors -- Exercise of
Representative's Warrants; -- Continuing Relationship with Representative;
Potential Influence."
LOCK-UP AGREEMENTS
Each of the Company's officers and directors have agreed to enter into
Lock-Up Agreements with the Representative for the purpose of restricting their
ability to sell the shares of Common Stock beneficially held by them for a
period of 24 months from the closing date of the Offering. Those stockholders
holding greater than five percent of the Company's outstanding Common Stock
before the Offering have also agreed to enter into similar lock-up arrangements
for a period of 12 months following the closing date of the Offering.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriter(s) named below, for whom First London Securities Corporation is
acting as the Representative, have severally agreed to purchase from the Company
an aggregate of 1,400,000 Units. The number of Units which each Underwriter has
agreed to purchase is set forth opposite its name.
<TABLE>
<CAPTION>
Number of Units
---------------
<S> <C>
First London Securities Corporation ....
----------
----------------------------- ......... ----------
----------------------------- ......... ----------
----------------------------- ......... ----------
----------------------------- ......... ----------
Total
</TABLE>
The Securities are offered by the Underwriters subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to approval
of certain legal matters by counsel and certain other conditions. The
Underwriters are committed to purchase all Securities offered by this
Prospectus, if any are purchased.
The Company has been advised that the Underwriters propose initially to
offer the Securities offered hereby to the public at the offering price set
forth on the cover page of this Prospectus. The Representative has advised the
Company that the Underwriters propose to offer the Securities through members of
the NASD, and may allow a concession, in their discretion, to certain dealers
who are members of the NASD and who agree to sell the Securities in conformity
with the NASD Conduct Rules. Such concessions shall not exceed the amount of
the underwriting discount that the Underwriters are to receive.
The Company has granted to the Representative an option, exercisable for 45
days from the date of this Prospectus, to purchase up to an additional 210,000
Units at the public offering price less the underwriting discount set forth on
the cover page of this Prospectus (the "Over-Allotment Option"). The
Representative may exercise the Over-Allotment Option solely to cover over-
allotments in the sale of the Securities being offered by this Prospectus.
Officers and directors of the Company may introduce the Representative to
persons to consider the Offering and purchase Securities either through the
Representative, other Underwriters, or through participating dealers. In this
connection, officers and directors will not receive any commissions or any other
compensation. As of ________________, 1998, no plans, proposals, arrangements
or understandings have been made. Furthermore,
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<PAGE>
no reservations of shares have been implemented. However, in the future, such
plans, proposals, arrangements or understandings may be made and such
reservations of shares may be implemented.
The Company has agreed to pay the Representative a commission of 10% of the
gross proceeds of the Offering (the "Underwriting Discount"), including the
gross proceeds from the sale of the Over-Allotment Option, if exercised. In
addition, the Company has agreed to pay to the Representative a non-accountable
expense allowance of three percent (3%) of the gross proceeds of this Offering,
including proceeds from any Securities purchased pursuant to the Over-Allotment
Option, of which $60,000 has been paid to date. The Representative's expenses
in excess of the non-accountable expense allowance will be paid by the
Representative. The Company has agreed to pay the Representative upon the
exercise or redemption of the Warrants a fee equal to 5% of the gross proceeds
received by the Company from the exercise of the Warrants solicited by the
Representative and 5% of the aggregate redemption price for Warrants redeemed.
Such fee will be paid to the Representative or its designees no sooner than 12
months after the effective date of this Offering. The Representative has
informed the Company that they do not expect sales to discretionary accounts to
exceed 5% of the total number of Securities offered by the Company hereby.
Additionally, the Representative shall have the right for two years to nominate
an Advisory Director to the Company's Board of Directors. The Advisory
Director will have the same privileges as a normal director including equal
compensation, but will not have the right to vote on Board issues. See "Risk
Factors -- Continued Relationship with Representative; Potential Influence."
Prior to this Offering, there has been no public market for the Securities.
Consequently, the initial public offering price for the Securities, and the
terms of the Warrants (including the exercise price of the Warrants), have been
determined by negotiation between the Company and the Representative. Among the
factors considered in determining the public offering price were the history of,
and the prospect for, the Company's business, an assessment of the Company's
management, its past and present operations, the Company's development and the
general condition of the securities market at the time of this Offering. The
initial public offering price does not necessarily bear any relationship to the
Company's assets, book value, earnings or other established criteria of value.
Such price is subject to change as a result of market conditions and other
factors, and no assurance can be given that a public market for the Common Stock
or Warrants will develop after the close of this Offering, or if a public market
in fact develops, that such public market will be sustained, or that the Common
Stock or Warrants can be resold at any time at the offering or any other price.
See "Risk Factors."
At the closing of this Offering, the Company will issue to the
Representative or its designee, for nominal consideration, Representative's
Warrants to purchase up to 140,000 Units. The Representative's Warrants will be
exercisable for a five-year period commencing one year from the closing date of
this Offering at a purchase price of 120% of the initial public offering price
of the Units, subject to adjustment. The Representative's Warrants will not be
transferable, except (i) to officers of the Representative, other Underwriters,
and officers and partners thereof; (ii) by will; or (iii) by operation of law.
The Representative's Warrants contain provisions providing for appropriate
adjustment in the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
Representative's Warrants contain net issuance provisions permitting the holders
thereof to elect to exercise the Representative's Warrants in whole or in part
and instruct the Company to withhold from the securities issuable upon exercise,
a number of securities, valued at the current fair market value on the date of
exercise, to pay the exercise price. Such net exercise provision has the effect
of requiring the Company to issue shares of Common Stock without a corresponding
increase in capital. A net exercise of the Representative's Warrants will have
the same dilutive effect on the interests of the Company's stockholders as will
a cash exercise. The Representative's Warrants do not entitle the holders
thereof to any rights as a stockholder of the Company until such
Representative's Warrants are exercised and shares of Common Stock are purchased
thereunder.
The Company has granted to the holders of the Representative's Warrants
certain rights with respect to registration of the Common Stock, the Underlying
Warrants and the Common Stock issuable upon exercise of the Underlying Warrants
(the "Registrable Securities") under the Securities Act. For a period of five
years commencing one year following the date of this Prospectus, the holders
representing more than 50% of the Registrable Securities may require the Company
at the Company's sole expense to prepare and file one registration statement
under the Securities Act with respect to the Registrable Securities. For a
period of five years commencing one year following the date of this Prospectus,
the holders representing more than 50% of the Registrable Securities also have
the right at the Representative's or holders' expense to require the Company to
prepare and file one registration statement with respect to the Registrable
Securities. In addition, subject to certain limitations, in the event the
Company proposes
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<PAGE>
to register any of its securities under the Securities Act during the seven-year
period following the date of this Prospectus, the holders of the Registrable
Securities are entitled to notice of such registration and may elect to include
the Registrable Securities held by them in such registration statement at the
sole expense of the Company.
The Company has agreed to indemnify the Underwriters against any costs or
liabilities incurred by the Underwriters by reasons of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement and the Prospectus. The Underwriters have in turn agreed
to indemnify the Company against any liabilities by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Prospectus, based on information relating to the Underwriters and furnished in
writing by the Underwriters. To the extent that this section may purport to
provide exculpation from possible liability arising from the federal securities
laws, in the opinion of the Commission, such indemnification is contrary to
public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to
copies of each such agreement which are filed as exhibits to the Registration
Statement. See "Available Information."
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Jackson Walker LLP, Dallas, Texas. Certain legal matters in
connection with the sale of the Securities offered hereby will be passed on for
the Underwriters by Jordaan & Pennington, PLLC, Dallas, Texas. Charles D.
Maguire, Jr., a partner with Jackson Walker L.L.P. is also a director of the
Company. Mr. Maguire does not beneficially own any shares of the Company's
Common Stock or other securities of the Company.
EXPERTS
The consolidated financial statements of U.S. Remodelers, Inc. at
September 30, 1998 and December 31, 1997 and for the periods then ended and the
combined financial statements of Reunion Home Services, Inc. and Kitchen
Masters, Inc. (collectively, "Reunion") at November 23, 1997 appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon, appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEX TO FINANCIAL STATEMENTS F-1
U.S. Remodelers, Inc.
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheet
as of December 31, 1997 F-3
Consolidated Statement of Operations
for the period ended December 31, 1997 F-4
Consolidated Statement of Stockholders' Deficit
for the period ended December 31, 1997 F-5
Consolidated Statement of Cash Flows
for the period ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
U.S. Remodelers, Inc.
Report of Ernst & Young LLP, Independent Auditors F-15
Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997 F-16
Consolidated Statements of Operations
for three months ended September 30, 1998 and 1997 (unaudited) F-17
Consolidated Statements of Operations
for nine months ended September 30, 1998 and the
period ended September 30, 1997 (unaudited) F-18
Consolidated Statement of Stockholders' Deficit F-19
Consolidated Statements of Cash Flows
for the three months ended September 30, 1998 and 1997 (unaudited) F-20
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and the
period ended September 30, 1997 (unaudited) F-21
Notes to Consolidated Financial Statements F-22
Reunion Home Services, Inc. and Kitchen Masters, Inc. (Reunion)
Report of Ernst & Young LLP, Independent Auditors F-36
Combined Balance Sheet as of November 23, 1997 F-37
Combined Statement of Operations as of November 23, 1997 F-38
Combined Statement of Stockholders' Equity for the period ended
November 23, 1997 F-39
Combined Statement of Cash Flows for the period ended November 23, 1997 F-40
Notes to Combined Financial Statements F-41
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
U.S. Remodelers, Inc.
We have audited the accompanying consolidated balance sheet of U.S. Remodelers,
Inc. as of December 31, 1997, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Remodelers,
Inc., at December 31, 1997, and the results of its operations and its cash flows
for the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
March 20, 1998,
except for Note 16,
as to which the date is
June 11, 1998
F-2
<PAGE>
U.S. REMODELERS, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 257,850
Accounts receivable, net of allowance for doubtful accounts of $79,715 518,593
Inventory 885,160
Prepaid expenses 320,147
-----------
Total current assets 1,981,750
Property, plant and equipment, net 2,628,374
Other assets 98,300
-----------
Total assets $ 4,708,424
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,352,396
Accrued wages, commissions and bonuses 304,436
Current portion of long-term debt 170,818
Current portion of capital lease obligations 88,771
Other accrued liabilities 274,080
-----------
Total current liabilities 2,190,501
Long-term debt, net of current portion 180,818
Long-term capital lease obligations, net of current portion 835,775
Notes payable - related parties 1,090,000
Commitments and contingencies
Redeemable preferred stock: $.01 par value, 80,000 shares issued and outstanding, liquidation
value $10 per share 689,967
Stockholders' deficit:
Preferred stock: $.01 par value, 100,000 shares authorized, 80,000 redeemable
preferred shares outstanding -
Common stock, $.01 par value: 15,000,000 shares authorized, 2,476,480 shares issued,
2,472,230 shares outstanding 24,765
Additional capital 1,146,473
Accumulated deficit (1,447,375)
Treasury stock - 4,250 shares (2,500)
-----------
Total stockholders' deficit (278,637)
-----------
Total liabilities and stockholders' deficit $ 4,708,424
===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
U.S. REMODELERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Period ended December 31, 1997
<TABLE>
<S> <C>
Contract revenue $16,158,745
Cost of goods sold 6,453,597
-----------
Gross profit 9,705,148
Operating expenses:
Branch operating 946,125
Sales and marketing 7,545,777
License fees 238,307
General and administrative 2,273,182
-----------
Net operating loss (1,298,243)
Other expenses, net (144,132)
-----------
Loss before income taxes (1,442,375)
Income taxes 5,000
-----------
Net loss $(1,447,375)
===========
Net loss per common share - basic and diluted $ (0.76)
===========
Weighted average shares outstanding 1,911,040
===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
U.S. REMODELERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Total
-------------------- Paid-In Accumulated -------------------- Stockholders'
Shares Amount Capital Deficit Shares Amount Deficit
-------- -------- ---------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 23, 1997
(inception) -- $ -- $ -- $ -- -- $ -- $ --
Issuance of common stock 2,105,000 21,050 1,031,450 -- -- -- 1,052,500
Issuance of common stock,
Reunion asset acquisition 371,480 3,715 121,690 -- -- -- 125,405
Purchase of treasury stock -- -- -- -- 4,250 (2,500) (2,500)
Accretion on redeemable
preferred stock -- -- (6,667) -- -- -- (6,667)
Net loss -- -- -- (1,447,375) -- -- (1,447,375)
--------- -------- ---------- ----------- -------- -------- -------------
Balance at December 31, 1997 2,476,480 $ 24,765 $1,146,473 $(1,447,375) 4,250 $ (2,500) $ (278,637)
========= ======== ========== =========== ======== ======== =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
U.S. REMODELERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Period ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,447,375)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 189,219
Provision for doubtful accounts 79,715
Changes in operating assets and liabilities:
Accounts receivable (260,509)
Inventory (437,222)
Prepaid expenses (223,120)
Accounts payable 674,304
Other assets and liabilities (49,829)
-----------
Net cash used in operating activities (1,474,817)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of AMRE assets (1,481,690)
Purchase of Reunion assets, net of cash acquired (486,611)
Capital expenditures (501,466)
Proceeds from sale of property, plant and equipment 22,700
-----------
Net cash used in investing activities (2,447,067)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings of long-term debt 1,231,029
Borrowings from related parties 1,090,000
Preferred stock issuance 683,300
Proceeds from issuance of common stock, net of treasury stock 1,175,405
-----------
Net cash provided by financing activities 4,179,734
-----------
Net increase in cash 257,850
Cash and cash equivalents at beginning of period --
-----------
Cash and cash equivalents at end of period $ 257,850
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 128,446
===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements
December 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
U. S. Remodelers, Inc. (the "Company") is engaged, through direct consumer
marketing, in the design, sales, manufacture and installation of kitchen cabinet
refacing products utilized in kitchen remodeling. The Company operates in 13
major metropolitan areas in the United States. The Company conducts a
substantial portion of its direct consumer marketing under the trademark and
service mark "Century 21 Cabinet Refacing" under license agreements with TM
Acquisition Corp. ("TM") and HFS Licensing Inc. ("HFS") pursuant to a master
license agreement between Century 21 Real Estate Corporation and each of TM and
HFS. The Company also conducts its business under the name "Facelifters/TM/."
The consolidated financial statements include the accounts of U. S. Remodelers,
Inc. and its wholly-owned subsidiary. All significant intercompany accounts and
transactions are eliminated in consolidation.
On January 23, 1997, the Company commenced business under the laws of the State
of Delaware. Effective April 3, 1997, the Company purchased selected assets of
Amre, Inc., and Facelifters Home Systems, Inc. ("Facelifters") and American
Remodeling Inc., wholly-owned subsidiaries of Amre, Inc. (collectively,
"AMRE") after AMRE filed for protection under Chapter 11 of the United States
Bankruptcy Code. Facelifters was a kitchen remodeling and cabinet refacing
business which was acquired by Amre, Inc. in April, 1996. Effective November 23,
1997, the Company acquired certain assets of Reunion Home Services, Inc. and
Kitchen Masters, Inc. (collectively "Reunion"). Reunion was a marketer and
installer of kitchen cabinet refacing products, as well as a manufacturer of
kitchen cabinet doors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in bank accounts, money market funds,
and certificates of deposit with maturities of 90 days or less.
ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from individuals, credit card
sponsors and financial institutions. Because of the diverse customer base, there
are no concentrations of credit risk. The Company provides for estimated losses
of uncollectable accounts.
INVENTORY
Inventory (consisting principally of raw materials) is carried at the lower of
cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives of the related assets
by using the straight-line method of depreciation. Maintenance and repairs are
expensed when incurred; renewals and betterments are capitalized.
REVENUE RECOGNITION
Revenue is recognized upon completion of each home improvement contract. Costs
of goods sold represent the costs of direct materials and labor associated with
installations and manufacturing overhead associated with the production of
cabinet fronts and countertops.
F-7
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETING
The Company's marketing consists predominantly of telemarketing and is
supplemented by television and other direct consumer marketing media. The
Company expenses all marketing costs as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred
income taxes are provided for temporary differences between the tax basis of
assets and liabilities and their basis for financial reporting purposes.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is based on the income (loss) available to
common stockholders and the weighted average number of shares outstanding during
the period. Diluted earnings (loss) per share includes the effect of dilutive
common stock equivalents except when those equivalents would be antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments approximate fair
value.
3. ACQUISITION
Effective April 3, 1997, the Company purchased selected assets from AMRE for
approximately $834,000 (see Note 1). The Company effected the purchase through a
cash payment of approximately $352,000 and the assumption of $482,000 in debt
related to certain of these assets. In addition, the Company assumed a capital
lease from Facelifters, for a manufacturing facility of approximately
$740,000.
On November 23, 1997, the Company acquired certain assets of Reunion Home
Services, Inc. and Kitchen Masters, Inc. (collectively Reunion). The Company
effected the purchase through the issuance of 371,480 shares of common stock
valued at $125,405 and 80,000 shares of Redeemable Preferred Stock with a fair
value of $683,300. The acquisition was accounted for as a purchase and
accordingly, the purchased assets and liabilities have been recorded at their
estimated fair value at the date of acquisition. The results of operations of
the acquired business have been included in the financial statements since the
date of acquisition.
The following unaudited pro forma information shows the results of the Company's
operations as though the purchase of Reunion had been made at the beginning of
the period (sales of $23.4 million, net loss of $1.5 million and loss per common
share of $0.80). The unaudited pro forma results are not necessarily indicative
of the actual results of operations that would have occurred had the purchase
actually been made at the beginning of the period, nor is it necessarily
indicative of future results of operations of the combined enterprise.
F-8
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
4. INVENTORY
Inventories at December 31, 1997 consisted of the following:
Raw materials $578,213
Work-in-progress 306,947
--------
$885,160
========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31 DEPRECIATION
1997 LIVES
----------- ------------
Land $ 50,000 -
Buildings and improvements 690,135 39 years
Machinery and equipment 1,502,865 3-7 years
Furniture, fixtures and
computer equipment 564,560 5-7 years
Leasehold improvements 5,262 3 years
----------
2,812,822
Less accumulated depreciation 184,448
----------
$2,628,374
==========
6. LONG-TERM DEBT
At December 31, 1997, long-term debt consisted of the following:
8.2% Secured note payable due to Central Fidelity National
Bank in monthly payments of principal and interest of
$10,411 through November, 1998 and a final payment of
$9,195 in December, 1998 $118,495
6.0% Secured note payable due to Industrial Development
Authority of Charles City County in monthly payments of
principal and interest of $4,998 through April, 2002 228,395
Other 4,746
--------
351,636
Less current portion 170,818
--------
$180,818
========
Notes payable to Central Fidelity National Bank and Industrial Development
Authority of Charles City County are collateralized by certain machinery and
equipment.
F-9
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
Maturities of the notes payable during the next five years are as follows:
1998 $170,818
1999 50,511
2000 53,627
2001 56,933
2002 19,747
--------
$351,636
========
7. CAPITAL LEASES
At December 31, 1997 obligations under capital leases consisted of the
following:
Land and building $709,474
Machinery and equipment 178,514
Office furniture and equipment 36,558
--------
$924,546
========
Future minimum lease payments under these leases are as follows:
1998 $ 159,731
1999 159,731
2000 151,781
2001 140,651
2002 116,198
Thereafter 565,760
----------
Total minimum lease payments 1,293,852
Interest discount amount (369,306)
----------
Total present value of minimum lease payments 924,546
Less current portion 88,771
----------
Long-term portion $ 835,775
==========
Capital leases generally contain a bargain purchase option payable at the end of
the lease. The leases mature at various dates between July 2000 and February
2009, and are collateralized by assets under the leases having a gross book
value of $971,011 and accumulated depreciation of $34,391 at December 31, 1997.
8. NOTES PAYABLE - RELATED PARTIES
On January 23, 1997, the Company's Board of Directors authorized and approved
the issuance of an aggregate of $2,092,500 in convertible promissory notes (the
"Convertible Notes"). The Convertible Notes were to mature on March 31, 2002 and
the interest rate on the outstanding principal was 6.1% simple interest. The
Convertible Notes provided that the principal could be converted into Common
Stock at a conversion price of $.5880 per share at the election of the Board of
Directors or upon the consummation of an underwritten public offering. On March
24, 1997, the Board of Directors authorized and approved a conversion of the
Convertible Notes into Common Stock for an aggregate consideration of
$1,052,500, and after giving effect to the 10 for 1 stock split, issued
1,789,250 shares of Common Stock. In addition, the Company replaced the
remaining Convertible Notes with promissory notes (the "Promissory Notes") which
are not convertible into shares of Common Stock. The Promissory Notes provide
for interest at the rate of 10% per annum and that cash payments of interest are
to be made in equal semi-annual payments on each October 1 and April 1 until
March 31, 2002, upon which date the principal, together with all accrued but
unpaid interest thereon, shall mature and be due and payable. As of December 31,
1997 and September 30, 1998, the outstanding principle on all of the Promissory
Notes was $1,040,000. Additionally, the Company has a separate outstanding
indebtedness to an officer of the Company with the same terms as the Promissory
Notes in the amount of $50,000.
Interest expense, including $26,000 of accrued interest, was approximately
$78,000 for the period ended December 31, 1997. In January 1998, the Company
received additional funds of $350,000 pursuant to promissory notes from certain
stockholders which mature March 31, 1999.
F-10
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company operates principally in leased facilities and, in most cases,
management expects that leases currently in effect will be renewed or replaced
by other leases of a similar nature and term. Escalation charges imposed by
lease agreements are not significant.
Rent expense recognized under operating leases was approximately $587,000 for
the period ended December 31, 1997. Commitments for future minimum rental
payments required under operating leases with terms in excess of one year for
the years ending December 31 are as follows:
1998 $ 576,000
1999 435,000
2000 300,000
2001 119,000
2002 105,000
Thereafter 84,000
----------
Total minimum lease payments $1,619,000
==========
REVOLVING CREDIT AGREEMENT
The Company has an agreement with a financial institution which makes financing
available to the Company's customers. The agreement provides the financial
institution with the right of first refusal on all of the Company's customer
credit applications. The customer executes a Revolving Credit Agreement with the
lender and the lender pays the Company on completion of the installation. The
Company's risk under the agreement is limited to its normal representations and
warranties regarding material and workmanship.
PURCHASE COMMITMENT
The Company has an agreement with a provider of long distance communication
services for 36 months ending February 2000. The agreement provides for certain
minimum monthly usage fees whether or not the Company's actual usage exceeds
these minimums. During the period ended December 31, 1997, in no month did these
minimums exceed the Company's actual usage. Management does not expect that the
minimums will exceed the Company's usage during the term of the agreement.
LITIGATION
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
F-11
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
10. REDEEMABLE PREFERRED STOCK
In connection with the acquisition of the Reunion assets (see Note 3), the
Company issued 80,000 shares of Series A Preferred Stock ("Redeemable Preferred
Stock") with a redemption price of $10 per share. Holders of the Redeemable
Preferred Stock have no voting rights. The Redeemable Preferred Stock was
recorded at fair value on the date of issuance. The excess of the liquidation
value over the carrying value is being accreted by periodic charges to
stockholders' equity through June 30, 1999.
In preference to shares of common stock, dividends on the Redeemable Preferred
Stock at an annual rate of $1 per share are cumulative from the date of issuance
and are payable semi-annually each last day of June and December in arrears
(commencing June 30, 1999, when and as declared by the Company's Board of
Directors) except that no dividends shall be payable if the Redeemable Preferred
Stock is redeemed prior to June 30, 1999.
The Redeemable Preferred Stock is redeemable at the option of the Company at any
time, in whole or in part. The Company must redeem 8,000 shares each June and
December commencing June 30, 1999, together with accrued and unpaid dividends.
In the event the Company were to consummate the sale of its common stock
pursuant to public offering under the Securities Act of 1933 in which the
Company was to receive net proceeds of $7.5 million, the Company must redeem all
outstanding shares of the Redeemable Preferred Stock.
11. INCOME TAXES
The provision for income taxes for the period ended December 31, 1997 consists
of $5,000 of current state income taxes.
The components of the Company's net deferred tax asset at December 31, 1997 are
as follows:
Net operating loss carryforward $ 381,595
Reserve for doubtful accounts 31,192
Other accruals 95,473
---------
508,260
Valuation allowance (508,260)
---------
Net deferred tax asset $ -
=========
The Company has provided a valuation allowance to reflect the uncertainties
associated with the ultimate realization of its deferred tax asset, in
accordance with SFAS No. 109, "Accounting for Income Taxes." A valuation
allowance is required when it is more likely than not that the deferred tax
asset will not be realized. Principally, since this is the Company's first year
of operation and it has no historical taxable income record, there can be no
assurance that the deferred tax asset will ultimately be realized.
F-12
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the provision for income taxes at
the statutory federal tax rate for the following reasons:
Statutory federal income tax benefit $(492,674)
State income taxes, net of federal tax benefit 3,300
Valuation allowance on deferred tax assets 508,260
Other (13,886)
---------
$ 5,000
=========
As of December 31, 1997, the Company has a net operating loss carryforward of
$1,122,338 which expires in the year 2012.
12. LICENSE FEES
The Company conducts a substantial portion of its direct consumer marketing
under the trademark and service mark "Century 21 Cabinet Refacing" under license
agreements with TM Acquisition Corp. ("TM") and HFS Licensing Inc. ("HFS")
pursuant to a master license agreement between Century 21 Real Estate
Corporation and each of TM and HFS (collectively, "Licensor"). The Company also
conducts its business under the name "Facelifters/TM/."
The license agreements provide for a term of 10 years ending in 2007 and give
the Company the right to market, sell and install kitchen cabinet refacing in
specific territories under the name "Century 21 Cabinet Refacing." The license
agreements may be terminated by the Company upon 90 days written notice. The
license agreements may be terminated by the Licensor if the Company is negligent
in the performance of its services, becomes insolvent or bankrupt, fails to
comply with any material provisions of the license agreements, or fails to meet
certain minimum revenues. In the event Licensor was to cancel its license
agreements, the Company believes that these products could be independently
marketed by the Company in these territories, however, the cancellation of the
license agreements could have an adverse effect on the business of the Company.
The License agreements provide for license fees to HFS equal to 2% of the
associated contract revenues in 1997, and 2% to 6% of contract revenues over the
remainder of the term of the agreement subject to certain adjustments based upon
contract revenue levels and minimum fees in certain of its territories. License
fees pursuant to the license agreements were $238,307 for the period ended
December 31, 1997.
13. OTHER EXPENSES, NET
Other expenses, net consists of the following for the period ended December 31,
1997:
Interest expense $(147,872)
Other income 3,740
---------
$(144,132)
=========
14. EMPLOYEE SAVINGS PLAN
The Company maintains an employee savings plan (the Plan), under which qualified
participants make contributions by salary reduction pursuant to section 401(k)
of the Internal Revenue Code. At the discretion of the Board of Directors, the
Company contributes up to a maximum of 6% of base salary. Employee contributions
vest immediately, while Company contributions fully vest after five years. The
Company made no contributions to the Plan in 1997.
F-13
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
15. LOSS PER SHARE
The following table sets forth the computation of loss per share (which includes
the effects of accretion on the Redeemable Preferred Stock):
Loss applicable to common stockholders $1,454,042
Weighted average shares outstanding 1,911,040
Loss per common share - basic and diluted $ 0.76
The Company has no dilutive common stock equivalents.
16. SUBSEQUENT EVENTS
In April 1998, the Company received a $700,000 term loan from a financial
institution collateralized by certain equipment. The agreement provides for a
seven year amortization and interest payable monthly, at 2.125% percentage
points above the Prime Rate. In addition, the Company also received from the
same financial institution a commitment to provide a revolving credit facility
up to $1,000,000. Based upon the terms of the commitment the Company's available
borrowing base under the revolving facility would have been approximately
$700,000 as of March 31, 1998. In addition, the Company has engaged First London
Securities Corporation with respect to an anticipated financing transaction by
the Company, involving debt and equity, which is intended to provide the Company
with sufficient cash to meet the Company's anticipated future working capital
needs.
In June 1998, the stockholders approved an increase in the authorized shares of
common stock of the Company from 1,000,000 shares to 15,000,000 shares.
Concurrent with the increase in the number of authorized shares, the Board of
Directors authorized a ten-for-one stock split effected in the form of a nine-
for-one stock dividend. Shareholder's equity has been restated to give
retroactive recognition to the stock split for all periods presented by
reclassifying from additional capital to common stock the par value of the
additional shares arising from the split. In addition, all references in the
financial statements to number of shares and per share amounts of the Company's
common stock have been restated.
F-14
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
U.S. Remodelers, Inc.
We have audited the accompanying consolidated balance sheet of U.S. Remodelers,
Inc. as of September 30, 1998 and December 31, 1997, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the periods ended September 30, 1998 and December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Remodelers,
Inc., at September 30, 1998 and December 31, 1997, and the results of its
operations and its cash flows for the periods ended September 30, 1998 and
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
November 11, 1998
F-15
<PAGE>
U. S. Remodelers, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 896,479 $ 257,850
Accounts receivable, net of allowance for doubtful accounts
of $80,370 and $79,715 744,755 518,593
Inventory 1,117,492 885,160
Prepaid expenses 460,795 320,147
----------- -----------
Total current assets 3,219,521 1,981,750
Property, plant and equipment, net 2,595,229 2,628,374
Other assets 114,817 98,300
----------- -----------
Total assets $ 5,929,567 $ 4,708,424
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,666,350 $ 1,352,396
Accrued wages, commissions and bonuses 625,556 304,436
Current portion of long-term debt 336,935 170,818
Current portion of capital lease obligations 173,519 88,771
Other accrued liabilities 491,897 274,080
----------- -----------
Total current liabilities 3,294,257 2,190,501
Long-term debt, net of current portion 699,759 180,818
Long-term capital lease obligations, net of current portion 833,150 835,775
Notes payable related parties 1,090,000 1,090,000
Commitments and contingencies
Redeemable preferred stock: $.01 par value,
80,000 shares issued and outstanding, liquidation value $10 per share 742,425 689,967
Stockholders' deficit:
Preferred stock: $.01 par value, 100,000 shares authorized,
80,000 redeemable preferred shares outstanding - -
Common stock, $.01 par value: 15,000,000 shares authorized,
2,500,000 shares issued and outstanding at September 30, 1998,
and 2,476,480 shares issued and 2,472,230 shares outstanding at
December 31, 1997 25,000 24,765
Additional capital 1,047,606 1,146,473
Accumulated deficit (1,802,630) (1,447,375)
Treasury stock 4,250 shares at December 31, 1997 - (2,500)
----------- -----------
Total stockholders' deficit (730,024) (278,637)
----------- -----------
Total liabilities and stockholders' deficit $ 5,929,567 $ 4,708,424
=========== ===========
</TABLE>
See accompanying notes.
F-16
<PAGE>
U.S. Remodelers, Inc.
Consolidated Statement of Operations
(unaudited)
Three Month Period
Ended
September 30,
------------------------
1998 1997
---------- ----------
Contract revenue $8,250,496 $4,891,548
Cost of goods sold 3,481,496 1,866,340
---------- ----------
Gross profit 4,769,000 3,025,208
Operating expenses:
Branch operating 390,763 245,857
Sales and marketing 3,057,497 2,139,101
License fees 130,061 71,710
General and administrative 714,997 518,442
---------- ----------
Net operating income 475,682 50,098
Other expenses, net (12,709) (47,626)
---------- ----------
Income before income taxes 462,973 2,472
Income taxes 5,000 -
---------- ----------
Net income $ 457,973 $ 2,472
========== ==========
Net income per common share basic and diluted $ .17 -
========== ==========
Weighted average shares outstanding 2,500,000 2,105,000
========== ==========
See accompanying notes.
F-17
<PAGE>
U. S. Remodelers, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Period Ended
September 30,
---------------------------
1997
1998 (unaudited)
----------- -----------
<S> <C> <C>
Contract revenue $21,146,566 $11,371,441
Cost of goods sold 8,844,059 4,089,872
----------- -----------
Gross profit 12,302,507 7,281,569
Operating expenses:
Branch operating 1,226,123 616,415
Sales and marketing 9,000,307 5,313,614
License fees 324,590 169,853
General and administrative 2,030,471 1,411,862
----------- -----------
Net operating loss (278,984) (230,175)
Other expenses, net (71,271) (87,718)
----------- -----------
Loss before income taxes (350,255) (317,893)
Income taxes 5,000 -
----------- -----------
Net loss $ (355,255) $ (317,893)
=========== ===========
Net loss per common share basic and diluted $ (0.19) $ (0.18)
=========== ===========
Weighted average shares outstanding 2,484,686 1,782,680
=========== ===========
</TABLE>
See accompanying notes.
F-18
<PAGE>
U. S. Remodelers, Inc.
Consolidated Statement of Stockholders' Deficit
<TABLE>
<CAPTION>
Total
Common Stock Additional Accumulated Treasury Stock Stockholders'
Shares Amount Capital Deficit Shares Amount Deficit
--------- ------- ----------- ------------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997 2,476,480 $24,765 $1,146,473 $(1,447,375) 4,250 $(2,500) $ (278,637)
Accrued dividends
Redeemable Preferred
Stock - - (20,001) - - - (20,001)
Accretion on Preferred
Stock - - (16,396) - - - (16,396)
Net loss - - - (596,132) - - (596,132)
--------- ------- ---------- ----------- ------ ------- -----------
Balance, March 31, 1998 2,476,480 $24,765 $1,110,076 $(2,043,507) 4,250 $(2,500) $ (911,166)
--------- ------- ---------- ----------- ------ ------- -----------
Accrued dividends
Redeemable Preferred
Stock - - (20,001) - - - (20,001)
Accretion on Preferred
Stock - - (17,806) - - - (17,806)
Issuance of Common
Stock 23,520 235 13,594 - (4,250) 2,500 16,329
Net loss - - - (217,096) - - (217,096)
--------- ------- ---------- ----------- ------ ------- -----------
Balance, June 30, 1998 2,500,000 $25,000 $1,085,863 $(2,260,603) - $ - $(1,149,740)
--------- ------- ---------- ----------- ------ ------- -----------
Accrued dividends
Redeemable Preferred
Stock - - (20,001) - - - (20,001)
Accretion on Preferred
Stock - - (18,256) - - - (18,256)
Issuance of Common
Stock - - - - - - -
Net income - - - 457,973 - - 457,973
--------- ------- ---------- ----------- ------ ------- -----------
Balance, September 30,
1998 2,500,000 $25,000 $1,047,606 $(1,802,630) - $ - $ (730,024)
========= ======= ========== =========== ====== ======= ===========
</TABLE>
See accompanying notes.
F-19
<PAGE>
U. S. Remodelers, Inc.
Consolidated Statement of Cash Flows
(unaudited)
Three Month Period
Ended
September 30,
---------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 457,973 $ 2,472
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 95,758 28,972
Provision for doubtful accounts 24,000 (4,232)
Changes in operating assets and liabilities:
Accounts receivable 42,831 (75,507)
Inventory (23,766) (65,010)
Prepaid expenses 121,729 12,534
Accounts payable (447,111) 180,822
Other assets and liabilities 266,338 (1,653)
--------- --------
Net cash provided by operating activities 537,752 78,398
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,889) (7,385)
--------- --------
Net cash used in investing activities (2,889) (7,385)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of long-term debt (195,216) (57,024)
--------- --------
Net cash used in financing activities (195,216) (57,024)
--------- --------
Net increase in cash 339,647 13,989
Cash and cash equivalents at beginning of period 556,832 597,847
--------- --------
Cash and cash equivalents at end of period $ 896,479 $611,836
========= ========
See accompanying notes.
F-20
<PAGE>
U. S. Remodelers, Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Period Ended
September 30,
-------------------------
1997
1998 (unaudited)
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(355,255) $ (317,893)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 290,019 56,744
Provision for doubtful accounts 93,000 60,768
Changes in operating assets and liabilities:
Accounts receivable (319,162) (888,290)
Inventory (232,332) (614,388)
Prepaid expenses (140,648) (340,670)
Accounts payable 313,954 621,933
Other assets and liabilities 462,417 248,322
--------- -----------
Net cash provided by (used in) operating activities 111,993 (1,173,474)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of AMRE assets - (1,481,690)
Capital expenditures (256,874) (197,001)
--------- -----------
Net cash used in investing activities (256,874) (1,678,691)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of long-term debt 767,181 1,309,001
Borrowings from related parties - 1,102,500
Proceeds from issuance of common stock 16,329 1,052,500
--------- -----------
Net cash provided by financing activities 783,510 3,464,001
--------- -----------
Net increase in cash 638,629 611,836
Cash and cash equivalents at beginning of period 257,850 -
--------- -----------
Cash and cash equivalents at end of period $ 896,479 $ 611,836
========= ===========
</TABLE>
See accompanying notes.
F-21
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements of U.S. Remodelers, Inc. and its
subsidiary (the "Company") for the three-month period ended September 30, 1998,
the three-month period ended September 30, 1997, and the period January 23, 1997
through September 30, 1997, included herein, are unaudited; however, in the
opinion of management, these interim statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows.
The Company is engaged, through direct consumer marketing, in the design,
sales, manufacture and installation of kitchen cabinet refacing products
utilized in kitchen remodeling. The Company operates in 13 major metropolitan
areas in the United States. The Company conducts a substantial portion of its
direct consumer marketing under the trademark and service mark "Century 21
Cabinet Refacing" under license agreements with TM Acquisition Corp. ("TM") and
HFS Licensing Inc. ("HFS") pursuant to a master license agreement between
Century 21 Real Estate Corporation and each of TM and HFS. The Company also
conducts its business under the name "Facelifters/TM/." The consolidated
financial statements include the accounts of U. S. Remodelers, Inc. and its
wholly-owned subsidiary. All significant intercompany accounts and transactions
are eliminated in consolidation.
On January 23, 1997, the Company commenced business under the laws of the State
of Delaware. Effective April 3, 1997, the Company purchased selected assets of
Amre, Inc., Facelifters Home Systems, Inc. ("Facelifters") and American
Remodeling Inc., wholly-owned subsidiaries of Amre, Inc. (collectively,
"AMRE") after AMRE filed for protection under Chapter 11 of the United States
Bankruptcy Code. Facelifters was a kitchen remodeling and cabinet refacing
business which was acquired by Amre, Inc. in April, 1996. Effective November 23,
1997, the Company acquired certain assets of Reunion Home Services, Inc. and
Kitchen Masters, Inc. (collectively "Reunion"). Reunion was a marketer and
installer of kitchen cabinet refacing products, as well as a manufacturer of
kitchen cabinet doors.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in bank accounts, money market funds,
and certificates of deposit with maturities of 90 days or less.
ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from individuals, credit card
sponsors, and financial institutions. Because of the diverse customer base,
there are no concentrations of credit risk. The Company provides for estimated
losses of uncollectable accounts.
F-22
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORY
Inventory (consisting principally of raw materials) is carried at the lower of
cost (first-in, first-out) or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment is carried at cost, less accumulated depreciation.
Depreciation is computed over the estimated useful lives of the related assets
by using the straight-line method of depreciation. Maintenance and repair
expenditures are expensed when incurred; renewals and betterments are
capitalized.
REVENUE RECOGNITION
Revenue is recognized upon completion of each home improvement contract. Costs
of goods sold represent the costs of direct materials and labor associated with
installations and manufacturing overhead associated with the production of
cabinet fronts and countertops.
MARKETING
The Company's marketing consists predominantly of telemarketing and is
supplemented by television and other direct consumer marketing media. The
Company expenses all marketing costs as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred
income taxes are provided for temporary differences between the tax bases of
assets and liabilities and their bases for financial reporting purposes.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on the income (loss) available to
common stockholders and the weighted average number of shares outstanding during
the period. Diluted earnings (loss) per share includes the effect of dilutive
common stock equivalents except when those equivalents would be antidilutive.
F-23
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments approximate fair
value.
NOTE 3: ACQUISITION
Effective April 3, 1997, the Company purchased selected assets from AMRE for
approximately $834,000 (see Note 1). The Company effected the purchase through a
cash payment of approximately $352,000 and the assumption of $482,000 in debt
related to certain of these assets. In addition, the Company assumed a capital
lease from AMRE for a manufacturing facility of approximately $740,000.
On November 23, 1997, the Company acquired certain assets of Reunion. The
Company effected the purchase through the issuance of 371,480 shares of common
stock valued at $125,405 and 80,000 shares of redeemable preferred stock with a
fair value of $683,300. The acquisition was accounted for as a purchase and
accordingly, the purchased assets and liabilities have been recorded at their
estimated fair value at the date of acquisition. The results of operations of
the acquired business have been included in the financial statements since the
date of acquisition.
The following unaudited pro forma information shows the results of the Company's
operations as though the purchase of Reunion had been made at the beginning of
the period. The unaudited pro forma results are not necessarily indicative of
the actual results of operations that would have occurred had the purchase
actually been made at the beginning of the period, nor is it necessarily
indicative of future results of operations of the combined enterprise.
F-24
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3: ACQUISITION (continued)
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION
------------------------------------------------------------
Three Month Period Year to Date Period Year to Date Period
Ended Ended Ended
September 30, 1997 September 30, 1997 December 31, 1997
------------------ ------------------- -------------------
<S> <C> <C> <C>
Contract revenues $7,093,727 $16,895,909 $23,395,301
Net loss (161,368) (513,388) (1,532,716)
Loss per share basic $ (.08) $ (.29) $ (.81)
</TABLE>
Note 4: Inventory
Inventories consisted of the following:
September 30, December 31,
1998 1997
---------- --------
Raw materials $ 626,240 $578,213
Work-in-progress 491,252 306,947
---------- --------
$1,117,492 $885,160
========== ========
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31, Depreciation
1998 1997 Lives
------------- ------------ ------------
<S> <C> <C> <C>
Land $ 50,000 $ 50,000 -
Buildings and improvements 690,135 690,135 39 years
Machinery and equipment 1,544,868 1,502,865 3-7 years
Furniture, fixtures and computer
equipment 726,284 564,560 3-7 years
Leasehold improvements 58,408 5,262 3 years
---------- ----------
3,069,695 2,812,822
Less accumulated depreciation 474,466 184,448
---------- ----------
$2,595,229 $2,628,374
========== ==========
</TABLE>
F-25
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6: LONG TERM DEBT
Long term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
8.2% Secured note payable due to Central Fidelity National
Bank in monthly payments of principal and interest of $10,411
through November, 1998 and a final payment of $9,195 in
December, 1998. $ 29,681 $118,495
6.0% Secured note payable due to Industrial Development
Authority of Charles City County in monthly payments of
principal and interest of $4,998.46 through April, 2002 192,981 228,395
Secured revolving credit facility payable to Finova Capital
Corporation 147,365 -
Secured term note payable to Finova Capital Corporation in 23
monthly principal payments of $8,333 through March 1, 2000
and a final payment of $508,333 on April 1, 2000 666,667 -
Other - 4,746
---------- --------
1,036,694 351,636
Less current portion 336,935 170,818
---------- --------
$ 699,759 $180,818
========== ========
</TABLE>
Notes payable to Central Fidelity National Bank and Industrial Development
Authority of Charles City County are secured by certain machinery and equipment.
In January, 1998, the Company received $350,000 in proceeds from the issuance of
promissory notes to certain of the Company's stockholders (the "Short-Term
Notes"). In April, 1998, the Company received a $700,000 secured term loan
("Term Loan") from a financial institution. A portion of the proceeds from the
Term Loan were used to retire the Short-Term Notes. In June, 1998, the Company
entered into a credit agreement with the same financial institution that
incorporated the Term Loan and also provided for a revolving credit facility
("Revolving Facility") up to $1.0 million.
Principal payments under the Term Loan consist of twenty-three (23) equal
monthly payments of $8,333 through March 1, 2000 and a final payment of $508,333
on April 1, 2000. Borrowings and required payments under the Revolving Facility
are based upon an asset formula involving accounts receivable and inventory.
The initial term of the Revolving Facility is for a period of two years and is
automatically renewable for successive periods of one year, unless terminated
earlier under the provisions of the agreement. At September 30, 1998, the
Company had outstanding borrowings under
F-26
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6: LONG TERM DEBT (continued)
the Revolving Facility of $147,365 and, based upon the terms of the agreement,
had an additional borrowing capacity of approximately $710,000.
Interest on both the Term Loan and Revolving Facility is payable monthly at
2.125 percentage points above the Prime Rate. However, under the provisions of
the agreement, the interest rate will be reduced to 1.50 percentage points above
the Prime Rate following the first anniversary if certain financial goals have
been achieved.
The credit agreement contains certain negative covenants. Among others, these
negative covenants require the Company to receive prior written consent from the
lender before the Company guarantees or incurs any additional indebtedness in
excess of designated amounts, declares or pays any dividend on its common stock,
merges or consolidates with any entity, or makes capital expenditures in excess
of designated amounts in any annual period.
The Term Loan and Revolving Facility are secured by substantially all of the
assets of the Company. In addition, a limited personal guaranty by Murray H.
Gross, President and Chief Executive Officer of the Company, secures these
obligations. This guaranty amount will be reduced if the Company meets certain
financial performance objectives. Certain stockholders of the Company have
entered into an agreement with Mr. Gross indemnifying him against certain
amounts paid as a result of such guaranty in an amount in excess of his pro rata
stock ownership in the Company.
Maturities of the notes payable through December 31 during the next five periods
are as follows:
1998 (includes Revolving Facility) $ 214,208
1999 150,511
2000 595,293
2001 56,934
2002 19,748
----------
$1,036,694
==========
F-27
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7: CAPITAL LEASES
Obligations under capital leases consisted of the following:
September 30, December 31,
1998 1997
------------- ------------
Land and building $ 677,167 $709,474
Machinery and equipment 301,022 178,514
Office furniture and equipment 28,480 36,558
---------- --------
$1,006,669 $924,546
========== ========
Future minimum lease payments through December 31 under these leases are as
follows:
1998 $ 56,844
1999 227,374
2000 219,424
2001 180,109
2002 116,198
Thereafter 749,252
----------
Total minimum lease payments $1,549,201
----------
Interest discount amount (542,532)
----------
Total present value of minimum lease payments 1,006,669
----------
Less current portion 173,519
----------
Long term portion $ 833,150
==========
Capital leases generally contain a bargain purchase option payable at the end of
the lease. The leases mature at various dates between July 2000 and February
2009, and are collateralized by assets under the leases having a gross book
value of $1,142,869 and accumulated depreciation of $98,864 at September 30,
1998.
NOTE 8: NOTES PAYABLE RELATED PARTIES
On January 23, 1997, the Company's Board of Directors authorized and approved
the issuance of an aggregate of $2,092,500 in convertible promissory notes (the
"Convertible Notes"). The Convertible Notes were to mature on March 31, 2002
and the interest rate on the outstanding principal was 6.1% simple interest.
The Convertible Notes provided that the principal could be converted into Common
Stock at a conversion price of $.5880 per share at the election of the Board of
Directors or upon the consummation of an underwritten public offering. On March
24, 1997, the Board of Directors authorized and approved a conversion of the
Convertible Notes into Common Stock for an aggregate consideration of
$1,052,500, and after giving effect to the 10 for 1 stock split, issued
1,789,250 shares of Common Stock. In addition, the Company
F-28
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8: NOTES PAYABLE RELATED PARTIES (continued)
replaced the remaining Convertible Notes with promissory notes (the "Promissory
Notes") which are not convertible into shares of Common Stock. The Promissory
Notes provide for interest at the rate of 10% per annum and that cash payments
of interest are to be made in equal semi-annual payments on each October 1 and
April 1 until March 31, 2002, upon which date the principal, together with all
accrued but unpaid interest thereon, shall mature and be due and payable. As of
December 31, 1997 and September 30, 1998, the outstanding principle on all of
the Promissory Notes was $1,040,000. Additionally, the Company has a separate
outstanding indebtedness to an officer of the Company with the same terms as the
Promissory Notes in the amount of $50,000.
In January, 1998, the Company received additional funds of $350,000 pursuant to
promissory notes from certain stockholders. A portion of the proceeds from the
$700,000 secured Term Loan (see Note 6) were used to retire these promissory
notes.
Interest expense, including $26,000 of accrued interest, was approximately
$78,000 for the period ended December 31, 1997. Interest expense for the period
ended September 30, 1998 was approximately $87,000.
NOTE 9: COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company operates principally in leased facilities, and in most cases,
management expects that leases currently in effect will be renewed or replaced
by other leases of a similar nature and term. Escalation charges imposed by
lease agreements are not significant.
Rent expense recognized under operating leases was approximately $587,000 for
the period ended December 31, 1997 and $628,000 for the period ended September
30, 1998. Commitments for future minimum rental payments required under
operating leases with terms in excess of one year for the periods ending
December 31 are as follows:
1998 $ 181,074
1999 605,861
2000 445,023
2001 219,620
2002 174,178
Thereafter 121,957
----------
Total minimum lease payments $1,747,713
==========
F-29
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9: COMMITMENTS AND CONTINGENCIES (continued)
REVOLVING CREDIT AGREEMENT
The Company has an agreement with a financial institution which makes financing
available to the Company's customers. The agreement provides the financial
institution with the right of first refusal on all of the Company's customer
credit applications. The customer executes a Revolving Credit Agreement with
the lender and the lender pays the Company on completion of the installation.
The Company's risk under the agreement is limited to its normal representations
and warranties regarding material and workmanship.
PURCHASE COMMITMENT
The Company has an agreement with a provider of long distance communication
services for 36 months ending February, 2000. The agreement provides for
certain minimum monthly usage fees whether or not the Company's actual usage
exceeds these minimums. During the periods ended December 31, 1997 and
September 30, 1998, in no month did these minimums exceed the Company's actual
usage. Management does not expect that the minimums will exceed the Company's
usage during the term of the agreement.
LITIGATION
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
EMPLOYMENT AGREEMENTS
During 1998, the Company entered into employment agreements with certain of its
officers. The agreements are for a one year period and automatically extend for
an additional year unless terminated by the officer or the Company. The
agreements generally provide for annual salaries and for salary continuation for
a specified number of months under certain circumstances, including a change in
control of the Company.
NOTE 10: REDEEMABLE PREFERRED STOCK
In connection with the acquisition of the Reunion assets (see Note 3), the
Company issued 80,000 shares of Series A Preferred Stock ("Redeemable Preferred
Stock") with a redemption price of $10 per share. Holders of the Redeemable
Preferred Stock have
F-30
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10: REDEEMABLE PREFERRED STOCK (continued)
no voting rights other than those expressly provided in the Certificate of
Incorporation or by applicable law. The Redeemable Preferred Stock was recorded
at fair value on the date of issuance. The excess of the liquidation value over
the carrying value is being accreted by periodic charges to stockholders' equity
through June 30, 1999.
In preference to shares of Common Stock, dividends on the Redeemable Preferred
Stock at an annual rate of $1 per share are cumulative from the date of issuance
and are payable, when and as declared by the Company's Board of Directors, semi-
annually each last day of June and December in arrears (the first being due and
payable on June 30, 1999), except that no dividends shall be payable if the
Redeemable Preferred Stock is redeemed prior to June 30, 1999.
The Redeemable Preferred Stock is redeemable at the option of Company at any
time, in whole or in part. However, the Company must redeem 8,000 shares each
June and December commencing June 30, 1999, together with accrued and unpaid
dividends. The Company may also convert and exchange all of the Redeemable
Preferred Stock into a promissory note in the original principal amount of the
redemption value of the outstanding shares, plus any accrued but unpaid
dividends. In the event the Company were to consummate the sale of its Common
Stock pursuant to a public offering under the Securities Act of 1933 in which
the Company was to receive net proceeds of $7.5 million, the Company must redeem
all outstanding shares of the Redeemable Preferred Stock.
NOTE 11: CAPITALIZATION
In June, 1998, the stockholders approved an increase in the authorized shares of
Common Stock of the company from 1,000,000 shares to 15,000,000 shares.
Concurrent with the increase in the number of authorized shares, the Board of
Directors authorized a 10 for 1 stock split effected in the form of a 9 for 1
stock dividend. Shareholders' equity has been restated to give retroactive
recognition to the stock split for all periods presented by reclassifying from
additional capital to Common Stock the par value of the additional shares
arising from the split. In addition, all references in the financial statements
to number of shares and per share amounts of the Company's Common Stock have
been restated.
F-31
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12: INCOME TAXES
The provision for income taxes for the periods ended December 31, 1997 and
September 30, 1998 consist of $5,000 of current state income taxes.
The components of the Company's net deferred tax asset at December 31, 1997 and
September 30, 1998 are as follows:
September 30, December 31,
1998 1997
------------- ------------
Net operating loss carryforward $ 534,887 $ 381,595
Reserve for doubtful accounts 31,449 31,192
Other 45,424 95,473
--------- ---------
611,760 508,260
Valuation allowance (611,760) (508,260)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
The Company has provided a valuation allowance to reflect the uncertainties
associated with the ultimate realization of its deferred tax asset, in
accordance with SFAS No. 109, "Accounting for Income Taxes." A valuation
allowance is required when it is more likely than not that the deferred tax
asset will not be realized. Principally, since the Company has no historical
taxable income record, there can be no assurance that the deferred tax asset
will ultimately be realized.
The provision for income taxes at the Company's effective tax rate differs from
the provision for income taxes at the statutory tax rate for the following
reasons:
September 30, December 31,
1998 1997
------------- ------------
Statutory federal income tax benefit $(119,087) $(492,674)
State income taxes, net of federal tax benefit 3,300 3,300
Valuation allowance on deferred tax assets 103,500 508,260
Other 17,287 (13,886)
--------- ---------
$ 5,000 $ 5,000
========= =========
As of September 30, 1998, the Company has a net operating loss carryforward of
$1,573,196 which expires in the year 2013.
F-32
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 13: LICENSE FEES
The Company conducts a substantial portion of its direct consumer marketing
under the trademark and service mark "Century 21 Cabinet Refacing" under license
agreements with TM Acquisition Corp. ("TM") and HFS Licensing Inc. ("HFS")
pursuant to a master license agreement between Century 21 Real Estate
Corporation and each of TM and HFS (collectively, "Licensor"). The Company also
conducts its business under the name "Facelifters/TM/."
The license agreements provide for a term of 10 years ending in 2007 and give
the Company the right to market, sell and install kitchen cabinet refacing in
specific territories under the name "Century 21 Cabinet Refacing." The license
agreements may be terminated by the Company upon 90 days written notice. The
license agreements may be terminated by the Licensor if the Company is negligent
in the performance of its services, becomes insolvent or bankrupt, fails to
comply with any material provisions of the license agreements, or fails to meet
certain minimum revenues. In the event Licensor were to cancel its license
agreements, the Company believes that these products could be independently
marketed by the Company in these territories, however, the cancellation of the
license agreements could have an adverse effect on the business of the Company.
The license agreements provide for license fees to HFS equal to 2% of the
associated contract revenues in 1997, and 2% - 6% of contract revenues over the
remainder of the term of the agreement, subject to certain adjustments based
upon contract revenue levels and minimum fees in certain of its territories.
License fees pursuant to the license agreements were $238,307 for the period
ended December 31, 1997 and $324,590 for the period ended September 30, 1998.
NOTE 14: OTHER EXPENSES, NET
Other income (expenses), net consist of the following for the periods ended
December 31, 1997 and September 30, 1998:
September 30, December 31,
1998 1997
------------- ------------
Interest expense $(229,208) $(147,872)
Other income 157,937 3,740
--------- ---------
$ (71,271) $(144,132)
========= =========
Other income consists principally of income derived from its arrangement with
its third party lender who provides financing for certain of the Company's
customers.
F-33
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 15: EMPLOYEE SAVINGS PLAN
The Company maintains an employee savings plan (the "Plan") under which
qualified participants make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. At the discretion of the Board of
Directors, the Company contributes up to a maximum of 6% of base salary.
Employee contributions vest immediately, while Company contributions fully vest
after five years. The Company has made no contributions to the Plan in 1997 or
1998.
NOTE 16: STOCK OPTIONS
In May, 1998, the Board of Directors adopted, and the stockholders of the
company approved, the 1998 Stock Option Plan (the "Plan"). The purpose of the
1998 Plan is to provide employees, directors and advisors with additional
incentives by increasing the proprietary interest in the Company. The aggregate
number of shares of Common Stock with respect to which options may be granted is
250,000, which amount may be increased at the discretion of the Board of
Directors to an amount not to exceed 10% of the total outstanding shares of the
Company, from time to time, provided, however, the aggregate number of shares of
Common Stock with respect to which options may be granted may in no event,
exceed 1,500,000 shares.
The 1998 Plan provides for the grant of incentive stock options ("ISO's") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, and
nonqualified stock options ("NSO's") (collectively ISO's and NSO's are referred
to as "Awards"). The 1998 Plan will be administered by the Company's full Board
of Directors, although the 1998 Plan may be administered by a committee of not
less than two members of the Board of Directors (the "Committee"). The Board of
Directors or, if established, the Committee has, subject to the terms of the
1998 Plan, the sole authority to grant Awards under the 1998 Plan, to construe
and interpret the 1998 Plan to make all other determinations to take any and all
actions necessary and advisable for the administration of the 1998 Plan. All of
the Company's full-time, salaried employees, members of the Board of Directors
and certain advisors are eligible to receive Awards under the 1998 Plan.
Options will be exercisable during the period specified in each Option Agreement
and will generally be exercisable in installments pursuant to a vesting schedule
to be designed by the Board of Directors or the Committee. The provisions of
Option Agreements may provide for acceleration of exercisability in the event of
certain events including certain reorganizations and changes in control of the
Company. No option will remain exercisable later than 10 years after the date
of grant. The exercise prices for ISO's granted under the 1998 Plan may be no
less than the fair market value of the Common Stock on the date of grant. The
exercise prices of NSO's are set by the Board of Directors or the Committee.
Each non-employee director of the Company shall automatically be granted a NSO
to purchase 1,000 shares of Common Stock upon
F-34
<PAGE>
U. S. REMODELERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 16: STOCK OPTIONS (continued)
initial election or appointment to the Board of Directors and will be granted a
NSO to purchase 1,000 shares of Common Stock on the date of each subsequent
annual meeting of the Board of Directors.
No options have been granted under the 1998 Plan as of September 30, 1998.
NOTE 17: EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of earnings (loss) per share:
<TABLE>
<CAPTION>
Three Month Period January 23, 1997
Ended Nine Month Period through
September 30, Ended September 30,
1998 1997 September 30, 1997
(unaudited) (unaudited) 1998 (unaudited)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares
Outstanding 2,500,000 2,105,000 2,484,686 1,782,680
========== ========== ========== ==========
Loss applicable to common
Stockholders:
Net income (loss) $ 457,973 $ 2,472 $ (355,255) $ (317,893)
Accretion on preferred stock (18,256) - (52,458) -
Accrued preferred stock dividends (20,001) - (60,003) -
---------- ---------- ---------- ----------
Income (loss) to common stockholders $ 419,716 $ 2,472 $ (467,716) $ (317,893)
========== ========== ========== ==========
Earnings (loss) per common share-
basic and diluted $.17 - $(.19) $(.18)
========== ========== ========== ==========
</TABLE>
The Company has no dilutive common stock equivalents.
F-35
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Reunion Home Services, Inc. and Kitchen Masters, Inc.
We have audited the accompanying combined balance sheet of Reunion Home
Services, Inc. and Kitchen Masters, Inc. (collectively "Reunion") as of
November 23, 1997, and the related combined statement of operations,
stockholders' equity and cash flows for the period ended November 23, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Reunion at
November 23, 1997, and the results of its operations and its cashflows for the
period ended November 23, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Dallas, Texas
August 5, 1998
F-36
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
COMBINED BALANCE SHEET
NOVEMBER 23, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 359,984
Accounts receivable, net of allowance for doubtful accounts of $54,534 337,799
Inventory 447,938
Prepaid expenses 103,942
-----------
Total current assets 1,249,663
Property, plant and equipment, net 729,563
Other assets 61,718
-----------
Total assets $ 2,040,944
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 905,248
Accrued wages, commissions and bonuses 430,320
Current portion of long-term debt 7,092
Current portion of capital lease obligations 20,013
Other accrued liabilities 130,308
-----------
Total current liabilities 1,492,981
Long-term capital lease obligations, net of current portion 44,985
Notes payable related parties 275,000
Commitments and contingencies
Stockholders' equity:
Reunion Home Services, Inc.
Common stock - $.01 par value, 20,000,000 shares authorized,
1,000,000 shares issued and outstanding 10,000
Additional capital 1,915,000
Kitchen Masters, Inc.
Common stock - $.01 par value, 20,000,000 shares authorized,
1,000,000 shares issued and outstanding 10,000
Additional capital 540,005
Accumulated deficit (2,247,027)
-----------
Total stockholders' equity 227,978
-----------
Total liabilities and stockholders' equity $ 2,040,944
===========
</TABLE>
See accompanying notes.
F-37
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
COMBINED STATEMENT OF OPERATIONS
PERIOD ENDED NOVEMBER 23, 1997
<TABLE>
<CAPTION>
<S> <C>
Contract revenue $11,519,504
Cost of goods sold 3,454,870
-----------
Gross profit 8,064,634
Operating expenses:
Branch operating 1,723,669
Sales and marketing 6,475,678
License fees 220,149
General and administrative 1,890,484
-----------
Net operating loss (2,245,346)
Other income, net 1,645
-----------
Loss before income taxes (2,243,701)
Income taxes 3,326
-----------
Net loss $(2,247,027)
===========
</TABLE>
See accompanying notes.
F-38
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD ENDED NOVEMBER 23, 1997
<TABLE>
<CAPTION>
Common Stock Total
---------------- Additional Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 21, 1997 - $ - $ - - $ -
(inception)
Issuance of Common Stock
Reunion Home Services, Inc. 1,000,000 10,000 1,915,000 - 1,925,000
Kitchen Masters, Inc 1,000,000 10,000 540,005 550,005
Net loss - - - (2,247,027) (2,247,027)
--------- ------- ---------- ----------- -----------
Balance at November 23, 1997 2,000,000 $20,000 $2,455,005 $(2,247,027) $ 227,978
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-39
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
COMBINED STATEMENT OF CASH FLOWS
PERIOD ENDED NOVEMBER 23, 1997
<TABLE>
<S> <C>
CASH FLOWS FORM OPERATING ACTIVITIES:
Net loss $(2,247,027)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 115,641
Provision for doubtful accounts 66,297
Changes in operating assets and liabilities:
Accounts receivable (404,096)
Inventory (447,938)
Prepaid expenses (103,942)
Accounts payable 905,248
Other assets and liabilities 498,910
-----------
Net cash used in operating activities (1,616,907)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of AMRE assets (733,259)
Capital expenditures (111,945)
-----------
Net cash used in investing activities (845,204)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of long-term debt 72,090
Net borrowings from related parties 275,000
Proceeds from issuance of common stock 2,475,005
-----------
Net cash provided by financing activities 2,822,095
-----------
Net increase in cash 359,984
Cash and cash equivalents at beginning of period -
-----------
Cash and cash equivalents at end of period $ 359,984
===========
</TABLE>
See accompanying notes.
F-40
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 23, 1997
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
Reunion Home Services, Inc. and Kitchen Masters, Inc. (collectively, "Reunion")
are engaged, through direct consumer marketing, in the design, sales,
manufacture and installation of kitchen cabinet refacing products utilized in
kitchen remodeling. Reunion operates in certain geographic markets in the
United States under the trademark and service mark "CENTURY 21 Cabinet Refacing"
under a license agreement with HFS Licensing, Inc. ("HFS") pursuant to a master
license agreement between Century 21 Real Estate Corporation and HFS.
Reunion commenced business on January 21, 1997. Effective April 3, 1997,
Reunion purchased selected assets of AMRE, Inc. ("AMRE") after AMRE filed for
protection under Chapter 11 of the United States Bankruptcy Code. Reunion
purchased the selected assets for a cash payment of approximately $733,000.
Effective November 23, 1997, U. S. Remodelers, Inc. ("US"), a company engaged in
the kitchen cabinet refacing business, purchased selected assets and assumed
certain liabilities of Reunion. The financial statements present Reunion's
financial position and results of operations immediately prior to the
transaction with US. Concurrent with the transaction between US and Reunion,
Reunion ceased its kitchen cabinet refacing business.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in bank accounts, money market funds,
and certificates of deposit with maturities of 90 days or less.
ACCOUNTS RECEIVABLE
Accounts receivable consists of amounts due from individuals, credit card
sponsors, and financial institutions. Because of the diverse customer base,
there are no concentrations of credit risk. Reunion provides for estimated
losses of uncollectible accounts.
F-41
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory (consisting principally of raw materials) is carried at the lower of
cost (first-in, first-out) or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment is carried at cost, less accumulated depreciation.
Depreciation is computed over the estimated useful lives of the related assets
by using the straight-line method of depreciation. Maintenance and repair
expenditures are expensed when incurred; renewals and betterments are
capitalized.
REVENUE RECOGNITION
Revenue is recognized upon completion of each home improvement contract.
CONTRACT COSTS
Contract costs represent the costs of direct materials and labor associated with
installations and manufacturing overhead associated with the production of
cabinet fronts and countertops.
MARKETING
Marketing consists predominantly of telemarketing and is supplemented by
television and other direct consumer marketing media. Reunion expenses all
marketing costs as incurred.
INCOME TAXES
Reunion accounts for income taxes under the liability method. Deferred income
taxes are provided for temporary differences between the tax bases of assets and
liabilities and their bases for financial reporting purposes.
F-42
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 3: INVENTORY
Inventories at November 23, 1997 consisted of the following:
Raw materials ...................................... $ 331,330
Work-in-progress.................................... 116,608
---------
$ 447,938
---------
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
At November 23, 1997, property, plant and equipment consisted
of the following:
Depreciation
Cost Lives
-------- ------------
Machinery and equipment............................. $539,664 5 years
Furniture, fixtures and computer equipment.......... 299,226 3-7 years
Leasehold improvements.............................. 6,314 3 years
--------
$845,204
Less accumulated depreciation....................... 115,641
--------
$729,563
========
F-43
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(continued)
NOTE 5: CAPITAL LEASE OBLIGATION
At November 23, 1997 capital lease obligations consisted of certain furniture
and telecommunications equipment. Future minimum lease payments through
December 31 of each respective period under the lease are as follows:
1997 ................................................ $ 2,715
1998 ................................................ 32,582
1999 ................................................ 32,582
2000 ................................................ 19,006
Total minimum lease payments......................... $ 86,885
Interest discount amount............................. (21,887)
Total present valueof minimum lease payments......... 64,998
---------
Less current portion................................. 20,013
---------
Long term portion.................................... $ 44,985
---------
The capital lease contains a bargain purchase option payable at the end of the
lease. The lease matures in July, 2000 and is collateralized by assets under
the lease having a gross book value of $70,742.
NOTE 6: COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Reunion operates in leased facilities. Escalation charges imposed by lease
agreements are not significant. In addition, Reunion leases certain furniture
and computer equipment.
F-44
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(continued)
NOTE 6: COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES (CONTINUED)
Rent expense recognized under operating leases was approximately $789,000 for
the period ended November 23, 1997. Commitments for future minimum rental
payments required under operating leases with terms in excess of one year for
the periods ending December 31 are as follows:
1997 ................................................ $ 72,940
1998 ................................................ 822,925
1999 ................................................ 680,167
2000 ................................................ 425,754
2001 ................................................ 303,225
Thereafter........................................... 1,278,885
----------
Total Minimum lease payments......................... $3,583,896
----------
REVOLVING CREDIT AGREEMENT
Reunion has an agreement with a financial institution that makes financing
available to Reunion's customers. The agreement provides the financial
institution with the right of first refusal on all of Reunion's customer credit
applications. The customer executes a Revolving Credit Agreement with the lender
and the lender pays Reunion on completion of the installation. Reunion's risk
under the agreement is limited to its normal representations and warranties
regarding material and workmanship.
PURCHASE COMMITMENT
Reunion has an agreement with a provider of long distance communication services
for 36 months ending July, 2000. The agreement provides for certain minimum
monthly usage fees whether or not actual usage fees exceed these
minimums. During the period ended November 23, 1997, in no month did these
minimums exceed the actual usage.
F-45
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(continued)
NOTE 6: COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
Reunion is subject to various legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations.
NOTE 7: NOTES PAYABLE RELATED PARTIES
Reunion received $25,000 and $250,000 pursuant to secured promissory notes from
Ronald I. Wagner, President and Chief Executive Officer of the company. The
notes bear interest at 8.25% and 9.0%, respectively. The notes are secured by
all of Reunion's assets.
NOTE 8: LICENSE FEES
Reunion conducts its direct consumer marketing under a license agreement with
HFS Licensing, Inc. pursuant to a master license agreement with Century 21 Real
Estate Corporation (collectively "Licensor"). The license agreement provides
for a term of 10 years ending December 31, 2007 and gives Reunion the right to
market, sell and install kitchen cabinet refacing in specific territories under
the trademark and service mark "CENTURY 21 Home Improvements" or "CENTURY 21
Cabinet Refacing." Reunion may terminate the license agreement upon 90 days
written notice. The Licensor may terminate the license agreement if Reunion is
negligent in the performance of its services, becomes insolvent or bankrupt,
fails to comply with any material provisions of the license agreement, or fails
to meet certain minimum revenues. In the event Licensor was to cancel its
license agreement, the company believes that these products could be
independently marketed by the company in these territories. However, the
cancellation of the license agreements could have an adverse effect on Reunion's
business and results of operation.
The license agreement provides for license fees equal to 2% of the associated
contract revenues in 1977 and 2% to 6% of contract revenues over the remainder
of the term of the agreement subject to certain adjustments based upon contract
revenue levels and minimum fees. License fees pursuant to the license
agreements were $220,149 for the period ended November 23, 1997.
F-46
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(continued)
NOTE 9: INCOME TAXES
The provision for income taxes for the period ended November 23, 1997 consists
of $3,326 of current state income taxes.
The components of the net deferred tax asset at November 23, 1997 are as
follows:
Net operating loss $ 692,365
Reserve for doubtful accounts 21,339
Other accruals 53,206
----------
766,910
Valuation allowance (766,910)
----------
Net deferred tax asset $ -
----------
A valuation allowance has been provided to reflect the uncertainty associated
with the ultimate realization of its deferred tax asset, in accordance with SFAS
No. 109, "Accounting for Income Taxes."
The provision for income taxes differs from the provision for income taxes at
the statutory federal tax rate for the following reasons:
Statutory federal income tax benefit $ (762,858)
State income taxes, net of federal benefit 2,195
Valuation allowance 766,910
Other (2,921)
----------
$ 3,326
----------
As of November 23, 1997, Reunion has a net operating loss carryforward of
approximately $2,036,000 which expires in the year 2012.
F-47
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
<S> <C>
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON U.S. REMODELERS, INC.
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES TO WHICH IT RELATES IN ANY STATE TO ANY PERSON
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN 1,400,000 UNITS
SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EACH UNIT COMPRISED OF ONE SHARE OF
SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY COMMON STOCK AND ONE REDEEMABLE
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS COMMON STOCK PURCHASE WARRANT
OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
Page
- -------------------------------------------------------------
Summary............................................... 3 P R O S P E C T U S
Risk Factors.......................................... 7
Use of Proceeds....................................... 14
Dividend Policy....................................... 14
Dilution ....................................... 15
Capitalization ....................................... 16
Selected Consolidated Financial Information........... 17
Unaudited Pro Forma Financial Information............. 18 FIRST LONDON SECURITIES CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 19
Business.............................................. 27
Management............................................ 32
Certain Relationships and Related Transactions........ 37
Principal Stockholders................................ 39 ____________________, 1998
Description of Securities............................. 40
Shares Eligible for Future Sale....................... 43
Underwriting.......................................... 44
Legal Matters......................................... 46
Experts............................................... 46
Index to Financial Statements......................... F-1
UNTIL __________ (_____ DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
====================================================================================================================================
</TABLE>
1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will bear the following estimated expenses incurred in
connection with this Offering:
Item Amount
---- ------------
SEC registration fee................................. $ 6,075.16
NASD filing fee...................................... 2,504.99
Nasdaq application and listing fee................... 10,000.00
Underwriters' non-accountable expense allowance...... 215,250.00*
Boston Stock Exchange application and listing fee.... 15,000.00
Blue sky filing fees and expenses.................... 40,000.00
Transfer agent and registrar fees.................... 5,000.00
Printing and engraving expenses...................... 40,000.00
Legal fees and expenses.............................. 110,000.00
Accounting fees and expenses......................... 25,000.00
Miscellaneous........................................ 4,730.15
-----------
TOTAL $473,200.30
===========
- -------------------------------
*$247,537.50 if the Underwriters' over-allotment option is exercised.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding 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.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit 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 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 or the court in which
II-1
<PAGE>
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in subsections (a) and (b). Such determination shall be
made, with respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by a majority vote of such directors,
even though less than a quorum, or (3) if there are no such directors, or if
such directors so direct, by independent legal counsel in a written opinion, or
(4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in such person's official capacity and as to action in another
capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the corporation would have the power to indemnify such person against such
liability under Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Certificate of Incorporation
The Certificate of Incorporation of the Company provides in general that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except as limited by the DGCL. If the DGCL is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Company, in addition to the limitation on personal liability
described above, shall be limited to the fullest extent permitted by the amended
DGCL. Further, any repeal or modification of such provision of the Certificate
of Incorporation by the stockholders of the Company shall be prospective only,
and shall not adversely affect any limitation on the personal liability of a
director of the Company existing at the time of such repeal or modification.
II-2
<PAGE>
Bylaws
The Bylaws of the Company provide that the Company will indemnify its
directors to the fullest extent permitted by the DGCL and may, if and to the
extent authorized by the Board of Directors, so indemnify its officers and any
other person whom it has the power to indemnify against liability, reasonable
expense or other matter whatsoever.
Underwriting Agreement
The Underwriting Agreement provides for the indemnification of the
directors and officers of the Company in certain circumstances.
Litigation
The Company is not involved in any material pending legal proceeding.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Unless otherwise noted herein, all issuances of Common Stock listed in this
Item reflect the 10 for 1 stock split effected by the Company on June 15, 1998.
a. INITIAL COMMON STOCK ISSUANCE.
Upon the formation of the Company on January 23, 1997, the Company issued a
total of 315,750 shares of Common Stock to certain officers of the Company and
one entity for proceeds of $315.75.
Information concerning the issuance of Common Stock is as follows:
No. of
Shares Date of Sale Purchaser Consideration
------- ------------------ ------------------ -------------
126,300 January 23, 1997 About Face Limited $126.30
84,200 January 23, 1997 Peter Bulger 84.20
84,200 January 23, 1997 Steven Gross/1/ 84.20
21,050 January 23, 1997 Malcom Harris 21.05
-------
315,750 $315.75
======= =======
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuances of its Common Stock.
No underwriter participated in the issuances, nor did the Company pay any
commissions with respect to these transactions. The investors had access to
information concerning the Company, its financial condition, assets, management
and proposed activities. In connection with the Company's reliance upon the
exemption from registration provided in Section 4(2) of the Securities Act, the
Company determined that (i) the Company's securities were acquired by the
investors for their own account, for investment purposes only and not with a
view towards distribution thereof, (ii) the investors had the ability to bear
economically a total loss of their investment in the Company, (iii) the
investors had such knowledge and experience in financial and business matters
that they were capable of evaluating the merits and risks of an investment in
the Company. The Company has impressed the stock certificates representing the
referenced shares of Common Stock with a restrictive legend.
- --------------------
/1/ On July 16, 1998, Steven Gross transferred his shares of Common Stock to
Gross Family Trust.
II-3
<PAGE>
b. STOCKHOLDER NOTES.
On January 23, 1997, the Company's Board of Directors authorized and
approved the issuance of the Convertible Notes. The Convertible Notes were to
mature on March 31, 2002 and the interest rate on the outstanding principal was
6.1% simple interest. The Convertible Notes provided that the principal could
be converted into Common Stock at a conversion price of $.5880 per share at the
election of the Board of Directors or upon the consummation of an underwritten
public offering. On March 24, 1997, the board of Directors authorized and
approved a conversion of the Convertible Notes into Common Stock for an
aggregate consideration of $1,052,500. As a result, the Company converted the
Convertible Notes into an aggregate of 1,789,250 shares of Common Stock and
issued these shares to directors and officers of the Company and other
investors. In addition, the Company replaced the Convertible Notes with
promissory notes which are not convertible into shares of Common Stock.
Information concerning the sale of such securities is as follows:
No. of
Shares Date of Sale Purchaser Consideration
--------- -------------- ----------------------------- -------------
255,000 March 24, 1997 About Face Limited $ 150,000
85,000 March 24, 1997 Peter Bulger 50,000
42,500 March 24, 1997 Marc Beresin 25,000
4,250 March 24, 1997 Curtis Baker 2,500
4,250 March 24, 1997 JoAnn Feeney 2,500
63,750 March 24, 1997 Steven Gross/2/ 37,500
85,000 March 24, 1997 Garden State Brickface, Inc. 50,000
42,500 March 24, 1997 Malcom Harris 25,000
170,000 March 24, 1997 Mark Honigsfeld Living Trust 100,000
212,500 March 24, 1997 Kiernan Family Trust 125,000
4,250 March 24, 1997 Paul Kalisz 2,500
382,500 March 24, 1997 Sonostar Ventures 225,000
4,250 March 24, 1997 David Silverman 2,500
170,000 March 24, 1997 Lynne Tarnopol 100,000
4,250 March 24, 1997 Steven Thompson 2,500
4,250 March 24, 1997 David Vargas 2,500
255,000 March 24, 1997 David A. Yoho Revocable Trust 150,000
1,789,250 $1,052,500
========= ==========
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuances of its Common Stock.
No underwriter participated in the issuances, nor did the Company pay any
commissions with respect to these transactions. The investors had access to
information concerning the Company, its financial condition, assets, management
and proposed activities. In connection with the Company's reliance upon the
exemption from registration provided in Section 4(2) of the Securities Act, the
Company determined that (i) the Company's securities were acquired by the
investors for their own account, for investment purposes only and not with a
view towards distribution thereof, (ii) the investors had the ability to bear
economically a total loss of their investment in the Company, (iii) the
investors had such knowledge and experience in financial and business matters
that they were capable of evaluating the merits and risks of an investment in
the Company. The Company has impressed the stock certificates representing the
referenced shares of Common Stock with a restrictive legend.
- --------------------
/2/ On July 16, 1998, Steven Gross transferred his shares of Common Stock to
Gross Family Trust.
II-4
<PAGE>
c. ASSET PURCHASE OF REUNION HOME SERVICES, INC. AND KITCHEN MASTERS,
INC.
Effective November 23, 1997, the Company acquired certain assets of
Reunion. The Company effected the purchase through the issuance of 371,480
shares of Common Stock valued at $125,405 to Ronald I. Wagner and 80,000 shares
of Series A Preferred Stock valued at $683,300 to KMI.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuances of its Common Stock.
No underwriter participated in the issuances, nor did the Company pay any
commissions with respect to these transactions. The investors had access to
information concerning the Company, its financial condition, assets, management
and proposed activities. In connection with the Company's reliance upon the
exemption from registration provided in Section 4(2) of the Securities Act, the
Company determined that (i) the Company's securities were acquired by the
investors for their own account, for investment purposes only and not with a
view towards distribution thereof, (ii) the investors had the ability to bear
economically a total loss of their investment in the Company, (iii) the
investors had such knowledge and experience in financial and business matters
that they were capable of evaluating the merits and risks of an investment in
the Company. The Company has impressed the stock certificates representing the
referenced shares of Common Stock with a restrictive legend.
d. COMMON STOCK ISSUANCE TO ROBERT DEFRONZO.
On May 31, 1998, the Company issued to Robert DeFronzo, Chief Financial
Officer, Treasurer and Secretary of the Company, 27,770 shares of Common Stock
for an aggregate consideration of $16,328.76. Of these shares, 23,520 were
original issue and 4,250 were treasury shares that had been acquired by the
Company from a previous stockholder.
The Company, after determining the availability of the exemption from
registration provided in Section 4(2) of the Securities Act, relied upon such
exemption in connection with the afore-referenced issuances of its Common Stock.
No underwriter participated in the issuances, nor did the Company pay any
commissions with respect to these transactions. Mr. DeFronzo had access to
information concerning the Company, its financial condition, assets, management
and proposed activities. In connection with the Company's reliance upon the
exemption from registration provided in Section 4(2) of the Securities Act, the
Company determined that (i) the Company's securities were acquired by Mr.
DeFronzo for his own account, for investment purposes only and not with a view
towards distribution thereof, (ii) Mr. DeFronzo had the ability to bear
economically a total loss of his investment in the Company, (iii) Mr. DeFronzo
had such knowledge and experience in financial and business matters that he was
capable of evaluating the merits and risks of an investment in the Company. The
Company has impressed the stock certificates representing the referenced shares
of Common Stock with a restrictive legend.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibit
Number Description of Exhibit
1.1+ Form of Underwriting Agreement in connection with the Offering.
1.2+ Form of Agreement Among Underwriters.
1.3+ Form of Selected Dealer Agreement.
1.4 Form of Representative's Warrant Agreement.
1.5+ Form of Lock-Up Agreements.
2.1+ Asset Purchase Agreement dated February 12, 1997 by and among AMRE,
Inc., Facelifters Home Systems, Inc., American Remodeling, Inc. and the
Company (Schedules have been omitted, but will be furnished to the
Commission upon request).
2.2+ First Amendment to Asset Purchase Agreement dated April 3, 1997 by and
among AMRE, Inc., Facelifters Home Systems, Inc., American Remodeling,
Inc. and the Company (Schedules have been omitted, but will be
furnished to the Commission upon request).
II-5
<PAGE>
Exhibit
Number Description of Exhibit
2.3+ Assignment and Assumption Agreement for Real Property Lease Dated April
3, 1997 by and among AMRE, Inc., Facelifters, Inc., American
Remodeling, Inc. and the Company (Certain schedules have been omitted,
but will be furnished to the Commission upon request).
2.4+ Asset Purchase Agreement dated November 30, 1997 by and among the
Company, Reunion Home Services, Inc. and Kitchen Masters, Inc.
(Schedules have been omitted, but will be furnished to the Commission
upon request).
2.5+ Confidentiality and Noncompetition Agreement dated November 30, 1997 by
and between the Company and Reunion Home Services, Inc.
2.6+ Confidentiality and Noncompetition Agreement dated November 30, 1997 by
and between the Company and Kitchen Masters, Inc.
2.7+ Confidentiality and Noncompetition Agreement dated November 30, 1997 by
and between the Company and Ronald I. Wagner.
3.1+ Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
4.1+ Specimen of Common Stock Certificate.
4.2+ Form of Warrant Agreement covering the Warrants.
4.3+ Form of Redeemable Common Stock Purchase Warrants issued in connection
with the sale of the Warrants.
4.4+ Certificate of Designations, Preferences, Rights and Limitations of
Series A Preferred Stock of the Company, filed December 8, 1997.
4.5+ Form of Amended and Restated Stockholders Agreement effective as of May
27, 1998. 4.6+ 1998 Stock Option Plan.
5.1* Opinion of Jackson Walker LLP regarding legality of the securities
being registered.
10.1+ License Agreement by and between HFS Licensing, Inc. and Reunion Home
Services, Inc. (Schedules have been omitted, but will be furnished to
the Commission upon request).
10.2+ Assignment and Assumption Agreement dated December 1, 1997 by and among
Reunion Home Services, Inc., the Company and HFS Licensing, Inc.
10.3+ License Agreement dated March 3, 1997 by and between TM Acquisition
Corp. and the Company (Schedules have been omitted, but will be
furnished to the Commission upon request).
10.4+ Form of Promissory Note dated March 24, 1997.
10.5+ Secured Promissory Term note dated April 6, 1998 in the principal
amount of $700,000. Maker is the Company and Payee is FINOVA Capital
Corporation.
10.6+ Security Agreement dated April 6, 1998 by and between the Company and
FINOVA Capital Corporation (Schedules have been omitted, but will be
furnished to the Commission upon request).
10.7+ Loan and Security Agreement dated June 5, 1998 by and between the
Company and FINOVA Capital Corporation (Schedules have been omitted,
but will be furnished to the Commission upon request).
10.8+ Amended and Restated Continuing Limited Personal Guaranty dated June 5,
1998 made by Murray H. Gross for the benefit of FINOVA Capital
Corporation.
10.9+ Form of First Amended and Restated Contribution and Indemnification
Agreement by and among Murray H. Gross and the Stockholders of the
Company named therein.
II-6
<PAGE>
Exhibit
Number Description of Exhibit
10.10+ Revolving Credit Program Agreement dated January 23, 1998 by and
between Green Tree Financial Corporation and the Company.
10.11+ Assumption Agreement by and between Industrial Development Authority of
Charles City County and the Company.
10.12* Employment Agreement by and between the Company and Murray H. Gross.
10.13* Employment Agreement by and between the Company and Peter Bulger.
10.14* Employment Agreement by and between the Company and Steven Gross.
10.15* Employment Agreement by and between the Company and Malcom Harris.
10.16* Employment Agreement by and between the Company and Robert DeFronzo.
21.1+ Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Jackson Walker LLP (Included in its opinion filed as
Exhibit 5.1).
24.1+ Power of attorney.
27.1++ Financial Data Schedule.
- ------------------------------
*To be filed by amendment.
+Previously filed as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-65029) as filed with the Commission on September 30,
1998.
++ Previously filed as an exhibit to Amendment No. 1 on Form S-1 to the
Company's Registration Statement (File No. 333-65029) as filed with the
Commission on November 2, 1998.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required in Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
which, individually or together, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) 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.
II-7
<PAGE>
(c) 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 foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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.
(d) 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 a
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 the
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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 2 to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on the 12th
day of November, 1998.
U. S. REMODELERS, INC.
(Company)
By: /s/ Murray H. Gross
-------------------------------------------
Murray H. Gross, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Murray H. Gross President, Chief Executive Officer and November 12, 1998
- -------------------------- Director
Murray H. Gross (Principal Executive Officer)
/s/ David A. Moore* Chairman of the Board and Director
- --------------------------
David A. Moore
/s/ Robert A. DeFronzo Financial Officer, Secretary and November 12, 1998
- -------------------------- Treasurer
Robert A. DeFronzo (Principal Financial and Accounting
Officer)
/s/ David A. Yoho* Director
- --------------------------
David A. Yoho
/s/ Gregory Kiernan* Director
- --------------------------
Gregory Kiernan
/s/ Marc W. Beresin* Director
- --------------------------
Marc W. Beresin
/s/ Ronald I. Wagner* Director
- --------------------------
Ronald I. Wagner
</TABLE>
II-9
<PAGE>
<TABLE>
<S> <C> <C>
/s/Charles D. Maguire, Jr. Director November 12, 1998
- --------------------------
Charles D. Maguire, Jr.
*By: /s/ Murray H. Gross November 12, 1998
- --------------------------
Murray H. Gross,
Attorney-in-Fact
</TABLE>
II-10
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
1.1+ Form of Underwriting Agreement in connection with the Offering.
1.2+ Form of Agreement Among Underwriters.
1.3+ Form of Selected Dealer Agreement.
1.4 Form of Representative's Warrant Agreement.
1.5+ Form of Lock-Up Agreements.
2.1+ Asset Purchase Agreement dated February 12, 1997 by and among AMRE,
Inc., Facelifters Home Systems, Inc., American Remodeling, Inc. and the
Company (Schedules have been omitted, but will be furnished to the
Commission upon request).
2.2+ First Amendment to Asset Purchase Agreement dated April 3, 1997 by and
among AMRE, Inc., Facelifters Home Systems, Inc., American Remodeling,
Inc. and the Company (Schedules have been omitted, but will be
furnished to the Commission upon request).
2.3+ Assignment and Assumption Agreement for Real Property Lease Dated April
3, 1997 by and among AMRE, Inc., Facelifters, Inc., American
Remodeling, Inc. and the Company (Certain schedules have been omitted,
but will be furnished to the Commission upon request).
2.4+ Asset Purchase Agreement dated November 30, 1997 by and among the
Company, Reunion Home Services, Inc. and Kitchen Masters, Inc.
(Schedules have been omitted, but will be furnished to the Commission
upon request).
2.5+ Confidentiality and Noncompetition Agreement dated November 30, 1997 by
and between the Company and Reunion Home Services, Inc.
2.6+ Confidentiality and Noncompetition Agreement dated November 30, 1997 by
and between the Company and Kitchen Masters, Inc.
2.7+ Confidentiality and Noncompetition Agreement dated November 30, 1997 by
and between the Company and Ronald I. Wagner.
3.1+ Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
4.1+ Specimen of Common Stock Certificate.
4.2+ Form of Warrant Agreement covering the Warrants.
4.3+ Form of Redeemable Common Stock Purchase Warrants issued in connection
with the sale of the Warrants.
4.4+ Certificate of Designations, Preferences, Rights and Limitations of
Series A Preferred Stock of the Company, filed December 8, 1997.
4.5+ Form of Amended and Restated Stockholders Agreement effective as of May
27, 1998. 4.6+ 1998 Stock Option Plan.
5.1* Opinion of Jackson Walker LLP regarding legality of the securities
being registered.
10.1+ License Agreement by and between HFS Licensing, Inc. and Reunion Home
Services, Inc. (Schedules have been omitted, but will be furnished to
the Commission upon request).
10.2+ Assignment and Assumption Agreement dated December 1, 1997 by and among
Reunion Home Services, Inc., the Company and HFS Licensing, Inc.
<PAGE>
Exhibit
Number Description of Exhibit
10.3+ License Agreement dated March 3, 1997 by and between TM Acquisition
Corp. and the Company (Schedules have been omitted, but will be
furnished to the Commission upon request).
10.4+ Form of Promissory Note dated March 24, 1997.
10.5+ Secured Promissory Term note dated April 6, 1998 in the principal
amount of $700,000. Maker is the Company and Payee is FINOVA Capital
Corporation.
10.6+ Security Agreement dated April 6, 1998 by and between the Company and
FINOVA Capital Corporation (Schedules have been omitted, but will be
furnished to the Commission upon request).
10.7+ Loan and Security Agreement dated June 5, 1998 by and between the
Company and FINOVA Capital Corporation (Schedules have been omitted,
but will be furnished to the Commission upon request).
10.8+ Amended and Restated Continuing Limited Personal Guaranty dated June 5,
1998 made by Murray H. Gross for the benefit of FINOVA Capital
Corporation.
10.9+ Form of First Amended and Restated Contribution and Indemnification
Agreement by and among Murray H. Gross and the Stockholders of the
Company listed therein.
10.10+ Revolving Credit Program Agreement dated January 23, 1998 by and
between Green Tree Financial Corporation and the Company.
10.11+ Assumption Agreement by and between Industrial Development Authority of
Charles City County and the Company.
10.12* Employment Agreement by and between the Company and Murray H. Gross.
10.13* Employment Agreement by and between the Company and Peter Bulger.
10.14* Employment Agreement by and between the Company and Steven Gross.
10.15* Employment Agreement by and between the Company and Malcom Harris.
10.16* Employment Agreement by and between the Company and Robert DeFronzo.
21.1+ Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Jackson Walker LLP (Included in its opinion filed as
Exhibit 5.1).
24.1+ Power of attorney.
27.1++ Financial Data Schedule.
- ------------------------------
*To be filed by amendment.
+Previously filed as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-65029) as filed with the Commission on September 30, 1998.
++Previously filed as an exhibit to Amendment No. 1 on Form S-1 to the Company's
Registration Statement (File No. 333-65029) as filed with the Commission on
November 2, 1998.
<PAGE>
Exhibit 1.4
REPRESENTATIVE'S WARRANT AGREEMENT
Representative's WARRANT AGREEMENT (the "Representative's Warrant
Agreement" or "Agreement"), dated as of ______________, 1998, between U.S.
REMODELERS, INC. (the "Company"), and FIRST LONDON SECURITIES CORPORATION (the
"Representative").
W I T N E S S E T H:
--------------------
WHEREAS, the Representative has agreed, pursuant to that certain
underwriting agreement dated as of the date hereof by and between the Company
and the Representative (the "Underwriting Agreement"), to act as the
representative of the Underwriters in connection with the Company's proposed
public offering (the "Public Offering") of 1,400,000 Units (the "Securities") at
$5.125 per Unit (the "Unit IPO Price"), each Unit comprised of one share of
common stock, par value $.01 per share (the "Common Stock"), at $5.00 per share
of Common Stock (the "Common Stock IPO Price") and one redeemable common stock
purchase warrant (the "Warrant") at $.125 per warrant (the "Warrant IPO
Price"); and
WHEREAS, the Company proposes to issue to the Representative and/or persons
related to the Representative as those persons are defined in Rule 2710 of the
NASD Conduct Rules (the "Holder"), 140,000 warrants ("Representative's
Warrants") to purchase 140,000 Units, each Unit comprised of one share of Common
Stock (the "Share") and one Warrant (the "Underlying Warrant") exercisable to
purchase one share of Common Stock (the "Underlying Warrant Share"). The
"Shares," the "Underlying Warrants" and the "Underlying Warrant Shares" are
collectively referred to as the "Warrant Securities;" and
WHEREAS, the Representative's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date (as such term is defined in the
Underwriting Agreement) by the Company to the holders ("Holders") in
consideration for, and as part of the compensation in connection with, the
Representative acting as representative pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of ONE HUNDRED DOLLARS AND NO CENTS ($100.00), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant and Period.
----------------
The Public Offering has been registered under a Registration Statement on
Form SB-2 (File No. ________________) (the "Registration Statement") and
declared effective by the Securities and Exchange Commission (the "SEC" or
"Commission") on ______________, 199__ (the "Effective Date"). This Agreement,
relating to the purchase of the Representative's Warrants, is entered into
pursuant to the Underwriting Agreement between the Company and the
Representative, as representative of the Underwriters, in connection with the
Public Offering.
<PAGE>
Pursuant to the Representative's Warrants, the Holders are hereby granted
the right to purchase from the Company, at any time during the four year period
commencing __________, 199__ (one year from the closing date (the "Closing
Date") of the Public Offering) (the "Purchase Date") and expiring at 5:00 New
York time on ____________, 200__, (four years after the Purchase Date) (the
"Expiration Time"), up to 140,000 Units, an initial exercise price (subject to
adjustment as provided in Article 8) of $6.15 per Unit (120% of the Unit IPO
Price)(the "Unit Exercise Price"), or $6.00 per Share (the "Share Exercise
Price") and $.15 per Underlying Warrant (the "Warrant Exercise Price"), subject
to the terms and conditions of this Agreement. Each Underlying Warrant is
exercisable to purchase one Underlying Warrant Share (subject to adjustment as
provided in Article 8) at the IPO exercise price (the "Underlying Warrant Share
Exercise Price") during the four year period commencing on the Purchase Date and
ending on the Expiration Time.
Except as specifically otherwise provided herein, the Shares, the
Underlying Warrants and the Underlying Warrant Shares constituting the Warrant
Securities shall bear the same terms and conditions as such securities described
under the caption "Description of Securities" in the Registration Statement, and
as designated in the Company's Certificate of Incorporation and any amendments
thereto, and the Underlying Warrants shall be governed by the terms of the
Warrant Agreement executed in connection with the Public Offering (the "Warrant
Agreement"), except as provided herein, and the Holders shall have registration
rights under the Securities Act of 1933, as amended (the "Act"), for the Shares,
the Underlying Warrants, and the Underlying Warrant Shares, as more fully
described in paragraph Article 7 of this Representative's Warrant Agreement. In
the event of any extension of the expiration date or reduction of the exercise
price of the Warrants, the same such changes to the Underlying Warrants shall be
simultaneously effected, except that the Underlying Warrants shall expire no
later than four years from the Purchase Date.
2. Warrant Certificates.
--------------------
The warrant certificates (the "Warrant Certificates") delivered and to be
delivered pursuant to this Agreement shall be in the form set forth in the form
of Warrant Certificate, attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
-------------------
3.1 Full Exercise.
-------------
(a) A Holder may effect a cash exercise of any of the Representative's
Warrants or the Underlying Warrants by surrendering the Warrant Certificate,
together with a Subscription in the form of Exhibit 1 attached thereto, duly
---------
executed by such Holder to the Company, at any time prior to the Expiration
Time, at the Company's principal office, accompanied by payment in cash or by
certified or official bank check payable to the order of the Company in the
amount of the aggregate purchase price of such Warrant Securities, subject to
any adjustments provided for in this Agreement. The aggregate purchase price
hereunder for each Holder shall be equal to the exercise price for such Warrant
Securities as set forth in Article 6 multiplied by the number of Underlying
Warrants,
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 2
<PAGE>
Underlying Warrant Shares or Shares, as applicable, that are the subject of each
Holder's Representative's Warrant (as adjusted as hereinafter provided).
(b) In lieu of the payment of the Share Exercise Price or the Underlying
Warrant Share Exercise Price, as the case may be, in the manner required by
Section 3.1(a), the Holder shall have the right to pay such exercise price for
the shares of Common Stock being so purchased by the surrender to the Company of
any exercisable but unexercised portion of such Holder's Representative's
Warrants or Underlying Warrants, as the case may be, having a then Value (as
defined below) equal to such exercise price multiplied by the number of shares
of Common Stock being purchased upon such exercise ("Cashless Exercise Right").
The sum of (i) the number of shares of Common Stock being purchased upon
exercise of the non-surrendered portion of the Representative's Warrants or the
Underlying Warrants, as the case may be, pursuant to this Cashless Exercise
Right and (ii) the number of shares of Common Stock underlying the portion of
the warrants being so surrendered, shall not in any event be greater than the
total number of shares of Common Stock purchasable upon the complete exercise of
the warrants being so surrendered, if the Share Exercise Price or the Underlying
Warrant Share Exercise Price, as the case may be, were paid in cash. The Value
of the portion of the Representative's Warrants or Underlying Warrants, as the
case may be, being surrendered shall equal the remainder derived from
subtracting (1) the Share Exercise Price or the Underlying Share Exercise Price,
as the case may be, multiplied by the number of shares of Common Stock
underlying the portion of the warrants being so surrendered from (2) the Market
Value (as defined below) of a share of Common Stock multiplied by the number of
shares of Common Stock underlying the portion of the warrants being so
surrendered. The Market Value shall be determined on a per share basis as of
the close of the business day preceding the exercise, which determination shall
be made as follows: (x) if the Common Stock is listed for trading on a national
or regional stock exchange or is included on the Nasdaq National Market or
SmallCap Market, the average closing sale price quoted on such exchange or the
Nasdaq National Market or SmallCap Market that is published in The Wall Street
---------------
Journal for the ten trading days immediately preceding the date of exercise, or
- -------
if no trade of the Common Stock shall have been reported during such period, the
last sale price so quoted for the next day prior thereto on which a trade in the
Common Stock was so reported; or (y) if the Common Stock is not so listed,
admitted to trading or included, the average of the closing highest reported bid
and lowest reported ask price as quoted on the National Association of
Securities Dealer's OTC Bulletin Board or in the "pink sheets" published by the
National Daily Quotation Bureau for the first day immediately preceding the date
of exercise on which the Common Stock is traded. The Cashless Exercise Right
may be exercised by the Holder by delivering the Warrant Certificate to the
Company together with a Subscription in the form of Exhibit 2 attached thereto,
---------
duly executed by such Holder, in which case no payment of cash will be required.
3.2 Partial Exercise.
----------------
The Warrant Securities referred to in Section 3.1 above also may be
exercised from time to time in part by surrendering the Warrant Certificate in
the manner specified in Section 3.1, except that with respect to a cash
exercise, the purchase price payable with respect to such exercise shall be
equal to the number of Warrant Securities being purchased hereunder multiplied
by the exercise price for
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 3
<PAGE>
such Warrant Security, subject to any adjustments provided for in this
Agreement. Upon any such partial exercise, the Company, at its expense, will
forthwith issue to the Holder hereof a new Warrant Certificate or
Representative's Warrants of like tenor calling in the aggregate for the number
of securities (as constituted as of the date hereof) for which the Warrant
Certificate shall not have been exercised, issued in the name of the Holder
hereof or as such Holder (upon payment by such Holder of any applicable transfer
taxes) may direct.
4. Issuance of Certificates.
------------------------
Upon the exercise of the Representative's Warrants or the Underlying
Warrants, the issuance of certificates for the shares of Common Stock or other
securities, as applicable, shall be made forthwith (and in any event within
three business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Articles 5
and 7) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the shares of
Common Stock or other securities, as applicable, shall be executed on behalf of
the Company by the manual or facsimile signature of the then present Chairman or
Vice Chairman of the Board of Directors or Chairman or Vice Chairman of the
Company under its corporate seal reproduced thereon, attested to by the manual
or facsimile signature of the then present Secretary or Assistant Secretary of
the Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of Representative's Warrants.
----------------------------------------------------
The Holder of a Warrant Certificate, by acceptance thereof, covenants and
agrees that the Representative's Warrants may not be sold, transferred,
assigned, hypothecated or otherwise disposed of, in whole or in part, except (a)
to officers of the Representative or to officers and partners of the other
Underwriters or Selected Dealers participating in the Public Offering; (b) by
will; or (c) by operation of law.
6. Exercise Price.
--------------
6.1 Initial and Adjusted Exercise Prices.
------------------------------------
The initial Unit Exercise Price of each Representative's Warrant shall be
$6.15 per Unit (120% of the Unit IPO Price), or $6.00 per Share and $.15 per
Warrant, that make up the Underlying Warrants. The initial Underlying Warrant
Share Exercise Price of each Underlying Warrant shall be
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 4
<PAGE>
the IPO exercise price. The adjusted exercise price of any Warrant Security
shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Article 8. The Representative's Warrants and the Underlying Warrants are
exercisable during the four year period commencing on the Purchase Date.
6.2 Exercise Price.
--------------
The term "exercise price" herein shall mean the initial exercise price or
the adjusted exercise price, depending upon the context.
7. Registration Rights.
-------------------
7.1 Registration Under the Securities Act of 1933.
---------------------------------------------
The Shares, the Underlying Warrants and the Underlying Warrants Shares
(collectively the "Registrable Securities") have been registered under the
Securities Act of 1933, as amended (the "Act"). Upon exercise, in part or in
whole, of the Representative's Warrants, certificates representing the Shares,
the Underlying Warrants or the Underlying Warrants Shares, as the case may be,
shall bear the following legend in the event there is no current registration
statement effective with the Commission at such time as to such securities:
The securities represented by this certificate may not be offered
or sold except pursuant to (i) an effective registration
statement under the Securities Act of 1933, as amended (the
"Act"), (ii) to the extent applicable, Rule 144 under the Act (or
any similar rule under such Act relating to the disposition of
securities), or (iii) an opinion of counsel, if such opinion
shall be reasonably satisfactory to counsel to the issuer, that
an exemption from registration under such Act and applicable
state securities laws is available.
7.2 Piggyback Registration.
----------------------
If, at any time commencing after the Effective Date of the Public Offering
and expiring seven (7) years thereafter, the Company prepares and files a post-
effective amendment to the Registration Statement, or a new registration
statement, under the Act, or files a Notification on Form 1-A or otherwise
registers securities under the Act, or files a similar disclosure document with
the Commission (collectively the "Registration Documents") as to any of its
securities under the Act (other than under a registration statement pursuant to
Form S-8 or Form S-4 or small business issue equivalent), it will give written
notice by registered mail, at least 30 days prior to the filing of each such
Registration Document, to the Representative and to all other Holders of the
Registrable Securities of its intention to do so. If the Representative or other
Holders of the Registrable Securities notify the Company within 20 days after
receipt of any such notice of its or their desire to include any such
Registrable Securities in such proposed Registration Documents, the Company
shall afford the Representative and such Holders of such Registrable Securities
the opportunity to have any
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 5
<PAGE>
Registrable Securities registered under such Registration Documents or any other
available Registration Document.
Notwithstanding the provisions of this Section 7.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 7.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 Demand Registration.
-------------------
(a) At any time commencing one year after the Effective Date of the Public
Offering, and expiring five years thereafter, the Holders of Registrable
Securities representing more than 50% of such securities at that time
outstanding shall have the right (which is in addition to the registration
rights under Section 7.2), exercisable by written notice to the Company, to have
the Company prepare and file with the Commission at the sole expense of the
Company, on one occasion, a registration statement and/or such other documents,
including a prospectus, and/or any other appropriate disclosure document as may
be reasonably necessary in the opinion of both counsel for the Company and
counsel for the Representative and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
respective Registrable Securities for nine consecutive months (or such longer
period of time as permitted by the Act) by such Holders and any other Holders of
any of the Registrable Securities who notify the Company within ten days after
being given notice from the Company of such request (a "Demand Registration").
A Demand Registration shall not be counted as a Demand Registration hereunder
until such Demand Registration has been declared effective by the SEC and
maintained continuously effective for a period of at least nine months, subject
to reasonable "black-out" periods in which event such nine months shall be
extended by a number of days equal to the duration and the "black-out" periods,
or such shorter period when all Registrable Securities included therein have
been sold in accordance with such Demand Registration, provided that a Demand
Registration shall be counted as a Demand Registration hereunder if the Company
ceases its efforts in respect of such Demand Registration at the request of the
majority Holders making the demand for a reason other than a material and
adverse change in the business, assets, prospects or condition (financial or
otherwise) of the Company and its subsidiaries taken as a whole.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by the majority of the Holders to
all other registered Holders of any of the Registrable Securities within ten
days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time commencing one year after the
Effective Date of the Public Offering, and expiring five years thereafter, the
Holders of any Registrable Securities representing more than 50% of such
securities shall have the right, exercisable by written request to the Company,
to have the Company prepare and file, on one occasion, with the Commission a
registration statement or any other appropriate disclosure document so as to
permit a public offering and sale for nine consecutive
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 6
<PAGE>
months (or such longer period of time as permitted by the Act) by any such
Holder of Registrable Securities; provided, however, that the provisions of
Section 7.4(b) shall not apply to any such registration request and registration
and all costs incident thereto shall be at the expense of the Holder or Holders
participating in the offering pro-rata.
(d) Any written request by the Holders made pursuant to this Section 7.3
shall:
(i) Specify the number of Registrable Securities which the Holders
intend to offer and sell and the minimum price at which the Holders intend
to offer and sell such securities;
(ii) State the intention of the Holders to offer such securities for
sale;
(iii) Describe the intended method of distribution of such
securities; and
(iv) Contain an undertaking on the part of the Holders to provide
all such information and materials concerning the Holders and take all such
action as may be reasonably required to permit the Company to comply with
all applicable requirements of the Commission and to obtain acceleration of
the effective date of the registration statement.
(e) In the event the Company receives from the Holders of any Registrable
Securities representing more than 50% of such securities at that time
outstanding, a request that the Company effect a registration on Form S-3 with
respect to the Registrable Securities and if Form S-3 is available for such
offering, the Company shall, as soon as practicable, effect such registration as
would permit or facilitate the sale and distribution of the Registrable
Securities as are specified in the request. All expenses incurred in connection
with a registration requested pursuant to this Subsection (e) shall be borne by
the Company. Registrations effected pursuant to this Subsection (e) shall not
be counted as registrations pursuant to Sections 7.3 (a) and 7.3 (c).
7.4 Covenants of the Company With Respect to Registration.
-----------------------------------------------------
In connection with any registration under Section 7.2 or 7.3, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within 45 days of receipt of any demand pursuant to Section 7.3, and
shall use its best efforts to have any such registration statement declared
effective at the earliest practicable time. The Company will promptly notify
each seller of such Registrable Securities, and confirm such advice in writing,
(i) when such registration statement becomes effective, (ii) when any post-
effective amendment to such registration statement becomes effective, and (iii)
of any request by the SEC for any amendment or supplement to such registration
statement or any prospectus relating thereto or for additional information.
The Company shall furnish to each seller of such Registrable Securities
such number of copies of such registration statement and of each such amendment
and supplement thereto (in each case including each preliminary prospectus and
summary prospectus) in conformity with the requirements
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 7
<PAGE>
of the Act, and such other documents as such seller may reasonably request in
order to facilitate the disposition of the Registrable Securities by such
seller.
(b) The Company shall pay all costs (excluding transfer taxes, if any, and
fees and reasonable expenses of Holder's counsel (such costs of counsel not to
exceed $10,000)), fees and expenses in connection with all registration
statements filed pursuant to Sections 7.2 and 7.3(a) including, without
limitation, the Company's legal and accounting fees, printing expenses, blue sky
fees and expenses. If the Company shall fail to comply with the provisions of
Section 7.3(a), the Company shall, in addition to any other equitable or other
relief available to the Holder, be liable for any or all special and
consequential damages sustained by the Holder requesting registration of their
Registrable Securities.
(c) The Company shall prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be reasonably necessary to keep such registration statement
effective for at least nine months, and to comply with the provisions of the 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 seller or sellers of Registrable Securities set forth in such
registration statement. If at any time the SEC should institute or threaten to
institute any proceedings for the purpose of issuing a stop order suspending the
effectiveness of any such registration statement, the Company will promptly
notify each seller of such Registrable Securities and will use all reasonable
efforts to prevent the issuance of any such stop order or to obtain the
withdrawal thereof as soon as possible. The Company will use its good faith
reasonable efforts and take all reasonably necessary action which may be
required in qualifying or registering the Registrable Securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are required by the seller of such Registrable
Securities, provided that the Company shall not be obligated to execute or file
any general consent to service of process or to qualify as a foreign corporation
to do business under the laws of any such jurisdiction. The Company shall use
its good faith reasonable efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities of the United States or any state thereof
as may be reasonably necessary to enable the seller or sellers thereof to
consummate the disposition of such Registrable Securities.
(d) The Company shall indemnify the Holder of the Registrable Securities
to be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify the Representative as contained in the Underwriting
Agreement.
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 8
<PAGE>
(e) If requested by the Company prior to the filing of any registration
statement covering the Registrable Securities, each of the Holders of the
Registrable Securities to be sold pursuant to a registration statement, and
their successors and assigns, shall severally, and not jointly, indemnify the
Company, its officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage or expense or liability (including
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which they may become subject under the Act,
the Exchange Act or otherwise, arising from written information furnished by
such Holder, or their successors or assigns, for specific inclusion in such
registration statement to the same extent and with the same effect as the
provisions contained in the Underwriting Agreement pursuant to which the
Representative have agreed to indemnify the Company, except that the maximum
amount which may be recovered from each Holder pursuant to this paragraph or
otherwise shall be limited to the amount of net proceeds received by the Holder
from the sale of the Registrable Securities.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holders to exercise their Representative's Warrants or Underlying Warrants
prior to the filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Registrable Securities to be included in any registration statement
filed pursuant to Section 7.3 without the prior written consent of the Holders
of the Registrable Securities representing a majority of such securities.
(h) The Company shall furnish to each Holder participating in the offering
and to each underwriter, if any, a signed counterpart, addressed to such Holder
or underwriter, of (i) an opinion of counsel to the Company, dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, an opinion dated the date of the closing under the
Underwriting Agreement), and (ii) a "cold comfort" letter dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing under the
Underwriting Agreement) signed by the independent public accountants who have
issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(i) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and the
managing underwriter copies of all correspondence between the Commission and the
Company, its counsel or auditors and all memoranda relating to discussions with
the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 9
<PAGE>
properties and opportunities to discuss the business of the Company with its
officers and independent auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder shall reasonably request.
(j) With respect to a registration statement filed pursuant to Section 7.3,
the Company, if requested, shall enter into an Underwriting Agreement with the
managing underwriter, reasonably satisfactory to the Company, selected for such
underwriting by Holders holding a majority of the Registrable Securities
requested to be included in such underwriting. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders, if required by the
underwriter to be parties to any underwriting agreement relating to an
underwritten sale of their Registrable Securities, may, at their option, require
that any or all the representations, warranties and covenants of the Company to
or for the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(k) Notwithstanding the provisions of Section 7.2 or Section 7.3 of this
Agreement, the Company shall not be required to effect or cause the registration
of Registrable Securities pursuant to Section 7.2 or Section 7.3 if and to the
extent that, within 30 days after its receipt of a request to register such
Registrable Securities (i) counsel for the Company delivers an opinion to the
Holders requesting registration of such Registrable Securities, in form and
substance satisfactory to counsel to such Holder, to the effect that the entire
number of Registrable Securities proposed to be sold by such Holders may
otherwise be sold, in the manner proposed by such Holder, without registration
under the Securities Act, or (ii) the SEC shall have issued a no-action
position, in form and substance reasonably satisfactory to counsel for the
Holder requesting registration of such Registrable Securities, to the effect
that the entire number of Registrable Securities proposed to be sold by such
Holder may be sold by it, in the manner proposed by such Holder, without
registration under the Securities Act.
(l) After completion of the Public Offering, the Company shall not,
directly or indirectly, enter into any merger, business combination or
consolidation in which (i) the Company shall not be the surviving corporation
and (ii) the stockholders of the Company are to receive, in whole or in part,
capital stock or other securities of the surviving corporation, unless the
surviving corporation shall, prior to such merger, business combination or
consolidation, agree in writing to assume the obligations of the Company under
this Agreement, and for that purpose references hereunder to "Registrable
Securities" shall be deemed to include the securities which the Holders would be
entitled to receive in exchange for Registrable Securities under any such
merger, business combination or consolidation, provided that to the extent such
securities to be received are convertible into shares of Common Stock of the
issuer thereof, then any such shares of Common Stock as are issued or issuable
upon conversion of said convertible securities shall also be included within the
definition of "Registrable Securities".
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 10
<PAGE>
8. Adjustments to Exercise Price and Number of Securities.
------------------------------------------------------
8.1 Adjustment for Dividends, Subdivisions, Combinations or
-------------------------------------------------------
Reclassification.
- ----------------
In case the Company shall (a) pay a dividend or make a distribution in
shares of its capital stock (whether shares of Common Stock or of capital stock
of any other class), (b) subdivide its outstanding shares of Common Stock into a
greater number of shares, (c) combine its outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of its shares
of Common Stock any shares of capital stock of the Company; then, and in each
such case, the Share Exercise Price, the Underlying Warrant Exercise Price and
the number of Representative's Warrants in effect immediately prior to such
action shall be adjusted so that the Holder thereafter upon the exercise hereof
shall be entitled to receive the number and kind of shares of the Company which
such Holder would have owned immediately following such action had this warrant
been exercised immediately prior thereto. An adjustment made pursuant to this
Section shall become effective immediately after the record date in the case of
a dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
If, as a result of an adjustment made pursuant to this Section, the Holder shall
become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive) shall determine the allocation of the adjusted Share Exercise Price
and Underlying Warrant Exercise Price between or among shares of such class of
capital stock.
Immediately upon any adjustment of the exercise price of any
Representative's Warrant pursuant to this Section, the Company shall send
written notice thereof to the Holder of Warrant Certificates (by first class
mail, postage prepaid), which notice shall state the exercise price of such
Representative's Warrant resulting from such adjustment, and any increase or
decrease in the number of Warrant Securities to be acquired upon exercise of the
Representative's Warrants, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
8.2 Adjustment For Reorganization, Merger or Consolidation.
------------------------------------------------------
In case of any reorganization of the Company or consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental Warrant agreement providing that the Holder of each
Representative's Warrant then outstanding or to be outstanding shall have the
right thereafter (until the expiration of such Representative's Warrant) to
receive, upon exercise of such Representative's Warrant, the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation or merger, by a holder of the number of shares of Common Stock of
the Company for which such Representative's Warrant might have been exercised
immediately prior to such reorganization, consolidation, merger, conveyance,
sale or transfer. Such supplemental Warrant agreement shall provide for
adjustments which shall be identical to the adjustments provided in Section 8.1
and such registration rights and other rights as provided in this Agreement.
The Company shall not effect any
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 11
<PAGE>
such consolidation, merger, or similar transaction as contemplated by this
Section 8.2, unless prior to or simultaneously with the consummation thereof,
the successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing, receiving, or leasing
such assets or other appropriate corporation or entity shall assume, by written
instrument executed and delivered to the Holders, the obligation to deliver to
the Holders, such shares of stock, securities, or assets as, in accordance with
the foregoing provisions, such holders may be entitled to purchase, and to
perform the other obligations of the Company under this Agreement. The above
provision of this Subsection shall similarly apply to successive consolidations
or successively whenever any event listed above shall occur.
8.3 Dividends and Other Distributions.
---------------------------------
In the event that the Company shall at any time prior to the exercise of
all of the Representative's Warrants and Underlying Warrants distribute to its
stockholders any assets, property, rights, evidences of indebtedness, securities
(other than a distribution made as a cash dividend payable out of earnings or
out of any earned surplus legally available for dividends under the laws of the
jurisdictions of incorporation of the Company), whether issued by the Company or
by another, the Holders of the unexercised Representative's Warrants shall
thereafter be entitled, in addition to the shares of Common Stock or other
securities and property receivable upon the exercise thereof, to receive, upon
the exercise of such Representative's Warrants, the same property, assets,
rights, evidences of indebtedness, securities or any other thing of value that
they would have been entitled to receive at the time of such distribution as if
the Representative's Warrants had been exercised immediately prior to such
distribution. At the time of any such distribution, the Company shall make
appropriate reserves to ensure the timely performance of the provisions of this
subsection or an adjustment to the exercise price of such Representative's
Warrants, which shall be effective as of the day following the record date for
such distribution.
8.4 Adjustment in Number of Securities.
----------------------------------
Upon each adjustment of the exercise price of Representative's Warrants
pursuant to the provisions of this Article 8, the number of securities issuable
upon the exercise of each Warrant and Underlying Warrant shall be adjusted to
the nearest full amount by multiplying a number equal to the exercise price in
effect immediately prior to such adjustment by the number of securities issuable
upon exercise of the Representative's Warrants and the Underlying Warrants
immediately prior to such adjustment and dividing the product so obtained by the
adjusted exercise price.
8.5 No Adjustment of Exercise Price in Certain Cases.
------------------------------------------------
No adjustment of the exercise price of any Representative's Warrant shall
be made if the amount of said adjustment would be less than $.05 per security;
provided, however, that in any such case any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least $.05 per security.
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 12
<PAGE>
8.6 Accountant's Certificate of Adjustment.
--------------------------------------
In each case of an adjustment or readjustment of the Share Exercise Price,
Underlying Warrant Exercise Price or the number of any securities issuable upon
exercise of the Representative's Warrants or the Underlying Warrants, the
Company, at its expense, shall cause independent certified public accountants of
recognized standing selected by the Company (who may be the independent
certified public accountants then auditing the books of the Company) to compute
such adjustment or readjustment in accordance herewith and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to any Holder of the Representative's
Warrants or the Underlying Warrants, as the case may be, at the Holder's address
as shown on the Company's books. The certificate shall set forth such
adjustment or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based including, but not limited to, a statement
of (i) the Share Exercise Price or the Underlying Warrant Share Exercise Price
at the time in effect, and (ii) the number of additional securities and the type
and amount, if any, of other property which at the time would be received upon
exercise of the Representative's Warrants or Underlying Warrants, as the case
may be.
8.7 Adjustment of Underlying Warrant Exercise Price.
-----------------------------------------------
With respect to any of the Underlying Warrants, whether or not the
Underlying Warrants have been exercised (or are exercisable) and whether or not
the Underlying Warrants are issued and outstanding, the Underlying Warrant Share
Exercise Price and the number of Underlying Warrant Shares shall be
automatically adjusted in accordance with the Warrant Agreement between the
Company and the Company's transfer agent, upon occurrence of any of the events
relating to adjustments described therein. Thereafter, the Underlying Warrants
shall be exercisable at such adjusted Underlying Warrant Share Exercise Price
for such adjusted number of Underlying Warrant Shares or other securities,
properties or rights.
9. Exchange and Replacement of Warrant Certificates.
------------------------------------------------
Each Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of securities in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Representative's
Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 13
<PAGE>
10. Elimination of Fractional Interest.
----------------------------------
The Company shall not be required to issue certificates representing
fractions of shares of Common Stock upon the exercise of the Representative's
Warrants or Underlying Warrants, nor shall it be required to issue script or pay
cash in lieu of fractional interests, it being the intent of the parties that
all fractional interests may be eliminated, at the Company's option, by rounding
any fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights, or in lieu thereof paying cash equal to such
fractional interest multiplied by the current value of a share of Common Stock.
11. Reservation and Listing.
-----------------------
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Representative's Warrants and the Underlying Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Representative's Warrants or the Underlying Warrants,
and payment of the exercise price therefor, all shares of Common Stock and other
securities issuable upon such exercise shall be duly and validly issued, fully
paid, non-assessable and not subject to the preemptive rights of any
stockholder. As long as the Representative's Warrants and Underlying Warrants
shall be outstanding, the Company shall use its best efforts to cause all shares
of Common Stock issuable upon the exercise of the Representative's Warrants and
the Underlying Warrants to be listed and quoted (subject to official notice of
issuance) on all securities exchanges and systems on which the Common Stock
and/or the Warrants may then be listed and/or quoted, including Nasdaq.
12. Notices to Warrant Holders.
--------------------------
Nothing contained in this Agreement shall be construed as conferring upon
the Holders of the Representative's Warrants or the Underlying Warrants the
right to vote or to consent or to receive notice as a stockholder in respect of
any meetings of stockholders, for the election of directors or any other matter,
or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Representative's Warrants
and the Underlying Warrants and their exercise, any of the following events
shall occur:
(a) The Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) The Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 14
<PAGE>
(c) A dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or substantially all
of its property, assets and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least 15 days prior to the date fixed as a record date of the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notices shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give
such notice or any defect therein shall not affect the validity of any action
taken in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Underlying Warrants.
-------------------
The form of the certificate representing the Underlying Warrants (and the
form of election to purchase shares of Common Stock upon the exercise of the
Underlying Warrants and the form of assignment printed on the reverse thereof)
shall be substantially as set forth in the exhibits to the Warrant Agreement.
Subject to the terms of this Agreement, one Underlying Warrant shall evidence
the right to initially purchase one fully paid and nonassessable share of Common
Stock at the Warrant IPO Price during the four year period commencing on the
Purchase Date and ending at the Effective Time, at which time the Underlying
Warrants Share shall expire. The Underlying Warrant Share Exercise Price and
the number of Underlying Warrant Shares issuable upon the exercise of the
Underlying Warrants are subject to adjustment, whether or not the
Representative's Warrants have been exercised and the Underlying Warrants have
been issued, in the manner and upon the occurrence of the events set forth in
the Warrant Agreement, which is hereby incorporated herein by reference and made
a part hereof as if set forth in its entirety herein. Subject to the provisions
of this Agreement and upon issuance of the Underlying Warrants, each registered
holder of such Underlying Warrant shall have the right to purchase from the
Company (and the Company shall issue to such registered holders) up to the
number of fully paid and nonassessable shares of Common Stock (subject to
adjustment as provided in the Warrant Agreement) set forth in such Warrant
Certificate, free and clear of all preemptive rights of stockholders, provided
that such registered Holder complies with the terms governing exercise of the
Underlying Warrant set forth in the Warrant Agreement, and pays the applicable
Underlying Warrant Share Exercise Price, determined in accordance with the terms
of the Warrant Agreement. Upon exercise of the Underlying Warrants, the Company
shall forthwith issue to the registered holder of any such Underlying Warrant in
his name or in such name as may be directed by him, certificates for the number
of shares of Common Stock so purchased. Except as otherwise provided herein and
in this Agreement, the Underlying Warrants shall be governed in all respects by
the terms of the Warrant Agreement. The Underlying Warrants shall be
transferable in the manner provided in the Warrant Agreement, and upon any such
transfer, a new Underlying Warrant certificate shall be issued promptly to the
transferee. The Company covenants to send to each Holder, irrespective of
whether or not the Representative's Warrants have been
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 15
<PAGE>
exercised, any and all notices required by the Warrant Agreement to be sent to
holders of Underlying Warrants.
14. Notices.
-------
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly given when personally
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of any of the Registrable Securities, to
the address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth below or to such other
address as the Company may designate by notice to the Holders.
U.S. Remodelers, Inc.
1341 West Mockingbird Lane, Suite 900E
Dallas, Texas 75247
Attention: Chief Executive Officer
With a copy to: Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202-3797
Attention: Charles D. Maguire, Jr.
15. Entire Agreement: Modification.
------------------------------
This Agreement (and the Underwriting Agreement and Warrant Agreement to the
extent applicable) contain the entire understanding between the parties hereto
with respect to the subject matter hereof, and the terms and provisions of this
Agreement may not be modified, waived or amended except in a writing executed by
the Company and the Holders of at least a majority of Registrable Securities
(based on underlying numbers of shares of Common Stock). Notice of any
modification, waiver or amendment shall be promptly provided to any Holder not
consenting to such modification, waiver or amendment.
16. Successors.
----------
All the covenants and provisions of this Agreement shall be binding upon
and inure to the benefit of the Company, the Holders and their respective
successors and assigns hereunder.
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 16
<PAGE>
17. Termination.
-----------
This Agreement shall terminate at 5:00 New York time on ______________,
2004. Notwithstanding the foregoing, the indemnification and piggy back
registration rights provisions of Section 7 shall survive such termination.
18. Governing Law; Submission to Jurisdiction.
-----------------------------------------
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of Texas and for all
purposes shall be construed in accordance with the laws of said State without
giving effect to the rules of said State governing the conflicts of laws. The
Company, the Representative and the Holders hereby agree that any action,
proceeding or claim arising out of, or relating in any way to, this Agreement
shall be brought and enforced in a federal or state court of competent
jurisdiction with venue only in the State District court in Dallas, County,
Texas or the United States District Court for the Northern District of Texas,
and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representative and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the Representative
and the Holders (at the option of the party bringing such action, proceeding or
claim) may be served by transmitting a copy thereof, by registered or certified
mail, return receipt requested, postage prepaid, addressed to it at the address
set forth in Section 14 hereof. Such mailing shall be deemed personal service
and shall be legal and binding upon the party so served in any action,
proceeding or claim.
19. Severability.
------------
If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
20. Captions.
--------
The caption headings of the Sections of this Agreement are for convenience
of reference only and are not intended, nor should they be construed as, a part
of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement.
--------------------------
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Representative and any other
registered Holder of the Warrant Certificates or Registrable Securities any
legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Representative and any other Holder of the Warrant Certificates or Registrable
Securities.
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 17
<PAGE>
22. Counterparts.
------------
This Agreement may be executed in any number of counterparts and each of
such counterparts shall for all purposes be deemed to be an original, and such
counterparts shall together constitute but one and the same instrument.
IN WITNESS HEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
U.S. REMODELERS, INC.
By:_________________________________
Name: ________________________
Title: _______________________
Attest:
________________________
FIRST LONDON SECURITIES CORPORATION
By:_______________________________________
Douglas R. Nichols, President
REPRESENTATIVE'S WARRANT AGREEMENT - PAGE 18
<PAGE>
EXHIBIT A
<PAGE>
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME ON ______________, 2004
NO. W-______
_____________ Representative's Warrants
_____________ Underlying Warrants
This Warrant Certificate certifies that ______________________________, or
registered assigns, is the registered holder (the "Holder") of ___________
Representative's Warrant and__________ Underlying Warrants, __________ of U.S.
Remodelers, Inc. (the "Company"). Each Representative's Warrant permits the
Holder to purchase initially, at any time from ____________, 1999 (the "Purchase
Date") until 5:00 p.m. New York Time on ____________, 2004 (the "Expiration
Time"), one Unit of the Company at the initial exercise price, subject to
adjustment in certain events, of $6.15 per Unit (the "Unit Exercise Price")(120%
of the Unit IPO Price). Each Underlying Warrant permits the Holder thereof to
purchase, at any time from the Purchase Date until the Expiration Time, one
share of the Company's Common Stock at the initial exercise price, subject to
adjustment in certain events, of $6.25 per share.
Any exercise of Representative's Warrants or Underlying Warrants shall be
effected by surrender of this Warrant Certificate and payment of the exercise
price thereof at an office or agency of the Company, but subject to the
conditions set forth herein and in the Representative's Warrant Agreement dated
as of _______________, 1998, between the Company and First London Securities
Corporation (the "Representative's Warrant Agreement"). Payment of the exercise
price shall be made by certified check or official bank check in New York
Clearing House funds payable to the order of the Company in the event there is
no cashless exercise pursuant to Section 3.1(b) of the
<PAGE>
Representative's Warrant Agreement. The Representative's Warrants and Underlying
Warrants are collectively referred to as "Warrants".
No Warrant may be exercised after the Expiration Time, at which time all
Warrants evidenced hereby, unless exercised prior thereto, hereby shall
thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Representative's Warrant
Agreement, which Representative's Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation or rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
The Representative's Warrant Agreement provides that upon the occurrence of
certain events, the exercise price, the type and the number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the exercise price and the
number or type of securities, as the case may be, issuable upon the exercise of
the Warrants; provided, however, that the failure of the Company to issue such
new Warrant Certificates shall not in any way change, alter, or otherwise
impair, the rights of the holder as set forth in the Representative's Warrant
Agreement.
Upon due presentment for registration or transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferees in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the
Representative's Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the Holder, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
All terms used in this Warrant Certificate which are defined in the
Representative's Warrant Agreement shall have the meanings assigned to them in
the Representative's Warrant Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of _______________, 1998
U.S. REMODELERS, INC.
By:
Name:____________________
Title: ____________________
Attest:
________________________________
<PAGE>
EXHIBIT 1
FORM OF SUBSCRIPTION (CASH EXERCISE)
------------------------------------
(To be signed only upon exercise of Warrant)
TO: U.S. Remodelers, Inc.
1341 West Mockingbird Lane, Suite 900E
Dallas, Texas 75247
The undersigned, the Holder of Warrant Certificate number ____ (the
"Warrant"), representing ______________ Representative's Warrants and __________
Underlying Warrants of U.S. Remodelers, Inc. (the "Company"), which Warrant
Certificate is being delivered herewith, hereby irrevocably elects to exercise
the purchase right provided by the Warrant Certificate for, and to purchase
thereunder, _____________ Shares and _________________ Underlying Warrants, and
herewith makes payment of $____________ therefor, and requests that the
certificates for such securities be issued in the name of, and delivered to,
__________________________________________ whose address is
____________________________________, all in accordance with the
Representative's Warrant Agreement and the Warrant Certificate.
Dated:____________________________
___________________________________________
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant Certificate)
___________________________________________
___________________________________________
(Address)
<PAGE>
EXHIBIT 2
FORM OF SUBSCRIPTION (CASHLESS EXERCISE)
----------------------------------------
TO: PawnMart, Inc.
301 Commerce Street, Suite 3600
Fort Worth, Texas 76102
The undersigned, the Holder of Warrant Certificate number ____ (the
"Warrant"), representing ___________ Representative's Warrants and
_________________ Underlying Warrants of U.S. Remodelers, Inc. (the "Company"),
which Warrant is being delivered herewith, hereby irrevocably elects the
cashless exercise of the purchase right provided by the Representative's Warrant
Agreement and the Warrant Certificate for, and to purchase thereunder, shares of
the Company Common Stock in accordance with the formula provided at Article 3 of
the Representative's Warrant Agreement. The undersigned requests that the
certificates for such shares be issued in the name of, and delivered to,________
___________________________________________ whose address is,_________________
_____________________________________ all in accordance with the Warrant
Certificate.
Dated:____________________________
__________________________________________
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant Certificate)
__________________________________________
__________________________________________
(Address)
<PAGE>
(FORM OF ASSIGNMENT)
(To be exercised by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED)_____________________________________________________________
hereby sells, assigns and transfers unto
(Print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint______________________________
Attorney, to transfer the within Warrant Certificate on the books of the within-
named Company, and full power of substitution.
Dated: __________________________ Signature:
____________________________________________
(Signature must conform in all respects to
name of holder as specified on the fact of
the Warrant Certificate)
____________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated November 11, 1998 with respect to the financial
statements of U.S. Remodlers, Inc. for the period ended September 30, 1998,
March 20, 1998 (except Note 16, as to which the date is June 11, 1998) with
respect to the financial statements of U.S. Remodelers, Inc. for the period
ended December 31, 1997, and August 5, 1998 with respect to the combined
financial statements of Reunion Home Services, Inc. and Kitchen Masters, Inc.
(collectively "Reunion") for the period ended November 23, 1997 in Amendment No.
2 to the Registration Statement (Form S-1 No. 333-65029) and related Prospectus
of U.S. Remodelers, Inc. for the registration of 1,610,000 shares of its common
stock.
Ernst & Young LLP
Dallas, Texas
November 12, 1998
