<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 14, 1998
REGISTRATION NO. 333-65029
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
AMENDMENT NO. 3
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)
----------
DELAWARE 1798 75-2686765
(State of (Primary Standard Industrial (I.R.S. Employer
incorporation) Classification Code Number) Identification No.)
----------
1341 W. MOCKINGBIRD LANE, SUITE 900E MURRAY H. GROSS
DALLAS, TEXAS 75247 U.S. REMODELERS, INC.
(214) 267-2000 1341 W. MOCKINGBIRD, SUITE 900E
(Address and telephone number of DALLAS, TEXAS 75247
registrant's principal executive offices) (214) 267-2000
(Name, address and telephone number
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
TITLE OF EACH AMOUNT TO PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES BE REGISTERED MAXIMUM AGGREGATE REGISTRATION
TO BE REGISTERED PER SECURITY(1) OFFERING PRICE 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 DECEMBER 14, 1998
LOGO 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 _______________, 1999 (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
2% 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 this Prospectus. 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 ____________________, 1999.
FIRST LONDON SECURITIES CORPORATION
The Date of this Prospectus is , 1999
<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. 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 12
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"). AMRE, Inc. was
involuntarily placed into bankruptcy by certain of its creditors on January
20, 1997. AMRE, Inc. then voluntarily placed its affiliated entities,
including Facelifters, into bankruptcy on January 22, 1997 by filing 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. The Purchase Agreement and the transactions contemplated
thereby were approved by the United States Bankruptcy Court for the
Northern District of Texas -Dallas Division.
Certain of the Company's directors and executive officers were
associated with AMRE prior to the date AMRE became involved in the above-
referenced bankruptcy proceedings. However, except as set forth below,
none of the Company's directors or executive officers were associated with
AMRE subsequent to the date AMRE sought protection under Chapter 11.
Specifically, David L. Moore, Chairman of the Board and a director of the
Company, served as a director of AMRE until the expiration of his term in
May 1996; Murray H. Gross, President, Chief Executive Officer and a
director of the Company, acted as Vice President and a director of AMRE
from May 1996 until his resignation in January 1997; Ronald I. Wagner, a
director of the Company, served as Chairman of the Board, Chief Executive
Officer and a director of AMRE and resigned from those positions in
December 1995; Peter T. Bulger, Vice President and Chief Operating Officer
of the Company, and Steven L. Gross, Vice President - Marketing of the
Company, were employees of AMRE following AMRE's acquisition of Facelifters
in April 1996 until January 1997; and Robert A. DeFronzo, Chief Financial
Officer, Secretary and Treasurer of the Company served as corporate
controller at the time of the Chapter 11 filing and continued in this
position until February 1997. See "Management."
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
____________________, 2004 (60 months from
-4-
<PAGE>
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 between the
date of the notice of redemption and the redemption
date. See "Description of Securities -- Redeemable
Common Stock Purchase Warrants."
OUTSTANDING SECURITIES(1)
<TABLE>
<CAPTION>
Securities to be
Securities Outstanding
Presently Upon Completion
Outstanding of the Offering
------------------------- ----------------
<S> <C> <C>
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
</TABLE>
ESTIMATED NET PROCEEDS TO COMPANY.... Approximately $5,984,300 if the
1,400,000 Units are sold, and $6,931,400
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)
Proforma
(Unaudited) -----------------------------
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 11,567,436
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
<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>
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(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."
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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; RECENT LOSSES; STOCKHOLDERS' DEFICIT. 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. The Company has incurred losses from operations. For
the nine-month period ended September 30, 1998, the Company had a net loss
of $355,255. Furthermore, at September 30, 1998, the Company had an
accumulated deficit of $1,802,603 and a stockholders' deficit of $730,024.
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 UNSPECIFIED 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 has designated approximately $1,000,000
or 16.7% of net proceeds from this Offering for acquisitions. 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
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<PAGE>
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 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."
DEPENDENCE ON PROPRIETY RIGHTS. Except for the trademark
"Facelifters," the Company does not own any patents or any other trademarks
or service marks. However, if the Company was to develop or otherwise
acquire additional intellectual property rights it would rely on a
combination of contracts, copyrights, trade secret laws and or patents to
protect such rights. There can be no assurance that the steps taken by the
Company will be adequate to deter misappropriation. In the event either TM
or HFS were to cancel the license agreements with the Company or the
Company was otherwise unable to utilize the "Century 21 Cabinet Refacing"
trade and service marks, the Company believes that its products could be
independently marketed; however, the loss of such marks could have an
adverse effect on the business of the Company. Furthermore, there can be no
assurance that if the Company was unable to utilize the marks that it could
find suitable substitutions, or that the Company's products and services
would receive the same market acceptance without the marks.
NO ASSURANCE OF FUNDING FOR ADDITIONAL CAPITAL REQUIREMENTS. 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."
DIFFICULTIES IN RECRUITING ADEQUATE 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
-8-
<PAGE>
$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."
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; POSSIBLE SUBSTANTIAL PAYMENTS
TO RELATED PARTIES. 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). The Company may find it necessary or advisable to reallocate
the net proceeds of this Offering 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,
including the utilization of working capital to redeem the Company's
outstanding Series A Preferred Stock, approximately $800,000, and for the
repayment of loans to the Company by certain stockholders in the aggregate
amount of approximately $1,090,000, will be at the discretion of the
Company's Board of Directors, with the Company's stockholders having no
opportunity to review or vote upon the terms of such reallocations. See
"Use of Proceeds."
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<PAGE>
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."
RELATIONSHIPS WITH AMRE. Certain of the Company's directors and
executive officers were associated with AMRE prior to the time AMRE become
involved in certain bankruptcy proceedings. Specifically, David L. Moore,
Chairman of the Board and a director of the Company, served as a director
of AMRE until the expiration of his term in May 1996; Murray H. Gross,
President, Chief Executive Officer and a director of the Company, acted as
Vice President and a director of AMRE from May 1996 until his resignation
in January 1997; Ronald I. Wagner, a director of the Company, served as
Chairman of the Board, Chief Executive Officer and a director of AMRE and
resigned from those positions in December 1995; Peter T. Bulger, Vice
President and Chief Operating Officer of the Company, and Steven L. Gross,
Vice President - Marketing of the Company, were employees of AMRE following
AMRE's acquisition of Facelifters in April 1996 until January 1997; and
Robert A. DeFronzo, Chief Financial Officer, Secretary and Treasurer of the
Company served as corporate controller at the time of the Chapter 11 filing
and continued in this position until February 1997. See "Summary" and
"Management."
ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK. 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 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."
NO DIVIDENDS. 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
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<PAGE>
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."
POSSIBLE ADVERSE EFFECTS OF 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 date of this Prospectus and
ending four years after such date at an exercise price of 120% of the
initial public offering 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."
POSSIBLE ADVERSE IMPACT ON MARKET UPON 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 adversely affect the market price of the
Securities. See "Description of Securities -- Redeemable Common Stock
Purchase Warrants."
POSSIBLE ADVERSE EFFECTS RELATED TO 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 REQUIRED 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
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<PAGE>
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 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
-12-
<PAGE>
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 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.
-13-
<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 $6,931,400 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 expenditure of (i) approximately $500,000 for new
technology, including, but not limited to, enhanced information and
computer systems, (ii) approximately $250,000 for expansion of
telemarketing operations, (iii) approximately $350,000 for marketing
and promotional activities, and (iv) approximately $2.4 million for
entry into new markets and related infrastructure costs, including the
development of retail showrooms and sales centers in new and existing
markets. See "Business -- Business Strategy."
(3) Working capital will be increased to $2,431,400 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.
Management of the Company believes that the net proceeds of the
Offering, together with anticipated cash flows and all other sources of
financing currently available to the Company, will be sufficient to sustain
the Company for a minimum of 12 months from the date of this Prospectus.
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
(deficit) 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 or 74% of the price per share of Common Stock
to be paid by 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.. $ 742,425 $ -- $ 742,425
outstanding (liquidation preference of $10.00 per share)
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........ 25,000 14,000 39,000
authorized; 2,500,000 shares issued and outstanding;
3,900,000 shares issued and outstanding, as adjusted
Redeemable Common Stock Purchase Warrants; 1,400,000............. -- 175,000 175,000
issued and outstanding, as adjusted
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)
Proforma
(Unaudited) ----------------------------
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 11,567,436
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)
=========== =========== ========== =========== ===========
</TABLE>
<TABLE>
<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>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
Note 1 -- Basis of Presentation -- The unaudited pro forma information
reflects the pro forma adjustments which eliminate Reunion's operations
which were not acquired by the Company. Costs of goods sold includes the
effects of the additional depreciation resulting from the write-up of the
manufacturing equipment acquired.
Note 2 -- Acquisition of Reunion -- On November 23, 1997, the Company
acquired certain net 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, based primarily on independent
appraisal. The following tables summarize the consideration for the
acquisition and the fair value of the net assets acquired.
<TABLE>
<S> <C>
Purchase consideration:
Common stock issued $ 125,405
Preferred stock issued 683,300
-----------
Fair value of assets acquired $ 808,705
===========
<CAPTION>
Allocation of fair value Net Assets
of net assets acquired: Acquired
(Adjusted Basis)
---------------
<S> <C>
Current assets $ 1,204,858
Manufacturing equipment 867,120
Current liabilities (1,283,712)
Other assets and liabilities, net 20,439
-----------
$ 808,705
===========
</TABLE>
Note 3 -- Purchase Price Allocation Adjustments -- The net current assets
and liabilities acquired were stated at estimated fair value. The
manufacturing equipment acquired was adjusted to reflect its fair value
based on independent appraisal.
-19-
<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 "Facelifters/TM/."
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.
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
-20-
<PAGE>
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>
Three-month period Nine-month January 23, 1997 January 23, 1997
------------------------------- period ended through through
September 30, September 30, 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>
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
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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.
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.
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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.
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.
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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.
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.
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
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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 Murray 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."
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."
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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 devices, 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.
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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 12 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
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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, 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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. PURSUE ACQUISITION OPPORTUNITIES. The Company intends to
selectively explore the acquisition of related or complimentary
businesses. Target companies will be in the home improvement
business and will provide the Company with complimentary
capabilities. Acceptable acquisition candidates are expected to
provide the Company with (i) additional products and services
that can be offered to the consumer, (ii) additional distribution
channels for its products and services, (iii) increased customer
lead generation capabilities, and/or (iv) synergies of
manufacturing and information systems technology and/or marketing
and sales expertise. There are no present agreements,
commitments, letters of intent or understandings with any
acquisition candidate. The Company intends to aggressively
pursue growth through acquisitions, subject to financial and
managerial resources.
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.
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. 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.
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
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<PAGE>
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 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 November 30, 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
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<PAGE>
in which the buyer may cancel. The Company has procedures designed to
comply with such laws and regulations. See "Risk Factors -- Government
Regulations."
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 November 30,
1998, the Company had under lease 12 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
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(1) 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>
- ----------
(1) The Baltimore, Maryland sales office was consolidated with the Lanham,
Maryland facility. The Baltimore, Maryland metropolitan area is
currently serviced by the staff of the Lanham, Maryland sales office.
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 L. Moore(1)(3) 42 Chairman of the Board and Director
Murray H. Gross(2)(3) 60 President and Chief Executive Officer and Director
Peter T. Bulger 39 Vice President and Chief Operating Officer
Steven L. 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(1) 70 Director
Gregory Kiernan(2) 41 Director
Marc W. Beresin 63 Director
Ronald I. Wagner(1)(3) 52 Director
Charles D. Maguire, Jr.(2) 40 Director
</TABLE>
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Nominating Committee.
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 L. 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 served as a director of AMRE,
Inc. until the expiration of his term in May 1996. Mr. Moore holds a B.A.
degree from Amherst College, Magna Cum Laude, and an M.B.A. degree from
Harvard University. See "Risk Factors -- Relationships with AMRE."
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
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<PAGE>
1981. From August 1981 to September 1983, Mr. Gross was employed at Home
Craftsman Company in Dallas, 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 and Mr. Gross became Vice
President and served as a director of AMRE until January 1997. AMRE sought
protection under federal bankruptcy laws in January 1997. Mr. Gross
attended the University of Pittsburgh from 1957 to 1960. Mr. Gross is the
father of Steven L. Gross. See "Risk Factors -- Relationships with AMRE."
PETER T. BULGER has been a Vice President of the Company since 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 with AMRE until January 1997. Mr. Bulger
earned a B.S. degree in 1982 from Russell Sage College, Troy, New York.
See "Risk Factors -- Relationships with AMRE."
STEVEN L. 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 and held such
position until January 1997. Steven L. Gross is the son of Murray H.
Gross. See "Risk Factors -- Relationships with AMRE."
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 February 1997. He became Chief Financial
Officer of Reunion Home Services, Inc. in February 1997. Mr. DeFronzo
holds an accounting degree from Illinois State University and an MBA in
Finance from Roosevelt University, Chicago, Illinois. See "Risk Factors --
Relationships with AMRE."
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. See "Risk Factors -- Relationships with
AMRE."
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> <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 L. Gross, Vice President -- 1997 $ 92,511
Marketing
Malcolm R. Harris, Vice President -- 1997 $ 81,607
Operations
Robert A. DeFronzo, Chief Financial 1997 $ -0-
Officer, 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 L. 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 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
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<PAGE>
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 L. 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 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.
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<PAGE>
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
On November 24, 1998, The Board of Directors established 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 is
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 is 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 is 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. As of the date of
this Prospectus, no meetings of the foregoing committees have been held.
See "Management."
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INFORMATION RELATING TO FOUNDERS
The Company was organized under the laws of the State of Delaware in
January 1997. The Company's founders were Murray H. Gross, Peter T. Bulger,
Steven L. Gross, Malcolm R. Harris, Gregory Kiernan, David L. Moore and
David A. Yoho. On January 23, 1997, in connection with the founding of the
Company, 126,300 shares of Common Stock were purchased by About Face
Limited, a family limited partnership of which Murray H. Gross is president
of the general partner, 84,200 shares of Common Stock were purchased by
Peter T. Bulger, 84,200 shares of Common Stock were purchased by Steven L.
Gross, and 21,050 shares of Common Stock were purchased by Malcolm R.
Harris. See "-- Stockholders' Notes."
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) upon 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, $150,000,
$50,000, $37,500 and $25,000 of principal on the Convertible Notes held by
each of About Face Limited, Sonostar Ventures L.L.C., the Kiernan Trust,
the Yoho Trust, Peter T. Bulger, Steven L. Gross and Malcolm R. Harris ,
respectively, and, after giving effect to the 10 for 1 stock split, issued
255,000, 382,500, 212,500, 255,000, 85,000, 63,750 and 42,500 shares of
Common Stock to About Face Limited, Sonostar Ventures L.L.C., the
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Kiernan Trust, the Yoho Trust, Peter T.. Bulger, Steven L. Gross and
Malcolm R. Harris, 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 the Promissory Notes owed to About Face Limited, Sonostar
Ventures L.L.C., the Kiernan Trust, the Yoho Trust, Peter T. Bulger, Steven
L. Gross and Malcolm R. Harris was $150,000, $225,000, $125,000, $150,000,
$50,000, $37,500 and $25,000, respectively. Additionally, the Company has
separate outstanding indebtedness to Murray H. Gross in the amount of
$50,000.
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"). 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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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of November 30,
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 L. 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 L. Moore(6)........................................ 477,500 19.1 12.2
David A. Yoho Revocable Trust dated January 19,.......... 255,000 10.2 6.5
1995 or any successor trustee(7)
Marc Honigsfeld Revocable Living Trust dated............. 170,000 6.8 4.4
March 27, 1996
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 November 30, 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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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 of
this Prospectus, 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 Required 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 date of this Prospectus 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 -- Possible Adverse Effects of 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.
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,
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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 -
- Possible Adverse Effects of 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.
Number of Units
---------------
First London Securities Corporation... __________
_____________________________......... __________
_____________________________......... __________
_____________________________......... __________
_____________________________......... __________
Total
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 ________________, 199__, no plans,
proposals, arrangements or understandings have been made. Furthermore, 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. Officers and directors of the
Company may also purchase the Securities offered hereby. Any such purchases
will be on terms identical to those offered to all public investors in the
Securities.
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
-44-
<PAGE>
exercised. In addition, the Company has agreed to pay to the
Representative a non-accountable expense allowance of two percent (2%) 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. Neither the Representative nor any member
or person associated with the Representative accepted, directly or
indirectly, any non-cash sales incentive item from the Company or an
affiliate thereof in excess of $100 per annum. 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 four-year period commencing one year from the
date of this Prospectus 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 for a period of one year from the date of
this Prospectus, 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 four 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 four 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 to register any of its securities under the Securities Act during
the seven-year period following the date of this
-45-
<PAGE>
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 and
for the period then ended 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.
-46-
<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-33
Combined Balance Sheet
as of November 23, 1997 F-34
Combined Statement of Operations
as of November 23, 1997 F-35
Combined Statement of Stockholders' Equity
for the period ended November 23, 1997 F-36
Combined Statement of Cash Flows
for the period ended November 23, 1997 F-37
Notes to Combined Financial Statements F-38
</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
Dallas, Texas
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>
<S> <C>
ASSETS
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
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
===========
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>
<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 -- cash acquired 322,094
Capital expenditures (501,466)
Proceeds from sale of property, plant and equipment 22,700
-----------
Net cash used in investing activities (1,638,362)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings of long-term debt 1,231,029
Borrowings from related parties 1,090,000
Proceeds from issuance of common stock, net of treasury stock 1,050,000
-----------
Net cash provided by financing activities 3,371,029
-----------
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." 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.
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 uncollectible 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 $118,495
Bank in monthly payments of principal and interest of
$10,411 through November 1998 and a final payment of
$9,195 in December 1998
6.0% Secured note payable due to Industrial Development 228,395
Authority of Charles City County in monthly payments of
principal and interest of $4,998 through April 2002
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
$.588 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
F-10
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE - RELATED PARTIES (CONTINUED)
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.
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.
F-11
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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 $ -
=========
F-12
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
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.
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."
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.
F-13
<PAGE>
U.S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
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.
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 sheets 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
Dallas, Texas
November 11, 1998
F-15
<PAGE>
U. S. REMODELERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 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 STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended
September 30,
--------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
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 loss 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 $ 0.17 $ -
============ ============
Weighted average shares outstanding 2,500,000 2,105,000
============ ============
</TABLE>
F-17
<PAGE>
U. S. REMODELERS, INC.
CONSOLIDATED STATEMENTS 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 expense, 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>
F-18
<PAGE>
U. S. Remodelers, Inc.
Consolidated Statement of StockholdersAE Deficit
<TABLE>
<CAPTION>
Common Stock Treasury Stock Total
------------ Additional Accumulated -------------- 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 STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended
September 30, 1998
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
---------- ----------
Net income
Adjustments to reconcile net income to net cash provided $ 457,973 $ 2,472
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 borrowing 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
========== ==========
</TABLE>
F-20
<PAGE>
U. S. REMODELERS, INC.
CONSOLIDATED STATEMENTS 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
Net 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>
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." 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 uncollectible 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 repair expenditures are expensed when incurred; renewals
and betterments are capitalized.
F-22
<PAGE>
U. S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-23
<PAGE>
U. S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
NOTE 3: ACQUISITION (CONTINUED)
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.
<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-24
<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 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.
F-25
<PAGE>
U. S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
NOTE 6: LONG TERM DEBT (CONTINUED)
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
==========
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
============= ============
F-26
<PAGE>
U. S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
NOTE 7: CAPITAL LEASES (CONTINUED)
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
$.588 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.
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.
F-27
<PAGE>
U. S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
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
==========
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.
F-28
<PAGE>
U. S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
NOTE 9: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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.
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.
F-29
<PAGE>
NOTE 12: INCOME TAXES (CONTINUED)
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.
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."
F-30
<PAGE>
U. S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
NOTE 13: LICENSE FEES (CONTINUED)
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.
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.
F-31
<PAGE>
U. S. REMODELERS, INC.
Notes to Consolidated Financial Statements (continued)
NOTE 16: STOCK OPTIONS (CONTINUED)
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 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 Nine Month
Period Ended Period Ended January 23,
September 30, September 30, 1997 through
---------------------------------------- September 30,
1998 1997 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 $ 0.17 $ - $ (0.19) $ (0.18)
========== ========== ========== =============
</TABLE>
The Company has no dilutive common stock equivalents.
F-32
<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 cash flows for
the period ended November 23, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Dallas, Texas
August 5, 1998
F-33
<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-34
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
COMBINED STATEMENT OF OPERATIONS
Period ended November 23, 1997
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)
============
See accompanying notes.
F-35
<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 Deficit
------ ------ ------- ------- -------
<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-36
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
COMBINED STATEMENT OF CASH FLOWS
Period ended November 23, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM 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-37
<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, the
"Company") 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 name "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 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. Reunion provides for estimated
losses of uncollectible 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 repair expenditures are expensed when incurred; renewals
and betterments are capitalized.
REVENUE RECOGNITION
Revenue is recognized upon completion of each home improvement contract.
F-38
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
Notes to Combined Financial Statements (continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
Depreciation
Cost Lives
--------- ------------
<S> <C> <C>
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
=========
</TABLE>
F-39
<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 value of 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.
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
===========
F-40
<PAGE>
REUNION HOME SERVICES, INC. AND KITCHEN MASTERS, INC.
Notes to Combined Financial Statements (continued)
NOTE 6: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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. 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 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. License
fees pursuant to the license agreements were $220,149 for the period ended
November 23, 1997.
F-41
<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-42
<PAGE>
================================================================================
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 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 SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.......................................................... 3
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
Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 20
Business......................................................... 27
Management....................................................... 32
Certain Relationships and Related Transactions................... 37
Principal Stockholders........................................... 39
Description of Securities........................................ 40
Shares Eligible for Future Sale.................................. 43
Underwriting..................................................... 44
Legal Matters.................................................... 46
Experts.......................................................... 46
Index to Financial Statements....................................F-1
</TABLE>
---------------------
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.
================================================================================
U.S. REMODELERS, INC.
1,400,000 UNITS
EACH UNIT COMPRISED OF ONE SHARE OF
COMMON STOCK AND ONE REDEEMABLE
COMMON STOCK PURCHASE WARRANT
---------------------
P R O S P E C T U S
---------------------
FIRST LONDON SECURITIES CORPORATION
____________________, 1999
================================================================================
<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:
<TABLE>
<CAPTION>
Item Amount
---- ------
<S> <C>
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...... 143,500.00*
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.............................. 146,750.00
Accounting fees and expenses......................... 60,000.00
Miscellaneous........................................ 4,370.15
-----------
TOTAL................................................$473,200.30
===========
</TABLE>
----------
*$165,025 if the Underwriters' over-allotment option is exercised.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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:
<TABLE>
<CAPTION>
No. of
Shares Date of Sale Purchaser Consideration
------ ------------ --------- -------------
<S> <C> <C> <C>
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 Malcolm R. Harris 21.05
-------
315,750 $315.75
======= =======
</TABLE>
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.
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
----------
/1/ On July 16, 1998, Steven Gross transferred his shares of Common Stock
to Gross Family Trust.
II-3
<PAGE>
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:
<TABLE>
<CAPTION>
No. of
Shares Date of Sale Purchaser Consideration
------ ------------ --------- -------------
<S> <C> <C> <C>
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 Malcolm R. 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
========= ==========
</TABLE>
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
Convertible Notes and upon said section as well as Section 3(a)(9) of the
Securities Act in connection with the issuance of the shares of Common
Stock upon the conversion thereof. 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.
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.
----------
/2/ On July 16, 1998, Steven Gross transferred his shares of Common Stock
to Gross Family Trust
II-4
<PAGE>
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.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ------------------------------------------------------------------------------------------------------
<C> <S>
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).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ------------------------------------------------------------------------------------------------------
<C> <S>
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.
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 T. Bulger.
10.14* Employment Agreement by and between the Company and Steven L. Gross.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ------------------------------------------------------------------------------------------------------
<C> <S>
10.15* Employment Agreement by and between the Company and Malcolm R. Harris.
10.16* Employment Agreement by and between the Company and Robert A. 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.
</TABLE>
- ------------------------------
* 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.
(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.
II-7
<PAGE>
(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. 3 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 14th day of December, 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. 3 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 December 14, 1998
- ------------------------------------------- Director
Murray H. Gross (Principal Executive Officer)
/s/ David L. Moore* Chairman of the Board and Director
- -------------------------------------------
David L. Moore
/s/ Robert A. DeFronzo Financial Officer, Secretary and December 14, 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
/s/Charles D. Maguire, Jr. Director December 14, 1998
- -------------------------------------------
Charles D. Maguire, Jr.
*By: /s/ Murray H. Gross December 14, 1998
---------------------------------------
Murray H. Gross, Attorney-in-Fact
</TABLE>
II-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ------------------------------------------------------------------------------------------------------
<C> <S>
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.
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ------------------------------------------------------------------------------------------------------
<C> <S>
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 T. Bulger.
10.14* Employment Agreement by and between the Company and Steven L. Gross.
10.15* Employment Agreement by and between the Company and Malcolm R. Harris.
10.16* Employment Agreement by and between the Company and Robert A. 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.
</TABLE>
- ------------------------------
* 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 1.1
U.S. REMODELERS, INC.
1,400,000 UNITS
EACH UNIT COMPRISED OF
ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
(AND ONE SHARE OF COMMON STOCK ISSUABLE UNDER THE WARRANT)
UNDERWRITING AGREEMENT
----------------------
Dallas, Texas
_________________, 1998
First London Securities Corporation
As Representative of the Several
Underwriters named in Schedule A
2600 State Street
Dallas, Texas 75204
Gentlemen:
U.S. Remodelers, Inc. (the "Company"), on the basis of the representations,
warranties, covenants and conditions contained herein, hereby proposes to issue
and sell to such Underwriters as named in Schedule A (the "Underwriters") to
this Underwriting Agreement (the "Agreement"), for whom First London Securities
Corporation ("First London") is acting as the Representative (the
"Representative"), pursuant to the terms of this Agreement, on a "firm
commitment" basis, 1,400,000 Units (the "Securities"), at $5.125 per Unit, each
Unit comprised of one share of common stock, par value $.01 per share (the
"Share"), at $5.00 per Share, and one redeemable common stock purchase warrant
(the "Warrant"), at $.125 per Warrant (each such price the "Initial Public
Offering Price"). Each Warrant is exercisable to purchase one share of common
stock (the "Common Stock") at a price equal to $6.25, subject to certain
adjustments, per Share at any time and continuing thereafter during the five
year period commencing on the date hereof, unless such period is extended by the
Company. The date upon which the Securities and Exchange Commission
("Commission") shall declare the registration statement of the Company effective
shall be the "Effective Date." The Warrants are subject to redemption under
certain circumstances. In addition, the Company proposes to grant to the
Underwriters (or, at the option of the Representative, to the Representative,
individually) the option referred to in Section 2(b) to purchase all or any part
of an aggregate of 210,000 Units (collectively, the "Option Securities").
<PAGE>
You have advised the Company that you and the other Underwriters desire to
purchase, severally, the Securities, and that you have been authorized by the
Underwriters to execute this Agreement on their behalf. The Company confirms
the agreements made by it with respect to the purchase of the Securities by the
several Underwriters on whose behalf you are signing this Agreement, as follows:
1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to, and agrees with each of the
Underwriters as of the Effective Date (as defined above), the date of this
Agreement, the Closing Date (as hereinafter defined) and the Option Closing Date
(as hereinafter defined) that:
(a) A registration statement (File No. __________________) on Form SB-2
relating to the public offering of the Securities, including a preliminary form
of the prospectus, copies of which have heretofore been delivered to you, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Commission thereunder, and has been filed
with the Commission under the Act. The Company has prepared in the same manner
and proposes to file, prior to the Effective Date of such registration
statement, an additional amendment or amendments to such registration statement,
including a final form of Prospectus, copies of which shall be delivered to you.
"Preliminary Prospectus" shall mean each prospectus filed pursuant to the Rules
and Regulations under the Act prior to the Effective Date. The registration
statement (including all financial schedules and exhibits) as amended at the
time it becomes effective and the final prospectus included therein are
respectively referred to as the "Registration Statement" and the "Prospectus,"
except that (i) if the prospectus first filed by the Company pursuant to Rule
424(b) of the Rules and Regulations shall differ from said prospectus as then
amended, the term "Prospectus" shall mean the prospectus first filed pursuant to
Rule 424(b), and (ii) if such registration statement or prospectus is amended or
such prospectus is supplemented, after the effective date of such registration
statement and prior to the Option Closing Date (as hereinafter defined), the
terms "Registration Statement" and "Prospectus" shall include such registration
statement and prospectus as so amended, and the term "Prospectus" shall include
the prospectus as so supplemented, or both, as the case may be.
(b) At the Effective Date and at all times subsequent thereto up to the
Option Closing Date, if any, and during such longer period as the Prospectus may
be required to be delivered in connection with sales by the Underwriters or any
selected dealers: (i) the Registration Statement and Prospectus will in all
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make statements therein, in light of the
circumstances under which they are made, not misleading; provided, however, that
the Company makes no representations, warranties or agreements as to information
contained in or omitted from the Registration Statement or Prospectus in
reliance upon, and in conformity with, written information furnished to the
Company by the Underwriters specifically for use in the preparation thereof. It
is understood that the statements set forth in the Prospectus with respect to
stabilization, under the heading "Underwriting" and regarding the identity of
counsel to
UNDERWRITING AGREEMENT-PAGE 2
<PAGE>
the Underwriters under the heading "Legal Matters" constitute the only
information furnished in writing by the Underwriters for inclusion in the
Prospectus.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with full power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus and is duly
qualified to do business as a foreign corporation and is in good standing in all
other jurisdictions in which the nature of its business or the character or
location of its properties requires such qualification, except where failure to
so qualify will not materially affect the Company's business, properties or
financial condition.
(d) The authorized, issued and outstanding securities of the Company as of
the date of the Prospectus is as set forth in the Prospectus under
"Capitalization;" all of the issued and outstanding securities of the Company
has been, or will be when issued as set forth in the Prospectus, duly
authorized, validly issued and fully paid and non-assessable; the issuances and
sales of all such securities complied in all material respects with applicable
federal and state securities laws; the holders thereof have no rights of
rescission against the Company with respect thereto, and are not subject to
personal liability by reason of being such holders; none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company; except as set
forth in the Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any securities of the Company have been granted or
entered into by the Company; and all of the securities of the Company, issued
and to be issued as set forth in the Registration Statement, conform to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Shares are duly authorized, and when issued, delivered and paid
for pursuant to this Agreement, will be duly authorized, validly issued, fully
paid and non-assessable and free of preemptive rights of any security holder of
the Company. Neither the filing of the Registration Statement nor the offering
or sale of the Securities as contemplated in this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or relating to
the registration of any securities of the Company, except as described in the
Registration Statement and Prospectus.
The Warrants have been duly authorized and, when issued, delivered and paid
for pursuant to this Agreement, will have been duly authorized, issued and
delivered and will constitute valid and legally binding obligations of the
Company enforceable in accordance with their terms and entitled to the benefits
provided by the warrant agreements pursuant to which such Warrants are to be
issued (the "Warrant Agreements"), which will be substantially in the form filed
as exhibits to the Registration Statement. The shares of Common Stock issuable
upon exercise of the Warrants have been reserved for issuance and when issued in
accordance with the terms of the Warrants and Warrant Agreements, will be duly
and validly authorized, validly issued, fully paid and non-assessable, free of
preemptive rights and no personal liability will attach to the ownership
thereof. Except as provided for in the Warrant Agreement, the Warrant exercise
periods and the Warrant exercise prices may not be changed or revised by the
Company without the prior written consent of First London. The
UNDERWRITING AGREEMENT-PAGE 3
<PAGE>
Warrant Agreements have been duly authorized and, when executed and delivered
pursuant to this Agreement will constitute valid and legally binding obligations
of the Company enforceable in accordance with their terms.
Each of the Representative Warrants and the Underlying Warrants (each of
which is defined in the Representative's Warrant Agreements described in Section
12 herein and all of which shall be collectively referred to as the
"Representative's Warrants"), has been duly authorized and, when issued,
delivered and paid for pursuant to the Representative's Warrant Agreements, will
have been duly authorized, issued and delivered and will constitute valid and
legally binding instruments of the Company enforceable in accordance with their
terms and entitled to the benefits provided by the Representative's Warrant
Agreements. The shares of Common Stock issuable upon exercise of each of the
Representative Warrants and the Underlying Warrants have been reserved for
issuance and when issued in accordance with the terms of the Representative
Warrants and the Underlying Warrants, will be duly and validly authorized,
validly issued, fully paid and non-assessable, free of preemptive rights and no
personal liability will attach to the ownership thereof. The exercise period
and the exercise price for each of the Representative Warrants and the
Underlying Warrants may not be changed or revised by the Company without the
prior written consent of First London.
(f) This Agreement, the Warrant Agreements and the Representative's
Warrant Agreements have been duly and validly authorized, executed and delivered
by the Company, and assuming due execution of this Agreement by the other party
hereto, constitute valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as enforceability may
be limited by bankruptcy, insolvency or other laws affecting the rights of
creditors generally. The Company has full power and lawful authority to
authorize, issue and sell the Securities to be sold by it hereunder on the terms
and conditions set forth herein, and no consent, approval, authorization or
other order of any third party or any governmental authority is required in
connection with such authorization, execution and delivery or with the
authorization, issuance and sale of the Securities or the securities to be
issued pursuant to the Representative's Warrant Agreements, except such as may
be required under the Act or state securities laws, or as otherwise have been
obtained.
(g) Except as described in the Prospectus, the Company is not in material
violation, breach of or default under, and consummation of the transactions
herein contemplated and the fulfillment of the terms of this Agreement will not
conflict with, or result in a breach of, or constitute a material default under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any of the property or assets of the Company or any of the terms or provisions
of any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which any of the property or assets of the Company is subject, nor will
such action result in any material violation of the provisions of the
certificate of incorporation or bylaws as amended of the Company, or any statute
or any order, rule or regulation applicable to the Company of any court or of
any regulatory authority or other governmental body having jurisdiction over the
Company.
UNDERWRITING AGREEMENT-PAGE 4
<PAGE>
(h) Subject to the qualifications stated in the Prospectus, the Company
has good and marketable title to all properties and assets described in the
Prospectus as owned by each of them, free and clear of all liens, charges,
encumbrances or restrictions, except such as are not materially significant or
important in relation to its business; all of the material leases and subleases
under which the Company is the lessor or sublessor of properties or assets or
under which the Company holds properties or assets as lessee or sublessee as
described in the Prospectus are in full force and effect, and, except as
described in the Prospectus, the Company is not in default in any material
respect with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone, adverse to rights of the
Company as lessor, sublessor, lessee, or sublessee under any of the leases or
subleases mentioned above, or affecting or questioning the right of the Company
to continued possession of the leased or subleased premises or assets under any
such lease or sublease except as described or referred to in the Prospectus; and
the Company owns or leases all such properties described in the Prospectus as
are necessary to its operations as now conducted and, except as otherwise stated
in the Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Ernst & Young LLP, which has examined the financial statements,
together with the related schedules and notes, for the Company and any
subsidiary of it for the periods therein stated, which have been filed with the
Commission as a part of the Registration Statement, which are included in the
Prospectus, are with respect to the Company independent accountants within the
meaning of the Act and the Rules and Regulations.
(j) The financial statements, together with the related notes and
schedules forming a part of the Registration Statement and the Prospectus,
fairly present the financial position and the results of operations of the
Company at the respective dates and for the respective periods to which they
apply; and all audited financial statements, together with the related notes and
schedules, and the unaudited financial information of the Company have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be otherwise
stated therein. The selected and summary financial and statistical data included
in the Registration Statement present fairly the information shown therein and
have been compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to be
included in the Registration Statement. The Company's internal accounting
controls and procedures are sufficient to cause the Company to prepare financial
statements which comply in all material respects with generally accepted
accounting principles applied on a basis which is consistent during the periods
involved. Except as disclosed to the Representative in writing, during the
preceding five year period, nothing has been brought to the attention of the
Company's management that would result in any reportable condition relating to
the Company's internal accounting procedures, weaknesses or controls.
(k) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus and to and including the
Option Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) the Company has not incurred and will not have
incurred any material liabilities or obligations, direct or contingent, and has
not entered into and will not have entered into any material transactions other
than in the ordinary
UNDERWRITING AGREEMENT-PAGE 5
<PAGE>
course of business and/or as contemplated in the Registration Statement and the
Prospectus; (ii) the Company has not and will not have paid or declared any
dividends or have made any other distribution on its capital stock; (iii) there
has not been any change in the capital stock of, or any incurrence of long-term
debt by, the Company; (iv) the Company has not issued any options, warrants or
other rights to purchase the capital stock of the Company; and (v) there has not
been and will not have been any material adverse change in the business,
financial condition or results of operations of the Company, or in the book
value of the assets of the Company, arising for any reason whatsoever.
(l) Except as set forth in the Prospectus, there is not pending or, to the
knowledge of the Company, threatened, any material action, suit, proceeding,
inquiry, arbitration or investigation against the Company, or any of the
officers or directors of the Company, or any material action, suit, proceeding,
inquiry, arbitration, or investigation, which might result in any material
adverse change in the condition (financial or other), business prospects, net
worth, or properties of the Company.
(m) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company
that has not been provided for in the financial statements.
(n) Except as set forth in the Prospectus, the Company has material
licenses, permits and other governmental authorizations currently required for
the conduct of its business or the ownership of its property as described in the
Prospectus and is in all material respects in compliance therewith and owns or
possesses adequate right to use all material patents, patent applications,
trademarks, service marks, trade-names, trademark registrations, service mark
registrations, copyrights, and licenses necessary for the conduct of such
business and has not received any notice of conflict, with the asserted rights
of others in respect thereof. To the best of the Company's knowledge, none of
the activities or business of the Company are in violation of, or cause the
Company to violate, any law, rule, regulation or order of the United States, any
state, county or locality, or of any agency or body of the United States or of
any state, county or locality, the violation of which would have a material
adverse impact upon the condition (financial or otherwise), business, property,
prospective results of operations, or net worth of the Company.
(o) The Company has not, directly or indirectly, at any time (i) made any
contributions to any candidate for political office, or failed to disclose fully
any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law.
(p) On the Closing Dates (herein defined) all transfer or other taxes
(including franchise, capital stock or other tax, other than income taxes,
imposed by any jurisdiction), if any, that are required to be paid in connection
with the sale and transfer of the Securities to the several Underwriters will
have been fully paid or provided for by the Company and all laws imposing such
taxes will have been fully complied with.
UNDERWRITING AGREEMENT-PAGE 6
<PAGE>
(q) All contracts and other documents which are required to be described
in or filed as exhibits to the Registration Statement have been so described
and/or filed.
(r) Except as described in the Registration Statement and Prospectus, no
holders of Common Stock or of any other securities of the Company have the right
to include such Common Stock or other securities in the Registration Statement
and Prospectus.
(s) Except as set forth in or contemplated by the Registration Statement
and the Prospectus, the Company has no material contingent liabilities.
(t) The Company has no equity interest in any corporation, limited
liability company, partnership, joint venture, trust or other entity and has not
entered into any binding agreements to obtain any such equity interest.
(u) The Commission has not issued an order preventing or suspending the
use of any Preliminary Prospectus with respect to the offer and sale of the
Securities and each Preliminary Prospectus, as of its date, has conformed fully
in all material respects with the requirements of the Act and the Rules and
Regulations and did not include any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein not
misleading.
(v) The Company, nor, to the Company's knowledge, any of its officers,
directors, employees or stockholders, has taken or will take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any of the securities of the Company.
(w) Item 26 of Part II of the Registration Statement accurately discloses
all unregistered securities sold by the Company within the three year period
prior to the date as of which information is presented in the Registration
Statement. All of such securities were sold in transactions which were exempt
from the registration provisions of the Act and not in violation of Section 5
thereof.
(x) Other than as set forth in the Prospectus, the Company has not entered
into any agreement pursuant to which any person is entitled, either directly or
indirectly, to compensation from the Company for services as a finder in
connection with the proposed offering, and the Company agrees to indemnify and
hold harmless the Underwriters against any losses, claims, damages or
liabilities, joint or several, which shall include, but not be limited to, all
costs to defend against any such claim, so long as such claim arises out of
agreements made or allegedly made by the Company.
(y) Based upon written representations received by the Company, no
officer, director or 5% or greater stockholder of the Company has any direct or
indirect affiliation or association with any member of the National Association
of Securities Dealers, Inc. ("NASD"), except as disclosed to the Representative
in writing, and, to the knowledge of the Company, no beneficial owner of the
Company's unregistered securities has any direct or indirect affiliation or
association with any NASD member except as disclosed to the Representative in
writing. The Company will advise the
UNDERWRITING AGREEMENT-PAGE 7
<PAGE>
Representative and the NASD if any 5% or greater stockholder of the Company is
or becomes an affiliate or associated person of an NASD member participating in
the distribution.
(z) The Company is in compliance in all material respects with all
federal, state and local laws and regulations respecting the employment of its
employees and employment practices, terms and conditions of employment and wages
and hours relating thereto. There are no pending investigations involving the
Company by the U.S. Department of Labor, or any other governmental agency
responsible for the enforcement of such federal, state or local laws and
regulations. There is no unfair labor practice charge or complaint against the
Company pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or to the knowledge of
the Company, threatened against or involving the Company, any predecessor
entity. No question concerning representation exists respecting the employees of
the Company and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company.
(aa) The Company does not maintain, sponsor or contribute to, nor is it
required to contribute to, any program or arrangement that is an "employee
pension benefit plan" an "employee benefit plan," or a "multi-employer plan" as
such terms are defined in Sections 3(2), 3(3) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). The Company has not maintained or contributed to a "defined benefit
plan," as defined in Section 3(35) of ERISA.
(bb) Based upon written representations received from the officers and
directors of the Company, except as disclosed in the Prospectus, during the past
five years, none of the officers or directors of the Company have been:
(i) The subject of a petition under the federal bankruptcy laws or
any state insolvency law filed by or against them, or by a receiver, fiscal
agent or similar officer appointed by a court for their business or
property, or any partnership in which any of them was a general partner at
or within two years before the time of such filing, or any corporation or
business association of which any of them was an executive officer at or
within two years before the time of such filing;
(ii) Convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(iii) The subject of any order, judgment, or decree not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining any of them from, or otherwise
limiting, any of the following activities:
(A) acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the
Commodity Futures Trading
UNDERWRITING AGREEMENT-PAGE 8
<PAGE>
Commission, or an associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in securities, or as
an affiliated person, director or employee of any investment company,
bank, savings and loan association or insurance company, or engaging
in or continuing any conduct or practice in connection with any such
activity;
(B) engaging in any type of business practice; or
(C) engaging in any activity in connection with the purchase or
sale of any security or commodity or in connection with any violation
of federal or state securities law or federal commodity laws.
(iv) The subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated of any federal or state authority barring,
suspending or otherwise limiting for more than 60 days either of their
right to engage in any activity described in paragraph (3)(i) above, or be
associated with persons engaged in any such activity;
(v) Found by any court of competent jurisdiction in a civil action or
by the Commission to have violated any federal or state securities law, and
the judgment in such civil action or finding by the Commission has not been
subsequently reversed, suspended or vacated; or
(vi) Found by a court of competent jurisdiction in a civil action or
by the Commodity Futures Trading Commission to have violated any federal
commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
(cc) Based upon written representations received from the officers and
directors of the Company, each of the officers and directors of the Company has
reviewed the sections in the Prospectus relating to their biographical data and
equity ownership position in the Company, and all information contained therein
is true and accurate.
2. Purchase, Delivery and Sale of the Securities.
---------------------------------------------
(a) Subject to the terms and conditions of this Agreement and upon the
basis of the representations, warranties and agreements herein contained, the
Company hereby agrees to issue and sell to the Underwriters an aggregate of
1,400,000 Units at $4.61, (the Initial Public Offering Price less 10%), at the
place and time hereinafter specified, in accordance with the number of Units set
forth opposite the names of the Underwriters in Schedule A attached hereto plus
any additional Securities which such Underwriters may become obligated to
purchase pursuant to the provisions of Section 9 hereof. The Securities shall
consist of 1,400,000 Units to be purchased from the Company, and the price at
which the Underwriters shall sell the Securities to the public shall be $5.125
per Unit, or $5.00 per Share and $.125 per Warrant.
UNDERWRITING AGREEMENT-PAGE 9
<PAGE>
Delivery of the Securities against payment therefor shall take place at the
offices of First London, 2600 State Street, Dallas, Texas 75204 (or at such
other place as may be designated by the Representative) at 10:00 a.m., Eastern
Time, on such date after the Effective Date as the Representative shall
designate, but not later than ten business days (holidays excepted) following
the first date that any of the Securities are released to you, such time and
date of payment and delivery for the Securities being herein called the "Closing
Date."
(b) In addition, subject to the terms and conditions of this Agreement,
and upon the basis of the representations, warranties and agreements herein
contained, the Company hereby grants the "Option" to the Underwriters (or, at
the option of the Representative, to the Representative, individually) to
purchase all or any part of an aggregate of an additional 210,000 Units, at the
same price per Unit as the Underwriters shall pay for the Securities being sold
pursuant to the provisions of subsection (a) of this Section 2 (such additional
Securities being referred to herein as the "Option Securities"). This Option may
be exercised within 45 days after the Closing Date upon notice by the
Underwriters (or the Representative, individually) to the Company advising as to
the amount of Option Securities as to which the Option is being exercised, the
names and denominations in which the certificates for such Option Securities are
to be registered and the time and date when such certificates are to be
delivered. Such time and date shall be determined by the Underwriters (or the
Representative, individually) but shall not be later than ten full business days
after the exercise of the Option, nor in any event prior to the Closing Date,
and such time and date is referred to herein as the "Option Closing Date."
Delivery of the Option Securities against payment therefor shall take place at
the offices of First London. The Option granted hereunder may be exercised only
to cover over-allotments in the sale by the Underwriters of the Securities
referred to in subsection (a) above. In the event the Company declares or pays a
dividend or distribution on its Common Stock, whether in the form of cash,
shares of Common Stock or any other consideration, prior to the Option Closing
Date, such dividend or distribution shall also be paid on the Option Securities
on the Option Closing Date.
(c) The Company will make the certificates for the Securities to be sold
hereunder available to you for inspection at least two full business days prior
to the Closing Date and the Option Closing Date, respectively, at the offices of
First London, and such certificates shall be registered in such names and
denominations as you may request. Time shall be of the essence and delivery at
the time and place specified in this Agreement is a further condition to the
obligations of the Company to each Underwriter.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company to you
for the accounts of the several Underwriters against payment of the respective
purchase prices by the several Underwriters, by certified or bank cashier's
checks in New York Clearing House funds, payable to the order of the Company or
by wire transfer in New York Clearing House funds.
In addition, in the event the Underwriters (or the Representative,
individually) exercise the Option to purchase from the Company all or any
portion of the Option Securities pursuant to the provisions of subsection (b)
above, payment for such Securities shall be made payable in New York Clearing
House funds at the offices of First London, or by wire transfer, at the time and
date of
UNDERWRITING AGREEMENT-PAGE 10
<PAGE>
delivery of such Securities as required by the provisions of subsection (b)
above, against receipt of the certificates for such Securities by the
Representative for the respective accounts of the several Underwriters
registered in such names and in such denominations as the Representative may
request.
It is understood that the Representative, individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make any and all payments required pursuant to this Section 2 on behalf of any
Underwriters whose check or checks shall not have been received by the
Representative at the time of delivery of the Securities to be purchased by such
Underwriter or Underwriters. Any such payment by the Representative shall not
relieve any such Underwriter or Underwriters of any of its or their obligations
hereunder. It is also understood that the Representative individually, rather
than all of the Underwriters, may (but shall not be obligated to) purchase the
Option Securities referred to in subsection (b) of this Section 2, but only to
cover over-allotments.
It is understood that the several Underwriters propose to offer the
Securities to be purchased hereunder to the public upon the terms and conditions
set forth in the Registration Statement, after the Registration Statement is
declared effective by the Commission.
3. Covenants of the Company. The Company covenants and agrees with the
------------------------
several Underwriters that:
(a) The Company, upon notification from the Commission that the
Registration Statement has become effective, will so advise you and will not at
any time, whether before or after the Effective Date, file any amendment to the
Registration Statement or supplement to the Prospectus of which you shall not
previously been advised and furnished with a copy or to which you or your
counsel shall have objected in writing, acting reasonably, or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to the
later of (i) the completion by the Underwriters of the distribution of the
Securities as contemplated hereby; or (ii) 25 days after the date on which the
Registration Statement shall have become or been declared effective, the Company
will prepare and file with the Commission, promptly upon your request, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary or advisable in connection with the distribution of the Securities
and as mutually agreed to by the Company and the Representative.
After the Effective Date and as soon as the Company is advised thereof, the
Company will advise you, and confirm the advice in writing, of the receipt of
any comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any supplement to the
Prospectus or any amended Prospectus, of any request made by the Commission for
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus, or of the
suspension of the qualification of the Securities for offering in any
jurisdiction, or of the institution of any proceedings for any of such purposes,
and will use its best efforts to prevent the issuance of any such order, and, if
issued, to obtain as soon as possible the lifting thereof.
UNDERWRITING AGREEMENT-PAGE 11
<PAGE>
The Company has caused to be delivered to you copies of each Preliminary
Prospectus and Prospectus, and the Company has consented and hereby consents to
the use of such copies for the purposes permitted by the Act. The Company
authorizes the Underwriters and the selected dealers to use the Prospectus in
connection with the sale of the Securities for such period as in the opinion of
counsel to the Underwriters the use thereof is required to comply with the
applicable provisions of the Act and the Rules and Regulations. In case of the
happening, at any time within such period as a Prospectus is required under the
Act to be delivered in connection with sales by the Underwriters or the selected
dealers, of any event of which the Company has knowledge and which materially
affects the Company or the Securities, or which in the opinion of counsel for
the Company or counsel for the Underwriters, should be set forth in an amendment
to the Registration Statement or a supplement to the Prospectus, in order to
make the statements therein not then misleading, in light of the circumstances
existing at the time the Prospectus is required to be delivered to a purchaser
of the Securities, or in case it shall be necessary to amend or supplement the
Prospectus to comply with law or with the Act and the Rules and Regulations, the
Company will notify you promptly and forthwith prepare and furnish to you copies
of such amended Prospectus or of such supplement to be attached to the
Prospectus, in such quantities as you may reasonably request, in order that the
Prospectus, as so amended or supplemented, will not contain any untrue statement
of a material fact or omit to state any material facts necessary in order to
make the statements in the Prospectus, in the light of the circumstances under
which they are made, not misleading. The preparation and furnishing of any such
amendment or supplement to the Registration Statement or amended Prospectus or
supplement to be attached to the Prospectus shall be without expense to the
Underwriters.
The Company will comply with the Act, the Rules and Regulations thereunder,
the Securities Exchange Act of 1934 (the "1934 Act"), and the rules and
regulations thereunder in connection with the offering and issuance of the
Securities.
(b) The Company will qualify to register the Securities for sale under the
securities or "blue sky" laws of such jurisdictions as the Representative may
designate and will make such applications and furnish such information as may be
required for that purpose and to comply with such laws, provided the Company
shall not be required to qualify as a foreign corporation or a dealer in
securities or to execute a general consent to service of process in any
jurisdiction in any action other than one arising out of the offering or sale of
the Securities. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as the Underwriters may reasonably request.
(c) If the sale of the Securities provided for herein is not consummated,
the Company shall pay all costs and expenses incident to the performance of the
Company's obligations hereunder, including, but not limited to, all such
expenses itemized in Section 8 hereof, and the actual, accountable out-of-pocket
expenses of the Representative if the offering for any reason is terminated. For
the purposes of this sub-paragraph, the Representative shall be deemed to have
assumed such expenses when they are billed or incurred, regardless of whether
such expenses have been paid. The Representative shall not be responsible for
any expenses of the Company or others, or for any charges or claims relative to
the proposed public offering whether or not consummated.
UNDERWRITING AGREEMENT-PAGE 12
<PAGE>
(d) The Company will deliver to you at or before the Closing Date two
signed copies of the Registration Statement, including all financial statements
and exhibits filed therewith, and of each amendment or supplement thereto. The
Company will deliver to or upon the order of the several Underwriters, from time
to time until the Effective Date of the Registration Statement, as many copies
of any Preliminary Prospectus filed with the Commission prior to the Effective
Date of the Registration Statement as the Underwriters may reasonably request.
The Company will deliver to the Underwriters on the Effective Date of the
Registration Statement and thereafter for so long as a Prospectus is required to
be delivered under the Act, from time to time, as many copies of the Prospectus,
in final form, or as thereafter amended or supplemented as the several
Underwriters may from time to time reasonably request.
(e) For so long as the Company is a reporting company under either Section
12 or 15 of the 1934 Act, the Company, at its expense, will furnish to the
Representative during the period ending five years from the Effective Date, (i)
as soon as practicable after the end of each fiscal year, a balance sheet of the
Company and any of its subsidiaries as at the end of such fiscal year, together
with statements of income, surplus and cash flow of the Company and any
subsidiaries for such fiscal year, all in reasonable detail and accompanied by a
copy of the certificate or report thereon of independent accountants; (ii) as
soon as they are available, a copy of all reports (financial or other) mailed to
security holders; (iii) as soon as they are available, a copy of all non-
confidential documents, including annual reports, periodic reports and financial
statements, furnished to or filed with the Commission under the Act and the 1934
Act; (iv) copies of each press release, news item and article with respect to
the Company's affairs released by the Company; and (v) such other information as
you may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its Stockholders
generally.
(g) The Company will make generally available to its stockholders and to
the registered holders of its Warrants and deliver to you as soon as it is
practicable, but in no event later than the first day of the sixteenth full
calendar month following the Effective Date, an earnings statement (which need
not be audited) covering a period of at least twelve consecutive months
beginning with the Effective Date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(h) On the Closing Date, the Company shall have taken the necessary action
to become a reporting company under Section 12 of the 1934 Act, and the Company
will make all filings required to, and will have obtained approval for, the
listing of the Shares and Warrants on The Nasdaq SmallCap Market, the Boston
Stock Exchange or a listing on a national market, and will use its best efforts
to maintain such listing for at least five years from the date of this
Agreement.
(i) For such period as the Securities are registered under the 1934 Act,
the Company will hold an annual meeting of Stockholders for the election of
directors within 180 days after the end of
UNDERWRITING AGREEMENT-PAGE 13
<PAGE>
each of the Company's fiscal years and, within 150 days after the end of each of
the Company's fiscal years will provide the Company's stockholders with the
audited financial statements of the Company as of the end of the fiscal year
just completed prior thereto. Such financial statements shall be those required
by Rule 14a-3 under the 1934 Act and shall be included in an annual report
pursuant to the requirements of such Rule.
(j) The Company will apply the net proceeds from the sale of the
Securities substantially in accordance with its statement under the caption "Use
of Proceeds" in the Prospectus, and will file such reports with the Commission
with respect to the sale of the Securities and the application of the proceeds
therefrom as may be required by Sections 12, 13 and/or 15 of the 1934 Act and
pursuant to Rule 463 under the Act.
(k) The Company will, promptly upon your request, prepare and file with
the Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
reasonable opinion of counsel to the Underwriters and the Company may be
reasonably necessary or advisable in connection with the distribution of the
Securities and will use its best efforts to cause the same to become effective
as promptly as possible.
(l) On the Closing Date the Company shall execute and deliver to you the
Representative's Warrant Agreements. The Representative's Warrant Agreements
and Warrant Certificates will be substantially in the form of the
Representative's Warrant Agreements and Warrant Certificates filed as an exhibit
to the Registration Statement.
(m) The Company will reserve and keep available for issuance that maximum
number of its authorized but unissued securities which are issuable upon
exercise of the warrants issuable pursuant to the Representative's Warrant
Agreements outstanding from time to time.
(n) Each beneficial owner of the Company's securities (including Warrants,
Options and Common Stock of the Company), as of the Effective Date, shall agree
in writing, in a form satisfactory to the Representative and Nasdaq, not to
sell, transfer or otherwise dispose of any of such securities or underlying
securities (except in a transaction other than on the open market with a
transferee who agrees to be bound by this provision) during the period of time,
commencing on the Effective Date, stated for each such beneficial owner on
Schedule B (the "lock-up period"), or any longer period required by any state or
required by Nasdaq as a condition to listing on The Nasdaq SmallCap Market,
without the prior written consent of First London and Nasdaq. Without the prior
written consent of Nasdaq, the Company shall not, directly or indirectly,
release any individual from his lock-up agreement or effect the transfer on its
books of any shares sold in contravention of a lock-up agreement. Any of such
securities that are originally registered in a name of a original beneficial
owner and are subsequently registered under a different name will be subject to
such original beneficial owner's lock-up period. Sales of the Company's
securities by officers and/or directors of the Company prior to the expiration
of their respective lock-up periods shall be effected through the
Representative.
UNDERWRITING AGREEMENT-PAGE 14
<PAGE>
(o) The Company shall pay to 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 and 5% of the aggregate redemption
price for the Warrants redeemed (collectively, the "Warrant Fee"). Such fee
will be paid to the Representative or their designees no sooner than 12 months
after the Effective Date. Additionally, as a condition to be entitled to
receive the Warrant Fee, the Representative or its designees must be designated
in writing by the Warrant holder as having solicited the Warrant (the
"Solicitation Designation") in order to receive the Warrant Fee and such Warrant
Fee shall not be paid with respect to any Warrant held in a discretionary
account without the prior written approval of such exercise by the discretionary
account holder or with respect to the exercise of any Warrant for which a
Solicitation Designation was not received by the Company before the exercise of
such Warrant. Neither the Representative nor any member or person associated
with the Representative accepted, directly or indirectly, any non-cash sales
incentive item from the Company or an affiliate thereof in excess of $100 per
annum.
(p) Prior to the Closing Date, the Company shall at its own expense,
undertake to list the Securities in the appropriate recognized securities manual
or manuals published by Standard & Poor's Corporation and such other manuals as
the Representative may designate, such listings to contain the information
required by such manuals and the Uniform Securities Act. The Company hereby
agrees to use its best efforts to maintain such listing for a period of not less
than five years unless the Securities otherwise qualify for a secondary market
trading exemption. The Company shall take such action as may be reasonably
requested by the Representative to obtain a secondary market trading exemption
in such states as may be reasonably requested by the Representative.
(q) During the one year period commencing on the Effective Date, the
Company will not, without the prior written consent of First London, which
consent will not be unreasonably withheld, offer, sell, contract to sell, grant
options or warrants to purchase or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock except for securities issued in connection with an acquisition or
merger by the Company or upon the issuance of Common Stock upon the exercise of
the Warrants presently outstanding securities or securities issued in connection
with the Company's employee stock option or director stock option plans.
(r) Prior to the Closing Date, the Company will not issue, directly or
indirectly, without the prior consent of First London, any press release or
other communication or hold any press conference with respect to the Company or
its activities or the offering of the Securities other than routine customary
advertising of the Company's products and services, and except as required by
any applicable law or the directives of any relevant regulatory authority in any
relevant jurisdiction.
(s) The Company shall employ the services of a firm of independent
certified public accountants in connection with the preparation of the financial
statements to be included in any registration statement or similar disclosure
document to be filed by the Company hereunder, or any amendment or supplement
thereto. For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit) the Company's financial statements for
each of the first three fiscal quarters prior to the announcement of quarterly
financial information, the filing of the Company's quarterly report and the
filing of quarterly financial information to stockholders.
UNDERWRITING AGREEMENT-PAGE 15
<PAGE>
(t) The Company shall retain _________________________ as the transfer
agent for the securities of the Company, or such other transfer agent as First
London may agree to in writing. In addition, the Company shall direct such
transfer agent to furnish the Representative with daily transfer sheets as to
each of the Company's securities as prepared by the Company's transfer agent and
copies of lists of stockholders and warrant holders as reasonably requested by
the Representative, for a five year period commencing from the Closing Date.
(u) The Company shall cause the Depository Trust Company, or such other
depository of the Company's securities, to deliver a "special security position
report" to the Representative on a daily and weekly basis at the expense of the
Company, for a five year period from the Effective Date.
(v) Following the Effective Date, the Company shall, at its sole cost and
expense, prepare and file such Blue Sky applications with such jurisdictions as
the Representative shall designate and the Company may reasonably agree.
(w) On the Effective Date and for a period of three years thereafter, the
Company's Board of Directors shall consist of a minimum of five persons, two of
whom shall be independent and not otherwise affiliated with the Company or
associated with any of the Company's affiliates.
(x) For such period as any Warrants are outstanding, the Company shall use
its best efforts to cause post-effective amendments to the Registration
Statement or a new Registration Statement to become effective in compliance with
the Act and without any lapse of time between the effectiveness of any such
post-effective amendments and cause a copy of each Prospectus, as then amended,
to be delivered to each holder of record of a Warrant and to furnish to each of
the Underwriters and each dealer as many copies of each such Prospectus as such
Underwriter or such dealer may reasonably request. Such post-effective
amendments or new Registration Statements shall also register the
Representative's Warrant and all the securities underlying the Representative's
Warrant. The Company shall not call for redemption of any of the Warrants
unless a Registration Statement covering the securities underlying the Warrants
or Representative's Warrant has been declared effective by the Commission and
remains current at least until the date fixed for redemption. In addition, the
Warrants or Representative's Warrant shall not be redeemable during the first
year after the Effective Date without the written consent of First London, which
consent will not be unreasonably withheld.
(y) Until such time as the securities of the Company are listed or quoted
on either the New York Stock Exchange, Nasdaq National Market or the American
Stock Exchange, the Company shall engage the Company's legal counsel to deliver
to the Representative a written opinion detailing those states in which the
Shares and Warrants of the Company may be traded in non-issuer transactions
under the Blue Sky laws of the fifty states ("Secondary Market Trading
Opinion"). The initial Secondary Market Trading opinion shall be delivered to
the Representative on the Effective Date, and the Company shall continue to
update such opinion and deliver same to the Representative on a timely basis,
but in any event at the beginning of each fiscal year, for a five year period,
if requested.
UNDERWRITING AGREEMENT-PAGE 16
<PAGE>
4. Conditions of Underwriters, Obligations. The obligations of the
---------------------------------------
several Underwriters to purchase and pay for the Securities which they have
agreed to purchase hereunder from the Company are subject, as of the date hereof
and as of the Closing Date and the Option Closing Date, as the case may be, to
the continuing accuracy of, and compliance with, the representations and
warranties of the Company herein, to the accuracy of statements of officers of
the Company made pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) (i) The Registration Statement shall have become effective not later
than 5:00 p.m., Eastern Time, on the date of this Agreement, or at such later
time or on such later date as you may agree to in writing; (ii) at or prior to
the Closing Date or Option Closing Date, as the case may be, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the Commission and no proceeding for that purpose shall have been
initiated or pending, or shall be threatened, or to the knowledge of the
Company, contemplated by the Commission; (iii) no stop order suspending the
effectiveness of the qualification or registration of the Securities under the
securities or "blue sky" laws of any jurisdiction (whether or not a jurisdiction
which you shall have specified) shall be threatened or to the knowledge of the
Company contemplated by the authorities of any such jurisdiction or shall have
been issued and in effect; (iv) any request for additional information on the
part of the Commission or any such authorities shall have been complied with to
the satisfaction of the Commission and any such authorities, and to the
satisfaction of counsel to the Underwriters; and (v) after the date hereof no
amendment or supplement to the Registration Statement or the Prospectus shall
have been filed unless a copy thereof was first submitted to the Underwriters
and the Underwriters did not object thereto.
(b) At the Closing Date, since the respective dates as of which
information is presented in the Registration Statement and the Prospectus, (i)
there shall not have been any material change in the capital stock or other
securities of the Company or any material adverse change in the long-term debt
of the Company except as set forth in or contemplated by the Registration
Statement, (ii) there shall not have been any material adverse change in the
general affairs, business, properties, condition (financial or otherwise),
management, or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, in each case other than as set
forth in or contemplated by the Registration Statement or Prospectus; (iii) the
Company shall not have sustained any material interference with its business or
properties from fire, explosion, flood or other casualty, whether or not covered
by insurance, or from any labor dispute or any court or legislative or other
governmental action, order or decree, which is not set forth in the Registration
Statement and Prospectus; and (iv) the Registration Statement and the Prospectus
and any amendments or supplements thereto shall contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and shall in all material respects conform to the requirements
thereof, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto shall contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstance under
which they are made, not misleading.
UNDERWRITING AGREEMENT-PAGE 17
<PAGE>
(c) Except as set forth in the Prospectus, there is not pending or, to the
knowledge of the Company, threatened, any material action, suit, proceeding,
inquiry, arbitration or investigation against the Company, or any of the
officers or directors of the Company, or any material action, suit, proceeding,
inquiry, arbitration, or investigation, which might result in any material
adverse change in the condition (financial or other), business prospects, net
worth, or properties of the Company.
(d) Each of the representations and warranties of the Company contained
herein shall be true and correct as of this date and at the Closing Date as if
made at the Closing Date, and all covenants and agreements herein contained to
be performed on the part of the Company and all conditions herein contained to
be fulfilled or complied with by the Company at or prior to the Closing Date and
Option Closing Date shall have been duly performed, fulfilled or complied with.
(e) At each Closing Date, you shall have received the opinion, together
with copies of such opinion for each of the other several Underwriters, dated as
of each Closing Date, from Jackson Walker, L.L.P., counsel for the Company, in
form and substance satisfactory to counsel for the Underwriters, to the effect
that:
(i) the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation with full corporate power and authority to own its properties
and conduct its business as described in the Registration Statement and
Prospectus and is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each other jurisdiction in which the
ownership or leasing of its properties or conduct of its business requires
such qualification except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company as a whole;
(ii) the authorized capitalization of the Company is as set forth
under "Capitalization" in the Prospectus; all shares of the Company's
outstanding stock and other securities requiring authorization for issuance
by the Company's Board of Directors have been duly authorized, validly
issued, are fully paid and non-assessable and conform to the description
thereof contained in the Prospectus; the outstanding shares of Common Stock
of the Company and other securities have not been issued in violation of
the preemptive rights of any stockholder and the stockholders of the
Company do not have any preemptive rights or, to such counsel's knowledge,
other rights to subscribe for or to purchase securities of the Company,
nor, to such counsel's knowledge, are there any restrictions upon the
voting or transfer of any of the securities of the Company, except as
disclosed in the Prospectus; the Common Stock, the Shares, the Warrants,
and the securities contained in the Representative's Warrant Agreements
conform to the respective descriptions thereof contained in the Prospectus;
the Common Stock, the Shares, the Warrants, the Representative's Warrants,
the shares of Common Stock to be issued upon exercise of the Warrants and
the Underlying Warrants, have been duly authorized and, when issued,
delivered and paid for, will be duly authorized, validly issued, fully
paid, non-assessable, free of preemptive rights and no personal liability
will attach to the ownership thereof; all prior sales by the Company of the
Company's securities have been made in compliance with or under an
exemption from registration under
UNDERWRITING AGREEMENT-PAGE 18
<PAGE>
the Act and applicable state securities laws and no stockholders of the
Company have any rescission rights against the Company with respect to the
Company's securities; a sufficient number of shares of Common Stock has
been reserved for issuance upon exercise of the Warrants, the
Representative Warrants and the Underlying Warrants, and to the best of
such counsel's knowledge, neither the filing of the Registration Statement
nor the offering or sale of the Securities as contemplated by this
Agreement gives rise to any registration rights or other rights, other than
those which have been waived or satisfied or described in the Registration
Statement;
(iii) this Agreement, the Representative's Warrant Agreements and the
Warrant Agreements have been duly and validly authorized, executed and
delivered by the Company and, assuming the due authorization, execution and
delivery of this Agreement by the Representative, are the valid and legally
binding obligations of the Company, enforceable in accordance with their
terms, except (a) as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws from
time to time in effect which effect creditors, rights generally; and (b) no
opinion is expressed as to the enforceability of the indemnity provisions
or the contribution provisions contained in this Agreement;
(iv) the certificates evidencing the outstanding securities of the
Company, the Shares, the Common Stock, the Warrants and the
Representative's Warrants are in valid and proper legal form;
(v) to the best of such counsel's knowledge, except as set forth in
the Prospectus, there is not pending or threatened, any material action,
suit, proceeding, inquiry, arbitration or investigation against the Company
or any of the officers or directors of the Company, nor any material
action, suit, proceeding, inquiry, arbitration, or investigation, which
might materially and adversely affect the condition (financial or
otherwise), business prospects, net worth, or properties of the Company;
(vi) the execution and delivery of this Agreement, the
Representative's Warrant Agreements, and the Warrant Agreements, and the
incurrence of the obligations herein and therein set forth and the
consummation of the transactions herein or therein contemplated, will not
result in a violation of, or constitute a default under (a) the Certificate
of Incorporation or Bylaws of the Company; (b) to the best of such
counsel's knowledge, any material obligations, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan agreement,
lease, joint venture or other agreement or instrument to which the Company
is a party or by which it or any of its properties is bound; or (c) to the
best of such counsel's knowledge, any material order, rule, regulation,
writ, injunction, or decree of any government, governmental instrumentality
or court, domestic or foreign;
(vii) the Registration Statement has become effective under the Act,
and to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement is in effect, and no
proceedings for that purpose have been instituted or are pending
UNDERWRITER AGREEMENT - PAGE 19
<PAGE>
before, or threatened by, the Commission; the Registration Statement and
the Prospectus (except for the financial statements and other financial
data contained therein, or omitted therefrom, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the Rules and Regulations;
(viii) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in connection
with the authorization, issuance, transfer, sale or delivery of the
Securities by the Company, in connection with the execution, delivery and
performance of this Agreement by the Company or in connection with the
taking of any action contemplated herein, or the issuance of the
Representative's Warrants or the securities underlying the Representative's
Warrants, other than registrations or qualifications of the securities
under applicable state or foreign securities or Blue Sky laws and
registration under the Act; and
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Representative or counsel for the Representative
shall reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law, upon opinions of counsel
satisfactory to you and counsel to the Underwriters. The opinion of such
counsel to the Company shall state that the opinion of any such other counsel is
in form satisfactory to such counsel and that the Representative and they are
justified in relying thereon.
Such counsel shall also include a statement to the effect that such counsel
has participated in the preparation of the Registration Statement and the
Prospectus and nothing has come to the attention of such counsel to lead such
counsel to believe that the Registration Statement or any amendment thereto at
the time it became effective contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
are made, not misleading or that the Prospectus or any supplement thereto
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make statements
therein, in light of the circumstances under which they are made, not misleading
(except, in the case of both the Registration Statement and any amendment
thereto and the Prospectus and any supplement thereto, for the financial
statements, notes thereto and other financial information and statistical data
contained therein, as to which such counsel need express no opinion).
(f) You and the several Underwriters shall have received on each Closing
Date a certificate dated as of each Closing Date, signed by the Chief Executive
Officer and the Chief Financial Officer of the Company and such other officers
of the Company as the Underwriters may request, certifying that:
(i) No order suspending the effectiveness of the Registration
Statement or stop order regarding the sale of the Securities is in effect
and no proceedings for such purpose are pending or are, to their knowledge,
threatened by the Commission;
UNDERWRITER AGREEMENT - PAGE 20
<PAGE>
(ii) To their knowledge there is no litigation instituted or
threatened against the Company, or any officer or director of the Company
of a character required to be disclosed in the Registration Statement which
is not disclosed therein; to their knowledge there are no contracts which
are required to be summarized in the Prospectus which are not so
summarized; and to their knowledge there are no material contracts required
to be filed as exhibits to the Registration Statement which are not so
filed;
(iii) They have each carefully examined the Registration Statement
and the Prospectus and, to the best of their knowledge, neither the
Registration Statement nor the Prospectus nor any amendment or supplement
to either of the foregoing contains an untrue statement of any material
fact or omits to state any material fact required to be stated therein or
necessary to make the statement therein, in light of the circumstances
under which they are made, not misleading; and since the Effective Date, to
the best of their knowledge, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been so set
forth;
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
material adverse change in the condition of the Company, financial or
otherwise, or in the results of its operations, except as reflected in or
contemplated by the Registration Statement and the Prospectus and except as
so reflected or contemplated since such date, there has not been any
material transaction entered into by the Company;
(v) The representations and warranties set forth in this Agreement
are true and correct in all material respects and the Company has complied
with all of its agreements herein contained;
(vi) The Company is not delinquent in the filing of any federal,
state and municipal tax return or the payment of any federal, state or
municipal taxes; they know of no proposed re-determination or reassessment
of taxes, adverse to the Company, and the Company has paid or provided by
adequate reserves for all known tax liabilities except such delinquency
that will not have a material adverse affect on the Company;
(vii) They know of no material obligation or liability of the
Company, contingent or otherwise, not disclosed in the Registration
Statement and Prospectus;
(viii) This Agreement, the Representative's Warrant Agreements and
the Warrant Agreements, the consummation of the transactions herein or
therein contemplated, and the fulfillment of the terms hereof or thereof,
will not result in a breach by the Company of any terms of, or constitute a
default under, its Certificate of Incorporation or Bylaws, any indenture,
mortgage, lease, deed of trust, bank loan or credit agreement or any other
material agreement or undertaking of the Company including, by way of
specification but not by way of limitation, any agreement or instrument to
which the Company is now a party or pursuant to which the Company has
acquired any right and/or obligations by succession or otherwise;
UNDERWRITER AGREEMENT - PAGE 21
<PAGE>
(ix) The financial statements, together with the related notes and
schedules forming a part of the Registration Statement and the Prospectus,
fairly present the financial position and the results of operations of the
Company at the respective dates and for the respective periods to which
they apply; and all audited financial statements, together with the related
notes and schedules, and the unaudited financial consolidated financial
information of the Company have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included in the Registration
Statement present fairly the information shown therein and have been
compiled on a basis consistent with the audited financial statements
presented therein. Since the respective dates of such financial
statements, there have been no material adverse change in the condition or
general affairs of the Company, financial or otherwise, other than as
referred to in the Prospectus;
(x) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, except as may otherwise
be indicated therein, the Company has not, prior to the Closing Date,
either (i) issued any securities or incurred any material liability or
obligation, direct or contingent, for borrowed money, or (ii) entered into
any material transaction other than in the ordinary course of business.
The Company has not declared, paid or made any dividend or distribution of
any kind on its capital stock except as disclosed in the Registration
Statement;
(xi) Based upon written representation from the officers and
directors of the Company they have reviewed the sections in the Prospectus
relating to their biographical data and equity ownership position in the
Company, and all information contained therein is true and accurate; and
(xii) Based upon written representation from the officers and
directors of the Company except as disclosed in the Prospectus, during the
past five years, the officers and directors of the Company have not been:
(A) Subject of a petition under the federal bankruptcy laws or
any state insolvency law filed by or against them, or by a receiver,
fiscal agent or similar officer appointed by a court for their
business or property, or any partnership in which any of them was a
general partner at or within two years before the time of such filing,
or any corporation or business association of which any of them was an
executive officer at or within two years before the time of such
filing;
(B) Convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
(C) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently
UNDERWRITER AGREEMENT - PAGE 22
<PAGE>
or temporarily enjoining either of them from, or otherwise limiting,
any of the following activities:
(1) acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator, floor
broker, leverage transaction merchant, any other person regulated
by the Commodity Futures Trading Commission, or an associated
person of any of the foregoing, or as an investment adviser,
underwriter, broker or dealer in securities, or as an affiliated
person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in
or continuing any conduct or practice in connection with any such
activity;
(2) engaging in any type of business practice; or
(3) engaging in any activity in connection with the purchase
or sale of any security or commodity or in connection with any
violation of federal or state securities law or federal commodity
laws.
(D) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any federal or state
authority barring, suspending or otherwise limiting for more than 60
days any of their right to engage in any activity described in
paragraph (3) (i) above, or be associated with persons engaged in any
such activity;
(E) Found by any court of competent jurisdiction in a civil
action or by the Commission to have violated any federal or state
securities law, and the judgment in such civil action or finding by
the Commission has not been subsequently reversed, suspended or
vacated; or
(F) Found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any
federal commodities law, and the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended or vacated.
(g) The Underwriters shall have received from Ernst & Young LLP,
independent auditors to the Company, certificates or letters, one dated and
delivered on the date hereof and one dated and delivered on the Closing Date, in
form and substance satisfactory to the Underwriters, stating, that:
(i) They are independent certified public accountants with respect to
the Company within the meaning of the Act and the applicable Rules and
Regulations;
(ii) The financial statements and the schedules included in the
Registration Statement and the Prospectus were examined by them and, in
their opinion, comply as to form in all material respects with the
applicable accounting requirements of the Act, the Rules and
UNDERWRITER AGREEMENT - PAGE 23
<PAGE>
Regulations and instructions of the Commission with respect to Registration
Statements on Form SB-2;
(iii) On the basis of inquiries and procedures conducted by them (not
constituting an examination in accordance with generally accepted auditing
standards), including a reading of the latest available unaudited interim
financial statements or other financial information of the Company (with an
indication of the date of the latest available unaudited interim financial
statements), inquiries of officers of the Company who have responsibility
for financial and accounting matters, review of minutes of all meetings of
the stockholders and the Board of Directors of the Company and other
specified inquiries and procedures, nothing has come to their attention as
a result of the foregoing inquiries and procedures that causes them to
believe that:
(A) During the period from (and including) the date of the
financial statements in the Registration Statement and the Prospectus
to a specified date not more than five days prior to the date of such
letters, there has been any change in the Common Stock, long-term debt
or other securities of the Company (except as specifically
contemplated in the Registration Statement and Prospectus) or any
material decreases in net current assets, net assets, stockholder's
equity, working capital or in any other item appearing in the
Company's financial statements as to which the Underwriters may
request advice, in each case as compared with amounts shown in the
balance sheet as of the date of the financial statement in the
Prospectus, except in each case for changes, increases or decreases
which the Prospectus discloses have occurred or will occur;
(B) During the period from (and including) the date of the
financial statements in the Registration Statement and the Prospectus
to such specified date there was any material decrease in revenues or
in the total or per share amounts of income or loss before
extraordinary items or net income or loss, or any other material
change in such other items appearing in the Company's financial
statements as to which the Underwriters may request advice, in each
case as compared with the corresponding period in the preceding year,
except in each case for increases, changes or decreases which the
Prospectus discloses have occurred or will occur;
(iv) They have compared specific dollar amounts, numbers of shares,
percentages of revenues and earnings, statements and other financial
information pertaining to the Company set forth in the Prospectus in each
case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including
work sheets, of the Company and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in accordance
with generally accepted auditing standards) set forth in the letter and
found them to be in agreement.
UNDERWRITER AGREEMENT - PAGE 24
<PAGE>
Such letters shall also set forth such other information as may be
requested by counsel for the Underwriters. Any changes, increases or decreases
in the items set forth in such letters which, in the judgment of the several
Underwriters, are materially adverse with respect to the financial position or
results of operations of the Company shall be deemed to constitute a failure of
the Company to comply with the conditions of the obligations to the several
Underwriters hereunder.
(h) Upon exercise of the Option provided for in Section 2(b) hereof, the
obligation of the several Underwriters (or, at its option, the Representative,
individually) to purchase and pay for the Option Securities referred to therein
will be subject (as of the date hereof and as of the Option Closing Date) to the
following additional conditions:
(i) The Registration Statement shall remain effective at the Option
Closing Date, and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been
instituted or shall be pending, or, to the knowledge of the Company, shall
be contemplated by the Commission, and any reasonable request on the part
of the Commission for additional information shall have been complied with
to the satisfaction of counsel to the Underwriters.
(ii) At the Option Closing Date, there shall have been delivered to
you the signed opinion from Jackson Walker, L.L.P., counsel for the
Company, dated as of the Option Closing Date, in form and substance
satisfactory to counsel to the Underwriters, which opinion shall be
substantially the same in scope and substance as the opinion furnished to
you at the Closing Date pursuant to Section 4(e) hereof, except that such
opinion, where appropriate, shall cover the Option Securities.
(iii) At the Option Closing Date, there shall have been delivered to
you a certificate of the Chief Executive Officer and Chief Financial
Officer of the Company, dated the Option Closing Date, in form and
substance satisfactory to counsel to the Underwriters, substantially the
same in scope and substance as the certificate furnished to you at the
Closing Date pursuant to Section 4(f) hereof.
(iv) At the Option Closing Date, there shall have been delivered to
you a letter in form and substance satisfactory to you from Ernst & Young
LLP, independent auditors to the Company, dated the Option Closing Date and
addressed to the several Underwriters confirming the information in their
letter referred to in Section 4(g) hereof and stating that nothing has come
to their attention during the period from the ending date of their review
referred to in said letter to a date not more than five business days prior
to the Option Closing Date, which would require any change in said letter
if it were required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and issuance of the Option Securities shall be
satisfactory in form and substance to the Underwriters, and the
Underwriters and counsel to the Underwriters shall have been furnished with
all such documents, certificates, and opinions as you may request in
connection
UNDERWRITER AGREEMENT - PAGE 25
<PAGE>
with this transaction in order to evidence the accuracy and completeness of
any of the representations, warranties or statements of the Company or its
compliance with any of the covenants or conditions contained herein.
(i) No action shall have been taken by the Commission or the NASD, the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Securities and no proceedings for the taking of such action shall have been
instituted or shall be pending, or, to the knowledge of the several Underwriters
or the Company, shall be contemplated by the Commission or the NASD. The
Company represents that at the date hereof it has no knowledge that any such
action is in fact contemplated by the Commission or the NASD. The Company shall
advise the Representative of any NASD affiliations of any of its officers,
directors, or Stockholders or their affiliates in accordance with paragraph 1(y)
of this Agreement.
(j) At the date of this Agreement, you shall have received from counsel to
the Company, dated as of the date hereof, in form and substance satisfactory to
counsel for the Underwriter, a written Secondary Market Trading Opinion
detailing those states in which the Shares and Warrants may be traded in non-
issuer transactions under the Blue Sky laws of the 50 states after the Effective
Date, in accordance with Section 3(y) of this Agreement.
(k) The authorization and issuance of the Securities and delivery thereof,
the Registration Statement, the Prospectus, and all corporate proceedings
incident thereto shall be satisfactory in all respects to counsel for the
several Underwriters, and such counsel shall be furnished with such documents,
certificates and opinions as they may reasonably request to enable them to pass
upon the matters referred to in this subparagraph.
(l) Prior to the Effective Date, the Representative shall have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Representative, as described in the Registration Statement.
(m) If any of the conditions herein provided for in this Section shall not
have been fulfilled as of the date indicated, this Agreement and all obligations
of the several Underwriters under this Agreement may be canceled at, or at any
time prior to, the Closing Date and/or the Option Closing Date by the
Representative and/or the Underwriters notifying the Company of such
cancellation in writing or by telegram at or prior to the applicable Closing
Date. Any such cancellation shall be without liability of the several
Underwriters to the Company.
5. Conditions of the Obligations of the Company. The obligation of the
--------------------------------------------
Company to sell and deliver the Securities is subject to the following
conditions:
(i) The Registration Statement shall have become effective not later
than 5:00 p.m., Eastern Time, on the date of this Agreement, or on such
later time or date as the Company and the Representative may agree in
writing; and
UNDERWRITER AGREEMENT - PAGE 26
<PAGE>
(ii) At the Closing Date and the Option Closing Date, no stop orders
suspending the effectiveness of the Registration Statement shall have been
issued under the Act or any proceedings therefore initiated or threatened
by the Commission.
If the conditions to the obligations of the Company provided for in this
Section have been fulfilled on the Closing Date but are not fulfilled after the
Closing Date and prior to the Option Closing Date, then only the obligation of
the Company to sell and deliver the Securities on exercise of the Option
provided for in Section 2(b) hereof shall be affected.
6. Indemnification. (a) The Company indemnifies and holds harmless each
----------------
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which the Underwriter or such controlling person may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
(i) the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, (ii) any blue sky application or other
document executed by the Company specifically for that purpose or based upon
written information furnished by the Company and filed in any state or other
jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such cases to the extent, but only to the
extent, that any such losses, claim, damages or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such Preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. Notwithstanding the foregoing, the Company shall have no
liability under this Section if such untrue statement or omission made in a
Preliminary Prospectus is cured in the Prospectus and the Prospectus is
delivered within the time required by the Act to the person or persons alleging
the liability upon which indemnification is being sought. This indemnity will
be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter, severally, but not jointly, indemnifies and holds
harmless the Company, each of its directors, each nominee (if any) for director
named in the Prospectus, each of its officers who have signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages or liabilities (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or any
such director, nominee, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages, or
UNDERWRITER AGREEMENT - PAGE 27
<PAGE>
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statements or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Company by you or by any Underwriter through you specifically
for use in the preparation thereof. Notwithstanding the foregoing, the
Underwriters shall have no liability under this Section if such untrue statement
or omission made in a Preliminary Prospectus is cured in the Prospectus and the
Prospectus is not delivered to the person or persons alleging the liability upon
which indemnification is being sought through no fault of the Underwriter. This
indemnity will be in addition to any liability which the Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is an Underwriter
or a person who controls such Underwriter within the meaning of the Act, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the Underwriter or such
controlling person and the indemnifying party and in the reasonable judgment of
the Representative, it is advisable for the Representative or such Underwriters
or controlling persons to be represented by separate counsel (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Underwriter or such controlling person, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys for all such Underwriters and controlling persons, which firm shall be
designated
UNDERWRITER AGREEMENT - PAGE 28
<PAGE>
in writing by you). No settlement of any action against an indemnified party
shall be made without the consent of the indemnifying party, which shall not be
unreasonably withheld in light of all factors of importance to such indemnifying
party.
7. Contribution. In order to provide for just and equitable contribution
-------------
under the Act in any case in which (i) each Underwriter makes claim for
indemnification pursuant to Section 6 but it is judicially determined (by the
entry of a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case, notwithstanding the fact
that the express provisions of Section 6 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and any such Underwriter shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys, fees) in either
such case (after contribution from others) in such proportions that all such
Underwriters are responsible in the aggregate for that portion of such losses,
claims, damages or liabilities represented by the percentage that the
underwriting discount per Share appearing on the cover page of the Prospectus
bears to the public offering price appearing thereon, and the Company shall be
responsible for the remaining portion, provided, however, that (a) if such
allocation is not permitted by applicable law then the relative fault of the
Company and the Underwriter and controlling persons, in the aggregate, in
connection with the statements or omissions which resulted in such damages and
other relevant equitable considerations shall also be considered. The relative
fault shall be determined by reference to, among other things, whether in the
case of an untrue statement of a material fact or the omission to state a
material fact, such statement or omission relates to information supplied by the
Company, or the Underwriter and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such untrue statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if the respective obligations of the Company and the Underwriters to
contribute pursuant to this Section 7 were to be determined by pro rata or per
capita allocation of the aggregate damages (even if the Underwriters and their
controlling persons in the aggregate were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the first sentence of this Section; and
(b) that the contribution of each contributing Underwriter shall not be in
excess of its proportionate share (based on the ratio of the number of
Securities purchased by such Underwriter to the number of Securities purchased
by all contributing Underwriters) of the portion of such losses, claims, damages
or liabilities for which the Underwriters are responsible. No person ultimately
determined to be guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not ultimately determined to be guilty of such fraudulent misrepresentation.
As used in this paragraph, the term "Underwriter" includes any officer,
director, or other person who controls the Underwriter within the meaning of
Section 15 of the Act, and the word "Company" includes any officer, director, or
person who controls the Company within the meaning of Section 15 of the Act. If
the full amount of the contribution specified in this Section is not permitted
by law, then the Underwriter and each person who controls the Underwriter shall
be entitled to contribution from the Company, its officers, directors and
controlling persons to the full extent permitted by law.
UNDERWRITER AGREEMENT - PAGE 29
<PAGE>
This foregoing agreement shall in no way affect the contribution liabilities of
any persons having liability under Section 11 of the Act other than the Company
and the Underwriter. No contribution shall be requested with regard to the
settlement of any matter from any party who did not consent to the settlement;
provided, however, that such consent shall not be unreasonably withheld in light
of all factors of importance to such party.
8. Costs and Expenses. (a) Whether or not this Agreement becomes
------------------
effective or the sale of the Securities to the Underwriters is consummated, the
Company will pay all costs and expenses incident to the performance of this
Agreement by the Company including but not limited to the fees and expenses of
the counsel to the Company or of the Company's accountants; the costs and
expenses incident to the preparation, printing, filing and distribution under
the Act of the Registration Statement (including the financial statements
therein and all amendments and exhibits thereto), Preliminary Prospectus and the
Prospectus, as amended or supplemented; the fee of the NASD in connection with
the filing required by the NASD relating to the offering of the Securities
contemplated hereby; all state filing fees, expenses and disbursements and legal
fees of counsel to the Company who shall serve as Blue Sky counsel to the
Company in connection with the filing of applications to register the Securities
under the state securities or blue sky laws; the cost of printing and furnishing
to the several Underwriters copies of the Registration Statement, each
Preliminary Prospectus, the Prospectus, this Agreement, the Selected Dealers
Agreement, the Agreement Among Underwriters, Underwriters Questionnaire,
Underwriters Power of Attorney and the Blue Sky Memorandum; the cost of printing
the certificates evidencing the securities comprising the Securities; the cost
of preparing and delivering to the Underwriters and its counsel of their bound
volumes containing copies of all documents and appropriate correspondence filed
with or received from the Commission and the NASD and all closing documents; and
the fees and disbursements of the transfer agent for the Company's securities.
The Company shall pay any and all taxes (including any original issue, transfer,
franchise, capital stock or other tax imposed by any jurisdiction) on sales to
the Underwriters hereunder. The Company will also pay all costs and expenses
incident to the furnishing of any amended Prospectus or of any supplement to be
attached to the Prospectus. The Company shall also engage the Company's counsel
to provide the Representative with a written Secondary Market Trading Opinion in
accordance with paragraphs 3(y) and 4(j) of this Agreement.
(b) In addition to the foregoing expenses, the Company shall at the Closing
Date pay to the Representative a non-accountable expense allowance equal to 2%
of the gross proceeds received from the sale of the Securities, of which $60,000
has been paid and the remainder shall be paid on the Closing Date. In the event
the over-allotment option is exercised, the Company shall pay to the
Representative at the Option Closing Date an additional amount equal to 2% of
the gross proceeds received upon exercise of the over-allotment option.
(c) Other than as disclosed in the Registration Statement, no person is
entitled either directly or indirectly to compensation from the Company, from
the Representative or from any other person for services as a finder in
connection with the proposed offering, and the Company agrees to indemnify and
hold harmless the Representative and the other Underwriters against any losses,
claims,
UNDERWRITER AGREEMENT - PAGE 30
<PAGE>
damages or liabilities, joint or several which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys, fees, to which the Representative or such other
Underwriter may become subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
claim of any person (other than an employee of the party claiming indemnity) or
entity that he or it is entitled to a finder's fee in connection with the
proposed offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
9. Substitution of Underwriters. If any of the Underwriters shall for
----------------------------
any reason not permitted hereunder cancel their obligations to purchase the
Securities hereunder, or shall fail to take up and pay for the number of
Securities set forth opposite their respective names in Schedule A hereto upon
----------
tender of such Securities in accordance with the terms hereof, then:
(a) If the aggregate number of Securities which such Underwriter or
Underwriters agreed but failed to purchase does not exceed 10% of the total
number of Securities, the other Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Securities
which such defaulting Underwriter or Underwriters agreed but failed to purchase.
(b) If any Underwriter or Underwriters so default and the agreed number of
Securities with respect to which such default or defaults occurs is more than
10% of the total number of Securities, the remaining Underwriters shall have the
right to take up and pay for (in such proportion as may be agreed upon among
them) the Securities which the defaulting Underwriter or Underwriters agreed but
failed to purchase. If such remaining Underwriters do not, at the Closing Date,
take up and pay for the Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase, the time for delivery of the
Securities shall be extended to the next business day to allow the several
Underwriters the privilege of substituting within twenty-four hours (including
non-business hours) another Underwriter or Underwriters satisfactory to the
Company. If no such Underwriter or Underwriters shall have been substituted as
aforesaid, within such twenty-four period, the time of delivery of the
Securities may, at the option of the Company, be again extended to the next
following business day, if necessary, to allow the Company the privilege of
finding within twenty-four hours (including non-business hours) another
Underwriter or Underwriters to purchase the Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted Underwriters to take up
the Securities of the defaulting Underwriter or Underwriters as provided in this
Section, (i) the Company or the Representative shall have the right to postpone
the time of delivery for a period of not more than seven business days, in order
to effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary; and (ii) the
respective numbers of Securities to be purchased by the remaining Underwriters
or substituted Underwriters shall be taken at the basis of the underwriting
obligation for all purposes of this Agreement.
If in the event of a default by one or more Underwriters and the remaining
Underwriters shall not take up and pay for all the Securities agreed to be
purchased by the defaulting Underwriters or
UNDERWRITER AGREEMENT - PAGE 31
<PAGE>
substitute another Underwriter or Underwriters as aforesaid, and the Company
shall not find or shall not elect to seek another Underwriter or Underwriters
for such Securities as aforesaid, then this Agreement shall terminate.
If, following exercise of the Option provided in Section 2(b) hereof, any
Underwriter or Underwriters shall for any reason not permitted hereunder cancel
their obligations to purchase Option Securities at the Option Closing Date, or
shall fail to take up and pay for the number of Option Securities, which they
become obligated to purchase at the Option Closing Date upon tender of such
Option Securities in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Securities of the defaulting Underwriters in the manner provided in Section 9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not
take up and pay for all Option Securities, the Underwriters shall be entitled to
purchase the number of Option Securities for which there is no default or, at
their election, the option shall terminate, the exercise thereof shall be of no
effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this Section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
10. Effective Date. The Agreement shall become effective upon its
--------------
execution except that you may, at your option, delay its effectiveness until
11:00 a.m., Eastern time, on the first full business day following the Effective
Date of the Registration Statement, or at such earlier time after the Effective
Date of the Registration Statement as you in your discretion shall first
commence the public offering by the Underwriters of any of the Securities. The
time of the public offering shall mean the time after the effectiveness of the
Registration Statement when the Securities are first generally offered by you to
the other Underwriters and the selected dealers. This Agreement may be
terminated by you at any time before it becomes effective as provided above,
except that Sections 3(c), 6, 7, 8, 13, 14, 15, 16, 17 and 18 shall remain in
effect notwithstanding such termination.
11. Termination. (a) This Agreement, except for Sections 3(c), 6, 7, 8,
-----------
13, 14, 15, 16, 17, and 18 hereof, may be terminated at any time prior to the
Closing Date, and the Option referred to in Section 2(b) hereof, if exercised,
may be canceled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriters for the resale of the Securities agreed to be purchased
hereunder by reason of: (i) the Company having sustained a material adverse
loss, whether or not insured, by reason of fire, earthquake, flood, accident or
other calamity, or from any labor dispute or court or government action, order
or decree; (ii) trading in securities on the Nasdaq SmallCap Market ir the
Boston Stock Exchange having been suspended or limited; (iii) material
governmental restrictions having been imposed on trading in securities generally
(not in force and effect on the date hereof); (iv) a banking moratorium having
been declared by federal or Texas state authorities; (v) an outbreak of major
international hostilities or other national or international calamity having
occurred which is reasonably believed likely by the Representative to have a
material adverse impact on the business, financial
UNDERWRITER AGREEMENT - PAGE 32
<PAGE>
condition or financial statements of the Company or the market for the
securities offered hereby; (vi) the passage by the Congress of the United States
or by any state legislative body of similar impact, of any act or measure, or
the adoption of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive;
(vii) any material adverse change in the financial or securities markets beyond
normal market fluctuations having occurred since the date of this Agreement;
(viii) a pending or threatened legal or governmental proceeding or action
relating generally to the Company's business, or a notification having been
received by the Company of the threat of any such proceeding or action, which
could, in the reasonable judgment of the Representative, materially adversely
affect the Company; (ix) except as contemplated by the Prospectus, the Company
is merged or consolidated into or acquired by another company or group or there
exists a binding legal commitment for the foregoing or any other material change
of ownership or control occurs; or (x) the Company shall not have complied in
all material respects with any term, condition or provisions on its part to be
performed, complied with or fulfilled (including but not limited to those set
forth in this Agreement) within the respective times therein provided.
(b) If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section, the Company shall be
promptly notified by you, by telephone, telegram or facsimile, confirmed by
letter.
12. Representative's Warrant Agreements. At the Closing Date, the Company
-----------------------------------
will issue to the Representative and/or persons related to the Representative,
for an aggregate purchase price of $100, and upon the terms and conditions set
forth in the form of Representative's Warrant Agreements annexed as an exhibit
to the Registration Statement, Representative's Warrants to purchase up to an
aggregate of 140,000 Units, in such denominations as the Representative shall
designate. In the event of conflict in the terms of this Agreement and the
Representative's Warrant Agreements, the language of the form of
Representative's Warrant Agreements shall control.
13. Representations, Warranties and Agreements to Survive Delivery. The
--------------------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company and its principal officers, where appropriate, and the
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriters, the Company or any of its officers or directors or any controlling
person and will survive delivery of and payment for the Securities and the
termination of this Agreement.
14. Notice. All communications hereunder will be in writing and, except
------
as otherwise expressly provided herein, will be mailed, delivered or telegraphed
and confirmed:
If to the Underwriters: First London Securities Corporation
2600 State Street
Dallas, Texas 75204
Attention: Douglas R. Nichols
UNDERWRITER AGREEMENT - PAGE 33
<PAGE>
Copy to: Jakes Jordaan
Jordaan & Pennington, PLLC
300 Crescent Court, Suite 1605
Dallas, Texas 75201
If to the Company: U.S. Remodelers, Inc.
1341 West Mockingbird Lane, Suite 900E
Dallas, Texas 75247
Attention: Chief Executive Officer
Copy to: Charles D. Maguire, Jr.
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202-3797
15. Parties in Interest. This Agreement herein set forth is made solely
-------------------
for the benefit of the several Underwriters, the Company and, to the extent
expressed, any person controlling the Company or any of the Underwriters, and
directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser of the Securities, as
such purchaser, from the several Underwriters. All of the obligations of the
Underwriters hereunder are several and not joint.
16. Applicable Law. This Agreement shall be governed and construed in
--------------
accordance with the laws of the State of Texas applicable to contracts made and
to be performed entirely within the State of Texas. The parties agree that any
action brought by any party against another party in connection with any rights
or obligations arising out of this Agreement shall be instituted properly in a
federal or state court of competent jurisdiction with venue only in the State
District Court of Dallas, County, Texas or the United States District Court for
the Northern District of Texas. A party to this Agreement named as a Defendant
in any action brought in connection with this Agreement in any court outside of
the above named designated county or district shall have the right to have the
venue of said action changed to the above designated county or district or, if
necessary, have the case dismissed, requiring the other party to re-file such
action in an appropriate court in the above designated county or federal
district.
17. 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 counter-parts shall together constitute but one and the
same instrument.
18. Entire Agreement. This Agreement and the agreements referred to
----------------
within this Agreement constitute the entire agreement of the parties, and
supersedes all prior agreement, understanding, negotiations and discussions,
whether written or oral, of the parties hereto.
UNDERWRITER AGREEMENT - PAGE 34
<PAGE>
19. Representative as Underwriter. In the event the Representative acts
-----------------------------
as the sole Underwriter in connection with the underwriting of the securities
being offered pursuant to the Registration Statement, all references to the
Representative in this Agreement shall be replaced by reference to the
"Underwriters," and (i) any consents required to be obtained from the
Representative shall be required to be obtained solely from the Underwriters;
(ii) all compensation to be received by the Representative shall instead be
received by the Underwriters; and (iii) the provisions of Section 9 of this
Agreement shall not apply.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this Agreement, whereupon it will become a binding
Agreement between the Company and the several Underwriters in accordance with
its terms.
Very truly yours,
U.S. REMODELERS, INC.
BY: __________________________________
Name: _________________________
Title: ________________________
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
FIRST LONDON SECURITIES CORPORATION
BY: __________________________________
Douglas R. Nichols, President
UNDERWRITER AGREEMENT - PAGE 35
<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 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 S-1 (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 date of the final prospectus
(the "Prospectus Date") relating to 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 for a
period of one year from the Prospectus Date, 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 Prospectus Date of the
Public Offering, and expiring four 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
Prospectus Date of the Public Offering, and expiring four 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 10.6
SECURITY AGREEMENT
------------------
This Security Agreement ("Security Agreement") is made this 6th day of
April, 1998 by and between U.S. REMODELERS, INC., a Delaware corporation with an
address at 1341 West Mockingbird Lane, Suite 900 East, Dallas, Texas 75247
(hereinafter referred to as "Debtor") and FINOVA Capital Corporation with an
address at 111 West 40th Street, New York, New York 10018 (hereinafter referred
to as "Secured Party").
FOR VALUED RECEIVED and intending to be legally bound hereby, the Debtor,
in consideration of and for the purpose of securing the payments of all
indebtedness and obligations of the Debtor under the Secured Promissory Term
Note ("Note") and all other indebtedness of Debtor to the Secured Party
howsoever incurred now existing or hereafter arising does hereby grant the
Secured Party its successors and assigns, a security interest pursuant to the
Uniform Commercial Code, in all the Collateral described herein.
1. Debtor hereby grants to Secured Party a continuing lien on and
security interest in the following property of Debtor (hereinafter referred to
as the "Collateral"):
(a) all equipment together with all additions, accessions,
attachments, substitutions, replacements thereof as more fully described on
Exhibit B attached hereto and made a part hereof, and
(b) all proceeds (including insurance proceeds) of all of the
foregoing.
2. The security interest hereby granted is to secure the Debtor's
obligations under the Note, as well as payment of any and all sums heretofore
and hereafter owing to Secured Party by Debtor, whether or not evidenced by any
note or other instrument and whether or not for the payment of money, direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, as well as all liabilities under any other agreements with
Secured Party, now and in the future including, without limitation, any debt,
liability or obligation owing from Debtor to others which Secured Party may have
obtained by assignment or otherwise, and further, including without limitation,
all interest, fees, charges, expenses and attorneys' fees chargeable to Debtor's
account, whether provided for herein or any other agreement between Debtor and
Secured Party. (All existing and future obligations including, but not limited
to: any and all principal, interest, fees, and/or costs owed by the Debtor to
the Secured Party and indebtedness hereinafter collectively referred to as the
"Obligations").
3. The Debtor hereby agrees that if the location of the Collateral
changes from the locations listed on Exhibit "A" hereto and made part hereof,
the Debtor will immediately notify the Secured Party in writing of any additions
or changes to any location of the Collateral. Debtor hereby guarantees that it
is the absolute owner of and is in possession of all of the Collateral, and
except for any lien or encumbrance granted herein, the Collateral and each item
thereof is free and clear of all security interests, liens, and encumbrances and
adverse claims of any kind or nature whatsoever.
<PAGE>
4. The Debtor covenants that it shall:
(a) from time to time and at all reasonable times with reasonable
notice, allow Secured Party, by or through any of its officers, agents,
attorneys, or accountants, to examine or inspect the Collateral wherever
located. The Debtor shall use its best efforts to do, obtain, make, execute and
deliver all such additional and further acts, things, deeds, assurances and
instruments as Secured Party may require to vest in and assure to Secured Party
its rights hereunder and in or to the Collateral, and the proceeds thereof,
including, but not limited to, waivers from landlords and mortgagees;
(b) immediately notify the Secured Party of any event causing a
material loss or decline in value of the Collateral, whether or not covered by
insurance, and the amount of such loss or depreciation; and
(c) have and maintain insurance at all times with respect to all
Collateral against risks of fire (including so-called extended coverage), theft,
sprinkler leakage, and other risks (including risk of flood if any Collateral is
maintained at a location in a flood hazard zone) as Secured Party may require,
in such form, in such amount, for such period and written by such companies as
may be satisfactory to the Secured Party. In the event of any failure to provide
insurance as herein provided, the Secured Party may, at its option, obtain such
insurance and the Debtor shall pay to the Secured Party, on demand, the cost
thereof. Proceeds of insurance may be applied by the Secured Party to reduce any
liability and indebtedness of the Debtor secured hereby or to repair or replace
Collateral, all in the Secured Party's exclusive discretion.
5. The Debtor will not sell or offer to sell or otherwise transfer or
grant or suffer the imposition of a lien or security interest upon the
Collateral or use any portion thereof in any manner inconsistent with this
Security Agreement or with the terms and conditions of any policy of insurance
thereon.
6. At the request of the Secured Party, the Debtor will join with the
Secured Party in executing all financing statements, continuation statements or
amendments thereto that the Secured Party may reasonably deem to be necessary
pursuant to the Uniform Commercial Code in form satisfactory to the Secured
Party in order to perfect or maintain FINOVA's perfected status in the
underlying Collateral. The Secured Party will pay the cost of preparing and
filing the same in all jurisdictions in which such filing is deemed by the
Secured Party to be necessary or desirable. A carbon, photographic or other copy
of this Security Agreement or of a UCC-1 financing statement may be filed as and
in lieu of an original UCC-1 financing statement.
7. Borrower covenants that, so long as the Obligations remain outstanding
and this Security Agreement remains in effect, it shall promptly reimburse
FINOVA for all costs, fees and expenses incurred by FINOVA in connection with
the negotiation, preparation, execution, delivery, administration and
enforcement of each of the documents related to this Security Agreement (the
"Security Documents") including, but not limited to, the attorneys' and
paralegals' fees of in-house and outside counsel, expert witness fees, lien,
title search and insurance fees, appraisal fees, and all
-2-
<PAGE>
other costs, expenses, taxes and filing or recording fees payable in connection
with the transactions contemplated by this Security Agreement.
8. The Debtor shall, at the option of Secured Party, be in default under
this Security Agreement upon the happening of any of the following events or
conditions ("Event of Default"):
(a) default by the Debtor in the payment, performance or observance of
any term, covenant, undertaking or liability referred to herein, or in
connection with any of the Obligations and the continuance of such default for
five (5) days, with respect to any payment default hereunder, and fifteen (15)
days, with respect to any non-payment default, after the Secured Party has given
Debtor notice thereof;
(b) falsity, inaccuracy or material breach by Debtor of any written
warranty, representation or statement made or furnished to the Secured Party by
or on behalf of the Debtor;
(c) any event which gives rise to the right of any party to accelerate
the maturity of the indebtedness of the Debtor to such party under any
indenture, agreement, or undertaking;
(d) an uninsured material loss, theft, damage, or destruction to any
of the Collateral, or the entry of any lien against or the making of any levy,
seizure or attachment thereof or thereon;
(e) dissolution, termination of existence, insolvency, business
suspension or failure, appointment of a receiver of any part of the property of
the Debtor, assignment for the benefit of creditors by the Debtor, or the
commencement of any proceedings under any federal bankruptcy or state insolvency
laws (now or hereafter enacted for the relief of debtors) by or against the
Debtor; or
(f) the occurrence of an Event of Default under the terms and
provisions of any agreement now existing or hereafter executed between the
Debtor or Borrower and the Secured Party.
After the occurrence and during the continuance of an Event of Default, the
Secured Party may declare all Obligations secured hereby immediately due and
payable and shall have, in addition to any remedies provided herein or by any
applicable law, all remedies of a secured party provided by the Uniform
Commercial Code. As permitted by such Code, the Secured Party may (i) peaceably
by its own means or with judicial assistance enter the Debtor's premises and
take possession of the Collateral, (ii) render the Collateral unusable, (iii)
dispose of the Collateral on the Debtor's premises, or (iv) require the Debtor
to assemble the Collateral and make it available to the Secured Party at a place
designated by the Secured Party. Unless the Collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, the Secured Party will give the Debtor reasonable notice of
the time and place of any public sale thereof or of the time after which any
private sale or any other intended disposition thereof is to be made. The
requirements of
-3-
<PAGE>
reasonable notice shall be met if such notice is sent by telephone, facsimile or
overnight mail, postage prepaid, to the business address of the Debtor shown in
this Security Agreement at least five (5) days before the time of the intended
sale or disposition. Expenses of retaking, holding, preparing for sale, selling
or the like shall include the Secured Party's reasonable attorney's fees and
legal expenses, incurred or expended by the Secured Party to enforce any
Obligations hereunder either as against the Debtor, or in the prosecution or
defense of any action, or concerning any matter growing out of or connection
with the subject matter of this Security Agreement, the collection of any
Obligations, or the Collateral pledged hereunder.
9. The Secured Party shall not be deemed to have waived any of the
Secured Party's rights hereunder or under any other agreement, instrument or
paper signed by the Debtor unless such waiver is in writing and signed by the
Secured Party. No delay or omission on the part of the Secured Party in
exercising any right shall operate as a waiver of such right or any other right.
A waiver on any one occasion shall not be construed as a bar to or waiver of any
right or remedy on any future occasion.
10. After the occurrence and during the continuance of an Event of
Default, the Debtor does hereby make, constitute and appoint any officer or
agent of the Secured Party as the Debtor's true and lawful attorney-in-fact,
with power to endorse the name of the Debtor or any of the Debtor's officers or
agents upon any notes, checks, drafts, money orders, or other instruments of
payment or Collateral that may come into the possession of the Secured Party in
full or part payment of any amounts owing to the Secured Party; granting to the
Debtor's said attorney full power to do any and all things necessary to be done
in and about the premises as fully and effectually as the Debtor might or could
do, including the right to compromise, settle and release all claims and
disputes with respect to the Collateral, and the Debtor hereby ratifies all that
said attorney shall lawfully do or cause to be done by virtue hereof. This power
of attorney shall be irrevocable for the life of this Security Agreement and all
transactions hereunder, but shall only be exercisable after and during the
continuance of an Event of Default.
11. All provisions herein shall inure to, and become binding upon the
successors, representatives, receivers, trustees and assigns of the parties. The
Debtor shall not delegate its duty of performance hereunder without the Secured
Party's prior written consent. The term "Security Agreement", as used in this
instrument, shall mean and include this Security Agreement, all amendments and
supplements to any of the foregoing, and all assignments, instruments and
documents submitted to the Secured Party in connection with any transaction
between the Debtor and the Secured Party. The Debtor hereby waives notice of
default, except as otherwise provided herein, and presentment, demand, protest,
and notice of dishonor as to any instrument. The Debtor hereby releases Secured
Party from all claims for loss or damage caused by any act or omission on the
part of Secured Party, its officers, agents, and employees, except for wilful
misconduct.
12. This Security Agreement, all amendments thereto, all supplements
thereof, and all acts, transactions, agreements, certificates, assignments and
transfers thereunder, and all rights of the parties hereto, shall be governed as
to their validity, enforcement, construction and effect, and
-4-
<PAGE>
in all other respects by the internal law of the State of Arizona (as opposed to
the conflicts of law provisions). The provisions hereof are severable, and the
invalidity or unenforceability of any provision shall not affect or impair the
remaining provisions which shall continue in full force and effect. No
modification hereof shall be binding or enforceable unless in writing and signed
on behalf of the party against whom enforcement is sought.
13. DEBTOR IRREVOCABLY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE
OR FEDERAL COURT LOCATED IN MARICOPA COUNTY, ARIZONA IN ANY AND ALL ACTIONS AND
PROCEEDINGS WHETHER ARISING HEREUNDER OR UNDER ANY OTHER AGREEMENT OR
UNDERTAKING AND IRREVOCABLY AGREES TO SERVICE OF PROCESS BY CERTIFIED MAIL,
RETURN RECEIPT REQUESTED TO THE ADDRESS OF DEBTOR SET FORTH HEREIN. DEBTOR AS AN
INDEPENDENT COVENANT IRREVOCABLY WAIVES JURY TRIAL AND THE RIGHT THERETO IN ANY
AND ALL DISPUTES BETWEEN DEBTOR AND SECURED PARTY WHETHER HEREUNDER OR UNDER ANY
OTHER AGREEMENTS, NOTES, PAPERS, INSTRUMENTS OR DOCUMENTS, WHETHER SIMILAR OR
DISSIMILAR.
14. THE DEBTOR BEING FULLY AWARE OF THE RIGHT TO NOTICE AND A HEARING ON
THE QUESTION OF THE VALIDITY OF ANY CLAIMS THAT MAY BE ASSERTED AGAINST THE
DEBTOR BY THE SECURED PARTY UNDER THIS SECURITY AGREEMENT, AND RELATED
AGREEMENTS AND DOCUMENTS, BEFORE THE DEBTOR CAN BE DEPRIVED OF ANY PROPERTY IN
THE DEBTOR'S POSSESSION, HEREBY WAIVES THESE RIGHTS AND AGREES THAT THE SECURED
PARTY MAY ENJOY SELF-HELP OR ANY LEGAL OR EQUITABLE PROCESS PROVIDED BY LAW TO
TAKE POSSESSION OF ANY SUCH PROPERTY WITHOUT FIRST OBTAINING A FINAL JUDGMENT OR
WITHOUT FIRST GIVING THE DEBTOR NOTICE AND THE OPPORTUNITY TO BE HEARD ON THE
VALIDITY OF THE CLAIM UPON WHICH SUCH TAKING IS MADE.
15. All capitalized terms not otherwise defined herein shall have the
meaning as set forth in the Secured Promissory Term Note.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have set their hands and seals on the day and year first above written.
FINOVA CAPITAL CORPORATION U.S. REMODELERS, INC.
BY: /s/ Melissa E. Schneck BY: /s/ Murray H. Gross
------------------------ ------------------------
Melissa E. Schneck Murray H. Gross, President
Assistant Vice President
ATTEST: /s/ SIGNATURE ILLEGIBLE
------------------------
Secretary
(Corporate Seal)
-6-
<PAGE>
EXHIBIT 10.10
REVOLVING CREDIT PROGRAM AGREEMENT
This Program Agreement ("Agreement") is made as of the 23/rd/ day of
January, 1998, by and between GREEN TREE FINANCIAL CORPORATION, a Delaware
corporation, its successors and assigns ("Green Tree"), with its executive
offices at 1100 Landmark Towers, 345 Saint Peter Street, St. Paul, Minnesota
55102, and U.S. REMODELERS, INC. ("U.S. Remodelers"), with its executive offices
at 13740 Midway Road, Suite 800, Dallas, Texas 75244.
WHEREAS, U.S. Remodelers sells various goods and services to customers and
desires to have Green Tree provide revolving credit financing to its qualified
customers, and
WHEREAS, Green Tree is willing to provide revolving credit financing
(including the issuance of Credit Cards) to qualified U.S. Remodelers customers
as set forth herein during the term of this Agreement,
NOW THEREFORE, in consideration of the terms and conditions stated herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Green Tree and U.S. Remodelers agree as follows:
SECTION 1. DEFINITIONS
- ----------------------
The following words shall have the following meanings when used in this
Agreement:
"Account" means all of the accounts, receivables and contract rights
created between an Accountholder and Green Tree pursuant to the Program.
"Accountholder" means any person to whom Green Tree has extended credit
under the Program.
"Authorization" means permission from Green Tree to make a sale of
services, products, or goods to a cardholder pursuant to the agreement that is
charged to an Account.
"Chargeback" means the refusal of Green Tree to pay U.S. Remodelers or a
Dealer for a sales slip or payment by U.S. Remodelers or a Dealer to Green Tree
for a sales slip for which U.S. Remodelers or a Dealer was previously paid.
"Credit Agreement" means the open-end revolving credit agreement between
Green Tree and each Accountholder, together with any modifications or amendments
which may be made to such agreement.
"Credit Card" means a plastic card issued and owned by Green Tree under the
Program that may be used exclusively for the purchase of Products from U.S.
Remodelers or a Dealer.
1
<PAGE>
"Dealer" means an independent enterprise and independent entrepreneur which
has been expressly authorized by U.S. Remodelers to sell Products to consumers
in retail transactions.
"Dealer Agreement" means the Green Tree Dealer Agreement between a Dealer
and Green Tree substantially in the form of Exhibit A attached hereto.
"Default" means any Event of Default or the occurrence of any event which
would be an Event of Default with the giving of notice or lapse of any
applicable grace period.
"Event of Default" has the meaning given in Section 7.01.
"Program Documents" has the meaning given in Section 3.01.
"Products" means all products and services which may be purchased by an
Accountholder from U.S. Remodelers or a Dealer.
"Presentment Warranty" means each of the warranties set forth in this
Agreement made by U.S. Remodelers each time a Purchase is presented to Green
Tree for approval and settlement.
"Program" means the program established by Green Tree on the terms and
conditions outlined in this Agreement pursuant to which Green Tree will offer to
qualified U.S. Remodelers customers the revolving credit facility described in
Section 2.02 hereof. The term includes the extension of credit by Green Tree,
billings, collections, accounting between Green Tree and U.S. Remodelers, and
all aspects of the customized revolving credit plan contemplated herein.
"Purchase" means a purchase of Products from U.S. Remodelers or a Dealer
for which Green Tree has extended credit to an Accountholder.
"Secured Credit Card" means a Credit Card which is secured by a mortgage or
deed of trust on the Accountholders' primary residence, where allowed by law,
granted by the Accountholders and any other persons required by state law to
perfect a valid security instrument, in favor of Green Tree.
"Shared Risk Reserve Pool" means a reserve pool of discount fees which (i)
is owned by U.S. Remodelers; (ii) is managed and held by Green Tree; and (iii)
may be used by Green Tree to pay for any losses or collection costs experienced
by Green Tree in connection with Accounts held by Accountholders who fall within
a mutually agreed upon score band that will keep the reserve pool solvent. Any
proceeds in the Shared Risk Reserve Pool after the Program is terminated shall
be forwarded to U.S. Remodelers by Green Tree upon either (i) the Accounts
covered by the Shared Risk Reserve Pool are liquidated or (ii) the Accounts
covered by the Shared Risk Reserve Pool are sold by Green Tree.
"Unsecured Credit Card" means a Credit Card which is not secured by a
mortgage or deed of trust on the Accountholders' primary residence.
"Vision 21 System" means Green Tree's data and application processing
system.
<PAGE>
SECTION 2. ESTABLISHMENT OF PROGRAM
- -----------------------------------
Section 2.01 Commencement of Program. The Program shall commence at such
------------------------------------
date and time as is mutually agreed to by Green Tree and U.S. Remodelers.
Section 2.02 Revolving Credit Facility. Under the Program, Green Tree
--------------------------------------
agrees to offer qualified U.S. Remodelers and Dealer customers a revolving line
of credit that will include (i) a Credit Card that may be used exclusively for
Purchases, and (ii) a cash advance feature that will enable Accountholders to
obtain cash advances from Green Tree by requesting a specific cash advance
utilizing personalized convenience checks furnished by Green Tree.
Section 2.03 Credit Terms.
-------------------------
(a) Unsecured Credit Card Terms. (i) Green Tree shall establish all of the
---------------------------
terms and conditions of an Unsecured Credit Card, the Credit Agreement and the
terms and conditions under which credit is extended to Accountholders, including
without limitation the interest rate and fees and charges applicable to
Purchases. Green Tree intends initially to establish a variable rate of
interest which will yield a minimum annual percentage rate on all Accounts equal
to Prime Rate plus 8.49% for all Purchases. Green Tree may from time to time in
its sole discretion modify such terms and conditions to the extent it deems
necessary. (ii) Green Tree agrees to offer special credit promotions on
Purchases in accordance with the term and conditions as may be mutually agreed
to by the parties. (iii) Green Tree's financing of the Purchases is amortized
over the life of the Account at a payment factor of 2.0%, with a minimum payment
amount of $50.00.
(b) Secured Credit Card Option. Green Tree may offer a Secured Credit Card
--------------------------
option under the Program. The following terms will govern the Secured Credit
Card option, the terms are subject to change by Green Tree: (i) Green Tree
shall establish an interest rate for Purchases that will vary by the Customer's
credit score and credit limit; (ii) Green Tree will charge an Origination Fee of
$100.00 or if applicable the highest amount allowed by state law whichever is
less, to the customer, (iii) Green Tree's financing of the Purchases shall be
amortized over the life of the Account with the payment factor of 2.5%. Except
as modified in this section the Secured Credit Card option will be subject to
all other terms of the Agreement. Green Tree and U.S. Remodelers shall mutually
agree on the commencement date of the Secured Credit Card option.
Section 2.04 U.S. Remodelers and Dealers to Honor Credit Card. U.S.
-------------------------------------------------------------
Remodelers and Dealers hereby agrees to participate in the program and to honor
the Credit Card for Purchases. U.S. Remodelers and Dealers shall honor the
Credit Card only in accordance with the procedures outlined in Section 4 hereof,
as the same may be amended from time to time in accordance with the terms of
Section 4.01.
Section 2.05 Green Tree to Extend Credit. Subject to (i) the terms of this
----------------------------------------
Agreement, (ii) the credit limits applicable to each Account, and (iii) the
terms and conditions in the Credit Agreement, Green Tree shall extend credit to
Accountholders in accordance with Section 4.
Section 2.06 Confidential Information. Each party agrees that any
-------------------------------------
information concerning the content and/or conduct of any aspect of the other
party's business divulged as a result of this Agreement, including but not
limited to marketing techniques and methods of
<PAGE>
operation, are and shall be treated as confidential knowledge, unique and
proprietary information, and trade or business secrets. Each party warrants and
guarantees to hold in strict confidence any and all confidential knowledge,
proprietary information, trade or business secrets or any other knowledge or
information, other than that which is public knowledge or otherwise known to the
party, of or relating to the other party's business, which may come to its
knowledge during the term of this Agreement, and agrees that it will not, except
as authorized or directed by the other party in writing, disclose to others, use
for its own benefit, copy or make notes of such confidential knowledge, own
business, access to confidential information furnished under this Agreement to
those of its employees, agents or subcontractors who reasonably require the same
to carry out the purposes of this Agreement shall ensure the confidentiality of
said information.
Section 2.07. U.S. Remodelers' and Dealer Customer List. The names of U.S.
-------------------------------------------------------
Remodelers and Dealer customers who make application to become Accountholders
and credit and other information relating to them does not constitute
"Confidential Information."
Section 2.08. U.S. Remodelers Commitment. U.S. Remodelers agrees that U.S.
----------------------------------------
Remodelers and its Dealers shall give Green Tree the right of first refusal for
all financed business generated by U.S. Remodelers and its Dealers. U.S.
Remodelers promises and commits to Green Tree that the Purchases made under the
Program shall be as follows: (i) there will be at least $20 million in Purchases
made during months 1 through 15 under the Program; (ii) there will be at least
an additional $22 million in Purchases made during months 15 through 27; (iii)
there will be at least an additional $25 million in Purchases made during months
28 through 39 under the Program: (iv) there will be at least an additional $27
million in Purchases made during months 40 through 51 under the Program; and (v)
there will be at least an additional $30 million in Purchases made during months
52 through 63 under the Program.
Section 2.09. Fees. Discounts and Charges
-------------------------------------------
(a) U.S. REMODELERS ACTIVATION FEE: U.S. Remodelers agrees to reimburse
------------------------------
Green Tree for 50% of all Program Document, system set-up and all other
activation expenses incurred by Green Tree in the activation of the Program if
the total Purchases generated in the first twelve months under the Program is
less than $20 million on a pro rata basis.
(b) PROMOTIONAL CASH DISCOUNT FEE: For promotional financing options
-----------------------------
offered under the Program, U.S. Remodelers shall pay Green Tree the following
discount fees:
i. 90 days same as cash without payments, a Discount Fee equal to
3.00% of the Purchase.
ii. 180 days same as cash without payments, a Discount Fee equal to
6.00% of the Purchase.
iii. 90 days deferred payment with interest accruing, a Discount Fee
equal to 0.00% of the Purchase.
iv. 180 days deferred payment with interest accruing, a Discount Fee
equal to 1.00% of the Purchase.
<PAGE>
For a Purchase to qualify under a promotional financing option, the
Purchase must be at least $250.00. Purchases made under the promotional
financing shall not exceed 20% of total Purchases under the Program. Green Tree
reserves the right to change the discount fees if U.S. Remodelers exceeds this
limit.
Discount fees on the promotional financing options can also be adjusted
upward or downward as the case may be following the first anniversary of the
Program commencement date and on an annual basis thereafter. Any adjustments
will be based on the one year Treasury Bill rate. For each ten basis point
increase in the Treasury Bill rate, the discount fee on 90 days promotional
financing options will be increased by three basis points and the discount fee
on 180 days promotional financing options will be increased by five basis
points. Decreases to the one year Treasury Bill rate will have the opposite
effect.
(c) SHARED RISK RESERVE DISCOUNT: U.S. Remodelers will pay Green Tree a
-----------------------------
discount fee equal to 7% of each Purchase made by Accountholders who fall into a
mutually agreed upon credit score band for the Unsecured Credit Card program.
The discount fees for this section shall be maintained in the Shared Risk
Reserve Pool.
(d) CONVENIENCE USAGE CHARGE: None.
-------------------------
(e) RETURNED MERCHANDISE CHARGE: None.
----------------------------
(f) FORMS FEE: Forms will be supplied and its associated expense will be
----------
paid by Green Tree.
(g) CHARGEBACK FEE: None.
--------------
(h) U.S. REMODELERS INSERT FEE: Green Tree will not charge U.S. Remodelers
--------------------------
any fees for billing statement inserts requested and provided by U.S.
Remodelers, unless the insert increases the postage paid by Green Tree for the
billing statement. In which case, U.S. Remodelers shall pay Green Tree the
increased postage.
(i) U.S. REMODELERS PARTICIPATION FEES: On a monthly basis, Green Tree will
-----------------------------------
pay U.S. Remodelers a participation fee based on the total Unsecured Credit Card
Purchases generated during the month as follows, if the volume commitments of
Section 2.08 are met:
Total Unsecured Purchases Under the Program Participation Fee
------------------------------------------- -----------------
During the First Fifteen Months of the Program
----------------------------------------------
$0-less than $35 million 1.5%
$35-less than $50 million 1.75%
$50 million or greater 2.0%
Total Unsecured Purchases Under the Program Participation Fee
------------------------------------------- -----------------
During the Each Subsequent 12 Month Period
------------------------------------------
$0-less than $35 million 1.5%
$35-less than $50 million 1.75%
$50 million or greater 2.0%
<PAGE>
(1) Retroactive recapture of the participation fee. The parties agree that
----------------------------------------------
once the total Purchases are greater than $35 million, then the previous
Unsecured Credit Card Purchases shall be subject to the 1.75 % participation fee
and Green Tree shall forward the additional .25% to U.S. Remodelers within 30
days of the date when Unsecured Credit Card Purchases exceed $35 million. The
parties agree that once the total Unsecured Credit Card Purchases are greater
than $50 million, then the previous Unsecured Credit Card Purchases shall be
subject to the 2.0% participation fee and Green Tree shall forward the
additional .25% to U.S. Remodelers within 30 days of the date when Unsecured
Credit Card Purchases exceed $50 million. However, the provisions of this
paragraph shall not apply to any Purchases after the sixtieth month of the
Program.
(2) Examples. The following example illustrates the participation fee
--------
calculation for one month under the Program: (i) total Unsecured Credit Card
Purchases under the Program as of March 31 are $20 million; (ii) Unsecured
Credit Card Purchases made during the month of April are $20 million; (iii) the
participation payment for the month of April would be $400,000, which is the sum
of (x) the product of $20 million multiplied by 0.25% ($100 million x 0.25% =
$50,000); plus (y) the product of $20 million multiplied by 1.75% ($20 million x
1.75% = $150,000).
The following example illustrates the participation fee calculation for the
following month: (i) total Unsecured Credit Card Purchases under the Program as
of April 30 are $40 million; (ii) Unsecured Credit Card Purchases made during
the month of May are $5 million: (iii) the participation payment for the month
of May would be $87,500, which is the product of $5 million multiplied by 1.75%.
The following example illustrates the participation fee calculation for the
first month on the sixteenth month of the Program: (i) total Unsecured Credit
Card Purchases under the Program at the end of the fifteenth month of the
Program are $75 million; (ii) Unsecured Credit Card Purchases made during the
sixteenth month of the Program are $10 million: (iii) the participation payment
for the sixteenth month would be $150,000.00. which is the product of $10
million multiplied by 1.5%.
Section 2.10. Guaranty of Dealer Obligations. Subject to the terms of
--------------------------------------------
Section 4.06, U.S. Remodelers shall be liable to Green Tree in the case of a
payment breach of the Dealer Agreement by any Dealer. Furthermore, U.S.
Remodelers shall pay Green Tree for any and all losses, as defined in Section
5.01, experienced by Green Tree as a result of any breach of any Dealer
Agreement by any Dealer. U.S. Remodelers does not guaranty the debts of any
Accountholder. U.S. Remodelers hereby now and forever waives all defenses
available to any Dealer and/or given to sureties or Guarantors at law or in
equity.
Green Tree shall provide notice to U.S. Remodelers within 5 business days
after Green Tree has determined that a breach of the Dealer Agreement has
occurred. Further, Green Tree shall provide reasonable access to information
and assist U.S. Remodelers in pursuit of claims against any defaulting Dealer.
No compromise or settlement shall be negotiated without the prior written
approval from U.S. Remodelers.
<PAGE>
SECTION 3. ADMINISTRATION OF PROGRAM
------------------------------------
Section 3.01 Preparation of Documents. Green Tree and U.S. Remodelers
-------------------------------------
shall cooperate and assist each other in the preparation of all documents to be
used in connection with the Program. Green Tree shall provide U.S. Remodelers
with the form and content of credit applications, Credit Agreements, Credit
Cards, and other forms used in connection with the Program (hereinafter referred
to as "Program Documents"). All Program Documents shall clearly disclose that
Green Tree is the creditor. U.S. Remodelers shall not use any Program Document
unless Green Tree has expressly approved its form and content. U.S. Remodelers
shall not refer to Green Tree, except in approved Program Documents.
Section 3.02 Credit Decisions. Green Tree, in its sole discretion, shall
-----------------------------
determine the creditworthiness of individual applicants under the Program and
the range of credit limits to be made available to individual Accountholders.
Green Tree shall make commercially reasonable efforts to approve creditworthy
customers. Green Tree may suspend or terminate the credit privileges of any
Accountholder at any time.
Section 3.03 Ownership of Accounts. Green Tree shall be the sole and
----------------------------------
exclusive owner of all Accounts, Credit Cards, Credit Agreements, Accountholder
data (including Accountholder lists), sales slips, credit slips and receipts or
evidences of payment or Purchases by Accountholders and other Program Documents,
and shall be entitled to receive all payments made by Accountholders on
Accounts, and U.S. Remodelers acknowledges and agrees that it has no right,
title or interest in the Accounts, Credit Cards, Credit Agreements,
Accountholder data, sales slips, credit slips, receipts or evidence of payments
or Purchases by Accountholders and other Program Documents and has no right to
any pavements made by Accountholder on Accounts. Green Tree shall be identified
to Accountholders as the creditor for all purposes.
Section 3.04 Periodic Statements. Green Tree shall be responsible for
--------------------------------
mailing monthly periodic statements to Accountholders and collecting all amounts
due on the Accounts. U.S. Remodelers shall not have any responsibilities
regarding billing or collections on Accounts and, except as otherwise provided
herein, shall not be responsible for uncollectible Accounts. U.S. Remodelers
authorizes and empowers Green Tree to sign and endorse U.S. Remodeler's name on
all checks, drafts, money orders, or other forms of payment with regard to the
Accounts.
Section 3.05 Enhancements. Green Tree and its affiliates may from time to
-------------------------
time make other products and services available to Accountholders that enhance
the features of the Program or the Accounts, including without limitation,
credit insurance, a credit card protection plan, legal services, auto clubs and
extended warranties. With respect to credit insurance, U.S. Remodelers, when
instructed by Green Tree, will offer credit insurance as a customer option in
connection with each Account. Optional credit insurance enrollment forms will
be provided by Green Tree.
Section 3.06 Promotions. U.S. Remodelers and Green Tree may from time to
-----------------------
time, upon mutual agreement, develop marketing programs pursuant to which Green
Tree will offer revolving lines of credit to U.S. Remodelers customers. The
mutually agreed upon marketing programs will be reduced to written agreements
which shall be signed by U.S. Remodelers and Green Tree.
<PAGE>
Section 3.07 Marketing. U.S. Remodelers may not, in any advertisement or
----------------------
promotion of its products or services, advertise the availability of financing
through Green Tree without the prior written approval of Green Tree.
SECTION 4. OPERATING PROCEDURES
- -------------------------------
Section 4.01 General. Green Tree and U.S. Remodelers shall follow the
--------------------
operating procedures outlined in this Section 4 for Accounts generated under the
Program. Green Tree may amend or supplement such operating procedures from time
to time in its sole discretion to the extent it deems necessary or desirable to
comply with applicable law.
Section 4.02 Solicitation of Accounts. The following procedures shall be
-------------------------------------
followed for the solicitation of Accounts and the processing of credit
applications:
(a) In connection with the sale of Products, U.S. Remodelers and Dealers
may take credit applications on behalf of Green Tree using the credit
application and disclosure forms provided by Green Tree.
(b) U.S. Remodelers or Dealer shall forward promptly to Green Tree, by
mail, telephone, facsimile transmission, or electronically via the Vision 21
System, credit applications completed by customers.
(c) All credit applications will be reviewed by Green Tree for approval and
establishment of the applicable credit limit. Green Tree will communicate
credit approvals and denials to both the customer and U.S. Remodelers or Dealer.
Section 4.03 New Account Fulfillment. Green Tree shall be solely
------------------------------------
responsible for Account fulfillment, including the mailing of Accountholder
welcome letters, Credit Cards, Credit Agreements and convenience checks.
Section 4.04 Procedures for Purchases and Credits.
-------------------------------------------------
(a) U.S. Remodelers or Dealer shall complete a sales slip for each Purchase
and imprint or write the Accountholders name and Account number on the sales
slip.
(b) U.S. Remodelers or Dealer shall obtain the Accountholder's signature on
the sales slip once all of the Purchase information is complete. If the
Accountholder does not have his/her Credit Card, the signature on the sales slip
must be reasonably similar to the signature on one form of identification, one
with a photograph, provided by the Accountholder. A valid drivers license,
military or state identification is required as identification. U.S. Remodelers
warrants the identity of the Accountholder in all cases.
<PAGE>
(c) U.S. Remodelers or Dealer shall obtain prior authorization for all
Purchases and record the authorization code on the sales slip. Authorization
may be obtained electronically through the Vision 21 System or by contacting
Green Tree at a designated telephone number established for the purpose of
issuing authorization under the Program.
Section 4.05 Settlement Procedures.
----------------------------------
(a) All sales data will be transmitted by U.S. Remodelers to Green Tree
through daily reports ("Daily Reports"). Daily Reports shall include the
following: (i) the account number, authorization number, amount and date of each
Purchase, (ii) the account number, amount and date for each credit slip issued
with respect to the Accounts, and (iii) such other information that Green Tree
may request.
(b) The receipt of the following supporting documents shall be a
condition to Green Tree's obligation to fund the Purchases:
(i) customer's original credit application;
(ii) original completed sales slip including:
. notice of right to cancel
. notice of cancellation
(iii) the original home equity line of credit agreement and mortgage/deed
of trust (collectively referred to as "Note"), in the case of Secured
Credit Card Accounts; and
(iv) a copy of a completion certificate signed by the Accountholder.
Funding of the Purchases will also be subject to an independent verification by
Green Tree of the customers satisfaction with the Products. Purchases where
Green Tree has not received the original application or Note are subject to
Chargeback under Section 5.
(c) Green Tree shall pay to U.S. Remodelers the amount of each Purchase for
which all of the proper supporting documentation has been provided less any
applicable discounts. Green Tree reserves the right to conduct customer
satisfaction calls prior to funding all Purchases. Green Tree shall be entitled
to set off against amounts due to U.S. Remodelers for Purchases the amount of
any credit slips issued for Purchases and any Chargebacks pursuant to Section 5
hereof. Funds due to U.S. Remodelers for Purchases hereunder shall be forwarded
to U.S. Remodelers via the Automated Clearing House System no later than the
next business day after all of the conditions to funding described herein have
been met.
(d) Subject to the terms of Section 5.03, Green Tree and U.S. Remodelers
shall cooperate in resolving any disputes regarding amounts set forth in the
Daily Reports or the supporting documentation. Green Tree shall be entitled to
withhold payment for the disputed portion of any Daily Report, or for any
Purchase for which the supporting documentation, in Green Tree's sole opinion,
is incomplete or unsatisfactory.
Section 4.06 Dispute Resolution Procedures. U.S. Remodelers shall
------------------------------------------
cooperate with Green Tree to promptly resolve any Accountholder Product related
dispute. Green Tree will notify U.S. Remodelers via fax upon receipt of the
Accountholder dispute. U.S. Remodelers will have forty calendar days to settle
or resolve the dispute. Failure to resolve or settle the dispute to the total
satisfaction of the Accountholder will result in a Chargeback pursuant to
Section 5 hereof.
<PAGE>
SECTION 5. CHARGEBACK
---------------------
Section 5.01 Chargeback Rights. Except as modified in Section 5.03, Green
------------------------------
Tree shall have the right, at its option, to Chargeback to U.S. Remodelers the
amount of any Purchase plus all accrued and unpaid finance charges and other
amounts owing to Green Tree if:
(a) Any Presentment Warranty made by U.S. Remodelers pursuant to Section
6.01 proves to be false or inaccurate in any material respect, after a
reasonable investigation by Green Tree;
(b) The Accountholder asserts any valid claim or defense against Green Tree
as, a result of any act or omission of U.S. Remodelers or a Dealer that violates
any applicable law, statute, ordinance, rule or regulation, after a reasonable
investigation by Green Tree;
(c) The Accountholder disputes the amount or existence of such Account or
the Accountholder refuses to pay (including by exercise of its right under the
Fair Credit Billing Act or other similar law to require Green Tree to credit its
Account), alleging dissatisfaction with the Products received, a breach of any
warranty or representation in connection with the transaction, or an offset or
counterclaim against Green Tree based on an act or omission of U.S. Remodelers
or a Dealer after a reasonable investigation by Green Tree; or
(d) U.S. Remodelers or a Dealer did not comply with the operating
procedures outlined in Section 4 herein.
Section 5.02 Limitation of Chargeback Rights. In its reasonable discretion
--------------------------------------------
Green Tree may compromise and settle any claim made by any Accountholder if such
claim may give Green Tree a right to Chargeback up to the face amount of any
sales slip. In the event of any such compromise or settlement, Green Tree shall
adjust the Accountholder's Account, and Green Tree's right to Chargeback shall
be limited to the actual amount so compromised.
Section 5.03 Exercise of Chargeback. If U.S. Remodelers does not agree
-----------------------------------
with the Accountholder's allegation regarding dissatisfaction with the Products
received, then Green Tree and U.S. Remodelers shall select an independent third
party to evaluate the Accountholder's dispute regarding the Product. U.S.
Remodelers shall pay for the costs associated with the third party evaluation.
If Green Tree exercises its right of Chargeback, Green Tree shall have the right
to off set the amount of the Chargeback against any amounts due U.S. Remodelers
under this Agreement or, if Chargebacks exceed sums due U.S. Remodelers, Green
Tree may demand immediate payment from U.S. Remodelers for the full amount of
such excess. If any Purchase is charged back, Green Tree shall assign, without
recourse, all right to payment for such Purchase to U.S. Remodelers upon the
request of U.S. Remodelers.
<PAGE>
SECTION 6. WARRANTIES AND COVENANTS
-----------------------------------
Section 6.01 Presentment Warranties. U.S. Remodelers represents and
-----------------------------------
warrants to Green Tree with respect to each Account (the following shall be
deemed restated, renewed and reaffirmed with respect to each Purchase presented
to Green Tree for approval and settlement):
(a) that the sales slip represents a bona fide sale and was actually
executed by the person named therein as Accountholder;
(b) that the signature on the sales slip appears reasonably similar to the
signature of the Accountholder on Credit Card or the signature on other valid
identification examined by U.S. Remodelers;
(c) that the sales slip has not been materially altered;
(d) that the Accountholder is of local age and competent to open an
Account;
(e) that the Products are accurately described on the sales slip and any
Products described therein have been delivered into the possession of the
Accountholder and any Products described therein have been fully performed to
the Accountholder's satisfaction;
(f) that the transaction, including prior authorization, was conducted by
U.S. Remodelers in accordance with the operating procedures set forth in Section
4 above (as same may be revised from time to time);
(g) that the account number, name of Accountholder and authorization
number have been printed on each sales slip;
(h) that U.S. Remodelers has not received, directly or indirectly, and will
refuse to accept, any reimbursement, payment or trade-in for the charges listed
on such sales slip (other than from Green Tree) and has not and will not, either
directly or indirectly, take or grant any right or security interest in any
sales slip or credit slip (other than to Green Tree) which is the subject of the
transaction;
(i) that the transaction was conducted by U.S. Remodelers in accordance
with all applicable laws and regulations that pertain to the sale of Products by
U.S. Remodelers;
(j) there is no fact nor any claim of defense of any Accountholder that
would impair the validity, enforceability, or collectability of the obligation
of the Accountholder evidenced by the sales slip or the Account;
(k) that U.S. Remodelers has full and complete title to the Products
subject only to the rights of the Accountholder which exist by virtue of the
Account;
(1) that there have been no representations or warranties made to the
Accountholder which are not contained in the sales slip other than U.S.
Remodelers' standard warranties; and in the event U.S. Remodelers breaches a
standard warranty, U.S. Remodelers will cure the breach within thirty (30)
calendar days of notice of the breach;
<PAGE>
(m) U.S. Remodelers shall, within three (3) business days of its receipt,
provide Green Tree with a copy of any written complaint from any customer
relating to any sales slip, however, if U.S. Remodelers receives a warranty card
it or a Dealer issued to an Accountholder within 59 days after completion of a
Product installation, then U.S. Remodelers needs to notify Green Tree of the
complaint, within 10 days of its receipt, if the complaint is not resolved to
the Accountholders satisfaction;
(n) U.S. Remodelers shall indemnify Green Tree and hold it harmless from
and against all losses, cost, damage, and expense, including reasonable
attorney's's fees, at any time incurred by Green Tree because of any violation
of state or Federal law or regulation or other illegal or actionable conduct;
(i) resulting from acts or omissions by U.S. Remodelers, its employees, its
agents or Dealers in connection with the sale of any Products, or (ii) resulting
from the documents used in connection with the transaction, including but not
limited to documents given to Accountholder pertaining to warranties, service
agreements, credit disclosures, insurance, and sales, application and contracts
forms, or (iii) resulting from any liability Green Tree incurs by reason of 12
Code of Federal Regulations Section 226.12 (c) of Regulation Z regarding the
right of a cardholder to assert claims and defenses against card issuers.
However, U.S. Remodelers liability for sufficiency of document contents does not
apply to any document provided by Green Tree, but shall apply to any other
failures or omissions by U.S. Remodelers or its agents related to any such
document furnished by Green Tree, including, but not limited to U.S. Remodelers'
failure in completing any such document, or properly delivering copies to
Accountholders;
(o) U.S. Remodelers owns the sales slip free from any claims, liens,
security interest or other encumbrances:
(p) the facts set forth in the sales slip, credit application, any
appraisal submitted to value the real property ("Appraisal") which real property
acts as security for a Secured Credit Account and any title report submitted in
connection with the Account ("Title Report") are true and accurate in all
material respects.
Section 6.02 Program Covenants. U.S. Remodelers covenants to do the
------------------------------
following during the term of this Agreement with respect to the operation of the
Program:
(a) U.S. Remodelers shall cooperate with Green Tree promptly to resolve all
disputes with Accountholders.
(b) U.S. Remodelers shall not seek or obtain any special agreement or
condition from, nor discriminate in any way against, any Accountholder with
respect to the terms of any transaction.
(c) U.S. Remodelers shall pay to Dealer, subject to prior receipt from
Green Tree, the amount of each Purchase for which all of the proper supporting
documentation has been provided less any applicable standard and promotional
discounts and other amounts owed to U.S. Remodelers by Dealer. Funds due to
Dealer for Purchases shall be forwarded from U.S. Remodelers to Dealer no later
than seven (7) business days after Green Tree has forwarded funds to U.S.
Remodelers.
Section 6.03 General Representations and Warranties of U.S. Remodelers.
----------------------------------------------------------------------
U.S. Remodelers makes the following representations and warranties to Green
Tree, each and all of
<PAGE>
which shall survive the execution and delivery of this Agreement, and each and
all of which shall be deemed to be restated and remade on each day on which any
Account is opened, any Purchase is presented for settlement pursuant to Section
4.05, or any action is taken with respect to the Program:
(a) Corporate Existence. U.S. Remodelers (i) is a corporation duly
-------------------
organized, validly existing, and in good standing under the laws of the State of
Delaware; (ii) is duly qualified as a corporation and in good standing under the
laws of each jurisdiction where its ownership or lease of property or the
conduct of its business requires such qualification; (iii) has the requisite
corporate power and authority and the legal right to own, pledge, mortgage, and
operate its .properties, to lease the properties it operates under a lease, and
to conduct its business as now conducted and hereafter contemplated to be
conducted; (iv) has all necessary licenses, permits, consents, or approvals
required for the conduct of its business; and (v) is in compliance with its
certificate of incorporation and bylaws.
(b) Corporate Power. Authorization: Enforceable Obligation. The
-------------------------------------------------------
execution, delivery, and performance of this Agreement and all instruments and
documents to be delivered by U.S. Remodelers hereunder: (i) are within U.S.
Remodelers' corporate power; (ii) have been duly authorized by all necessary or
proper corporate action, including the consent of shareholders where required;
(iii) do not and will not contravene any provisions of U.S. Remodelers'
certificate of incorporation or bylaws; (iv) will not violate any law or
regulation or any order or decree of any court or Governmental instrumentality;
(v) will not conflict with or result in the breach of, or constitute a default
under any indenture, mortgage, deed of trust, lease, agreement, or other
instrument to which U.S. Remodelers is a party or by which U.S. Remodelers or
any of its assets or property are bound; and (vi) do not require any filing or
registration with, or the consent or approval of, any Governmental body, agency,
authority, or any other person which has not been made or obtained previously,
copies of which have been provided to Green Tree. The Agreement has been duly
executed and delivered by U.S. Remodelers and constitutes a legal, valid, and
binding obligation of U.S. Remodelers enforceable against U.S. Remodelers in
accordance with it terms.
Section 6.04 Program Covenants of Green Tree. Green Tree covenants to
--------------------------------------------
provide and maintain the Vision 21 System computer software required for the
Program.
Section 6.05 Representations and Warranties of Green Tree. Green Tree
---------------------------------------------------------
makes the following representations and warranties to U.S. Remodelers, each and
all of which shall be deemed to be made on each day on which Accounts are
opened, Purchase documentation is received for settlement pursuant to Section
4.05, or any action is taken with respect to the Program on or after the Program
commencement date established pursuant to Section 2.01:
(a) Corporate Existence. Green Tree (i) is a corporation duly organized,
-------------------
validly existing and in good standing under the laws of the State of Delaware;
(ii) has the requisite corporate power and authority and the legal right to own,
pledge, mortgage, and operate its properties, to lease the properties it
operates under a lease, and to conduct its business as now conducted and
hereafter contemplated to be conducted; and (iii) is in compliance with its
articles of incorporation and bylaws.
(b) Corporate Power. Authorization: Enforceable Obligation. The
-------------------------------------------------------
execution, delivery, and performance of this Agreement and all instruments and
documents to be delivered by Green
<PAGE>
Tree hereunder, (i) are within Green Tree's corporate power, (ii) have been duly
authorized by all necessary or proper corporate action, including the consent of
shareholders where required; (iii) do not and will not contravene any provision
of Green Tree's certificate of incorporation or bylaws; (iv) will not violate
any law or regulation or an order or decree of any court or Governmental
instrumentality; (v) will not conflict with or result in the breach of, or
constitute a default under, any indenture, by which Green Tree or any of its
property is bound; and (vi) do not require any filing or registration with or
the consent or approval of any Governmental body, agency, authority, or any
other person which has not been made or obtained previously. This Agreement has
been duly executed and delivered by Green Tree, and constitutes the legal,
valid, and binding obligation of Green Tree, enforceable against Green Tree in
accordance with its terms.
(c) Program Compliance. Green Tree warrants to U.S. Remodelers that the
------------------
Program shall be administered and serviced in compliance with applicable state
and federal laws.
SECTION 7. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
- -------------------------------------------------
Section 7.01 Events of Default. The occurrence of any one or more of the
------------------------------
following events shall constitute an "Event of Default" hereunder:
(a) Either U.S. Remodelers or Green Tree shall fail to make any payment of
any amount due pursuant to this Agreement when due and payable or declared due
and payable, and the same shall remain unpaid for a period of fifteen (15) days;
(b) Either U.S. Remodelers or Green Tree shall fail or neglect to perform,
keep, or observe any term, provision, condition, commitment or covenant
contained in this Agreement that is required to be performed, kept or observed
by either party, and the same shall remain uncured for a period of thirty (30)
days after the other party shall have given written notice thereof;
(c) Any representation or warranty made or delivered by either U.S.
Remodelers or Green Tree or any of its respective officers, employees, agents,
or representatives shall not be true and correct in any material respect as of
the date when made or reaffirmed;
(d) U.S. Remodelers shall be acquired (whether by merger, consolidation,
change of control, as defined below, or otherwise) by any person not an
affiliate of U.S. Remodelers as of the date of execution of this Agreement,
unless Green Tree consents to the acquisition in writing prior to the
acquisition, which consent shall not be unreasonably withheld. For purposes of
this section of "change of control" shall mean any sale of all or substantially
all of the assets of an entity (whether in one or a series of transactions) or
an entity is merged or consolidated into another corporation or the capital
stock of an entity is transferred;
(e) Either U.S. Remodelers or Green Tree shall (i) file a petition seeking
relief pursuant to the Bankruptcy Code or any other applicable bankruptcy or
other similar law; (ii) consent to the institution of proceedings pursuant
thereto or to the filing of any such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee, or
sequestrate (or similar official) of either party of any substantial part of its
properties; (iii) fail generally to pay its debts as such debts become due; or
(iv) take corporate action in furtherance of any such action;
<PAGE>
(f) A material adverse change shall occur in the operations, financial
condition, business or prospects of U.S. Remodelers which has impaired or is
reasonable likely to impair, the ongoing operation or continued viability of the
Program, in each case, as determined by Green Tree, in its sole discretion.
Section 7.02 Remedies. If any Event of Default shall have occurred and be
---------------------
continuing the non-defaulting party shall have the right to terminate this
Agreement in the manner specified in Section 8 hereof
SECTION 8. TERM/TERMINATION
- ---------------------------
Section 8.01 Term. This Agreement shall continue in full force and effect
-----------------
until the sixty third month of the Program commencement date (established
pursuant to Section 2.01); thereafter, this Agreement shall renew automatically
for successive one year terms unless and until terminated by either U.S.
Remodelers or Green Tree by written notice to the other party at least 180 days
prior to the end of the original or any renewal term.
Section 8.02 Termination for Cause. If an Event of Default under Section
----------------------------------
7.01 shall occur, the non-defaulting party shall have the right immediately to
-----------
terminate this Agreement upon notice.
Section 8.03 Effect of Termination. Upon termination, all of the rights
----------------------------------
and obligation of the respective parties hereto shall cease; provided, however,
that the following shall survive the termination of this Agreement: (i) U.S.
Remodelers' obligation to reimburse Green Tree for amounts due to Green Tree in
connection with the offering of special credit promotions and a grace period on
Purchases pursuant to Section 2.03; (ii) Green Tree's Chargeback rights pursuant
to Section 5; (iii) the obligations of the parties related to indemnification
under Section 9. Upon termination, Green Tree shall cease to honor Purchases and
will terminate all privileges related to the Credit Cards. Furthermore, upon
termination U. S. Remodelers' right to Participation Fees under Section 2.09 (i)
shall cease immediately and Green Tree shall not be required to pay any
Participation Fees upon or any time after termination. Upon termination, U.S.
Remodelers may purchase from Green Tree all Accounts then outstanding for cash
in an amount equal to 102% of their unpaid principal balance plus all accrued
and unpaid finance charges and other amounts owing, to Green Tree. Upon such
payment, Green Tree will assign all such Accounts to U.S. Remodelers, or its
assigns, without recourse or warranty.
SECTION 9. INDEMNIFICATION
- --------------------------
Section 9.01 By Green Tree. Green Tree shall be liable to and shall
--------------------------
indemnify and hold harmless U.S. Remodelers and its officers, directors and
employees from and against any Losses, as defined below, arising out of the
intentional or negligent act or omission of Green Tree in the performance of its
duties and obligations under this Agreement or its failure to comply with the
terms of this Agreement or any applicable laws or regulations applicable to it,
including but not limited to a breach by Green Tree of the warranty contained in
Section 6.05 (c), Green Tree shall indemnify U.S. Remodelers for any Products
offered or sold by Green Tree.
Section 9.02 By U.S. Remodelers. U.S. Remodelers shall be liable to and
-------------------------------
shall indemnify and hold harmless Green Tree and its officers, directors and
employees from and
<PAGE>
against any Losses, as defined below, arising out of the intentional or
negligent act or omission of U.S. Remodelers in the performance of its duties or
obligations under this Agreement or its failure to comply with the terms of this
Agreement or any applicable laws or regulations, including without limitation
Losses resulting from (i) acts or omissions in connection with the sale of any
Products, (ii) the Program Documents and other documents used in connection with
the transactions, including but not limited to documents given to any
Accountholder pertaining to warranties or service agreements, U.S. Remodelers'
liability for the Program Documents and other documents does not apply to any
document provided by Green Tree, but shall apply to any failures or omissions by
U.S. Remodelers or its officers, employees or agents related to any such
document furnished by Green Tree, including, but not limited to, U.S.
Remodelers' failure properly to complete any such document or deliver copies to
Accountholders, (iii) the material inaccuracy or incompleteness of any
information contained in any credit application of any Accountholder, or (iv)
any liability Green Tree incurs by reason of 12 Code of Federal Regulations
Section 226.12 (c) of Regulation Z regarding the right of a cardholder to assert
claims and defenses against card issuers, (v) the failure by U.S. Remodelers to
provide Products to Accountholders in accordance with their terms, and (vi) any
product liability or warranty claims in respect of such Products. U.S.
Remodelers shall not indemnify Green Tree for any Losses that result from any
products or services offered or sold by Green Tree.
Section 9.03 General. U.S. Remodelers and Green Tree shall promptly notify
--------------------
the other of any claim, demand, suit or threat of suit of which it becomes aware
(except with respect to a threat of suit either party might institute against
the other) which may give rise to a right of indemnification pursuant to this
Agreement. The indemnifying party will be entitled to participate in the
settlement or defense thereof and, if the indemnifying party elects, to take
over and control the settlement or defense thereof with counsel satisfactory to
the indemnified party. In any case, the indemnifying party and the indemnified
party shall cooperate (at no cost to the indemnified party) in the settlement or
defense of any such claim, demand, suit or proceeding. For purposes of this
Section 9, the term "Losses" shall mean any losses, damages, costs and expenses,
liabilities, settlements, including, without limitation, any attorneys' fees and
disbursements and court costs reasonably incurred by Green Tree or U.S.
Remodelers, as the case may be.
SECTION 10. MISCELLANEOUS
- -------------------------
Section 10.01 Independent Contractors. In performing their respective
-------------------------------------
responsibilities under this Agreement, Green Tree and U.S. Remodelers are
independent contractors. This Agreement is not intended to create and shall not
be construed to create, a relationship of partner or joint venture or an
association for profit between Green Tree and U.S. Remodelers.
Section 10.02 Financial Statements. At least annually or more often if
----------------------------------
requested by Green Tree, U.S. Remodelers shall provide Green Tree with audited
balance sheets and profit and loss statements and make available to Green Tree's
representatives such other financial information as may be reasonably requested
by Green Tree. U.S. Remodelers understands and agrees that Green Tree may
verify any financial information provided by U.S. Remodelers and may, from time
to time, seek credit and other information concerning U.S. Remodelers from
others.
Section 10.03 Assignment: Delegation of Duties. Without the express
-----------------------------------------------
written consent of the other party, neither U.S. Remodelers nor Green Tree may
assign this Agreement or
<PAGE>
delegate any of its duties hereunder except that (a) either U.S. Remodelers or
Green Tree may delegate such duties to any party which is then a wholly owned
subsidiary of the delegating party or a corporation under common control with
the delegating party, (b) Green Tree may assign this Agreement to a wholly owned
subsidiary, and (c) Green Tree may contract with a bank or other financial
institution in structuring the Program and in connection with such contract may
assign this Agreement or delegate duties to such financial institution to the
extent Green Tree deems necessary or desirable.
Section 10.04 Amendment. Subject to the right of Green Tree to amend and
-----------------------
supplement the operating procedures pursuant to Section 4.01 hereof, this
Agreement may not be amended except by written instrument signed by both Green
Tree and U.S. Remodelers.
Section 10.05 Non-Waiver. No delay by U.S. Remodelers or Green Tree hereto
------------------------
in exercising any of its rights hereunder or partial or single exercise of such
rights, shall operate as a waiver of that or any other right. The exercise of
one or more of U.S. Remodelers' or Green Tree's rights hereunder shall not be a
waiver of, nor preclude the exercise of, any rights or remedies available to
such party under this Agreement or in law or equity.
Section 10.06 Severability. If any provision of this Agreement is held to
--------------------------
be invalid, void or unenforceable, all other provisions shall remain valid and
be enforced and construed as if such invalid provision were never a part of this
Agreement.
Section 10.07 Governing Law. This Agreement and all rights and obligations
---------------------------
hereunder shall be governed by and construed in accordance with the substantive
laws of the State of Minnesota.
Section 10.08 Entire Agreement. This Agreement, including any addenda or
------------------------------
exhibits, constitutes the entire agreement between Green Tree and U.S.
Remodelers with respect to the Program and any matters relating thereto and all
prior agreements, negotiations and communications on such subject are hereby
superseded.
Section 10.09 Captions. Cautions used in this Agreement are for convenient
----------------------
reference only and shall not be construed as limiting or defining the
substantial content of this Agreement.
Section 10.10 Use of U.S. Remodelers Name and Mark. U.S. Remodelers hereby
--------------------------------------------------
expressly gives Green Tree permission to use its name, logo, registered
trademarks and service marks (if any) in connection with the operation of the
Program.
Section 10.11 Notices. Except as otherwise provided in this Agreement, all
---------------------
notices, demands and other communications hereunder shall be in writing and
shall be delivered personally or sent by facsimile, other electronic means or
nationally recognized overnight courier service addressed to the party to whom
such notice or other communication is to be given or made at such party's
address as set forth below, or to such other address as such party may designate
in writing to the other party from time to time in accordance with the
provisions hereof, and shall be deemed given when personally delivered, when
sent electronically or one (1) business day after being sent by overnight
courier.
<PAGE>
To Green Tree:
Green Tree Financial Corporation
332 Minnesota Street, Suite 600
St. Paul, Minnesota 55101
Attention: Bruce Crittenden
Facsimile: 612.292.2470
with copies to:
Green Tree Financial Corporation
1100 Landmark Towers
345 Saint Peter Street
St. Paul, Minnesota 55102
Attention: Joel Gottesman, Esq.
Facsimile: 612.293.5746
Green Tree Financial Corporation
332 Minnesota Street, Suite 600
St. Paul, Minnesota 55101
Attention: Don McConnell, Esq.
Facsimile: 612.292.2470
To U.S. Remodelers:
U.S. Remodelers Incorporated
1341 West Mockingbird Lane Suite 900E
Dallas, Texas 75247-6913
Attention: Murray H. Gross
Facsimile: 214.267.2014
Section 10.12 Multiple Counterparts. This Agreement may be executed in any
-----------------------------------
number of multiple counterparts, all of which shall constitute but one and the
same original.
IN WITNESS WHEREOF, Green Tree and U.S. Remodelers have hereunto set their
hands as of the date first written above.
GREEN TREE FINANCIAL U.S. REMODELERS INC.
CORPORATION
By: /s/ illegible By: /s/ Murray H. Gross
------------------- -------------------
Its E.V.P. Its: President
------------------- ---------
<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.
3 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
December 11, 1998
