<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1999
REGISTRATION NO. 333
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
ART RENAISSANCE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5999 38-3112715
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or classification code number) identification
organization) number)
</TABLE>
156 WILLIAM STREET, SUITE 1204
NEW YORK, NY 10038
(212) 571-4400
(Address, including zip code, and Telephone Number, including
area code, of Registrant's Principal Executive Offices)
EUGENE I. SCHUSTER
156 WILLIAM STREET, SUITE 1204
NEW YORK, NY 10038
(212) 571-4400
(Name, Address, including zip code, and Telephone Number, including area code,
of Agent for Service)
------------------------------
COPIES TO:
ROBERT H. COHEN, ESQ. KENNETH S. GOODWIN, ESQ.
Morrison Cohen Singer & Weinstein, LLP Coleman, Rhine & Goodwin LLP
750 Lexington Avenue 750 Lexington Avenue
New York, New York 10022 New York, New York 10022
(212) 735-8600 (212) 317-8880
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, 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 posteffective 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 posteffective 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. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER SHARE PROPOSED MAXIMUM
REGISTERED REGISTERED (1) (2) AGGREGATE OFFERING PRICE
<S> <C> <C> <C>
Common Stock, $0.01 par value per share..... 3,910,000 $11.00 $43,010,000
Underwriter's Warrant (3)................... 1 $.001 --
Common Stock, $0.01 par value per share,
issuable upon exercise of Underwriter's
Warrant................................... 238,000(4) $13.75 $3,272,500
Total....................................... $46,282,500
<CAPTION>
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT OF
REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, $0.01 par value per share..... $11,956.78
Underwriter's Warrant (3)................... --
Common Stock, $0.01 par value per share,
issuable upon exercise of Underwriter's
Warrant................................... $909.76
Total....................................... $12,866.54
</TABLE>
(1) Includes 510,000 shares that the Underwriter has the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o) of the Securities Act of 1933, as amended.
(3) Represents warrants to purchase 238,000 shares of common stock to be issued
to the Underwriter (the "Underwriter's Warrant").
(4) Represents common stock issuable upon the exercise of the Underwriter's
Warrant. Pursuant to Rule 416, this Registration Statement also covers any
additional shares which may become issuable by reason of the antidilution
provisions of the Underwriter's Warrant.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 1, 1999.
3,400,000 SHARES OF COMMON STOCK
ART RENAISSANCE, INC.
This is an initial public offering of common stock of shares of Art
Renaissance, Inc. All of the 3,400,000 shares of common stock are being sold by
Art Renaissance, Inc.
Prior to this offering, there has been no public market for the common
stock. We currently estimate that the initial public offering price per share
will be between $9.00 and $11.00 per share. We intend to list the common stock
on the NASDAQ National Market under the symbol "ARTS".
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT CERTAIN FACTORS
YOU SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------- -----
<S> <C> <C>
Initial Public Offering Price.................................................................. $ $
Underwriter Discount(1)........................................................................ $ $
Proceeds to Art Renaissance, Inc............................................................... $ $
</TABLE>
- ------------------------
(1) For a further description of underwriting compensation, please see
"Underwriting."
We have granted the Underwriter a 45 day option to purchase up to an additional
510,000 shares from us to cover over-allotments.
The Underwriter expects to deliver the shares against payment in New York, New
York on , .
------------------------
AUERBACH, POLLAK & RICHARDSON, INC.
Prospectus dated , 1999
<PAGE>
[INSIDE FRONT COVER: ART TO COME.
The following text appears on the inside front cover: Art Renaissance, Inc.,
Dyansen, Merrill Chase, Galerie Renaissance, Internet, Auctions, Galleries, The
Artique.]
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED, THIS PROSPECTUS REFLECTS THE
ISSUANCE IN SEPTEMBER 1999 OF 53,205 SHARES OF COMMON STOCK AS SATISFACTION OF
$345,840 OF ACCRUED INTEREST AND 188,016 SHARES OF COMMON STOCK IN CANCELLATION
OF OUTSTANDING WARRANTS PLUS AN INTEREST CHARGE OF $168,855 RELATING TO THESE
ISSUANCES. ALL INFORMATION IN THIS PROSPECTUS RELATING TO THE NUMBER OF SHARES
OF OUR COMMON STOCK, OPTIONS AND WARRANTS IS BASED UPON INFORMATION AS OF JULY
31, 1999 AND ASSUMES AN APPROXIMATE 58.138 TO 1 FORWARD SPLIT OF OUR COMMON
STOCK TO BE EFFECTED BEFORE THE OFFERING. THIS PROSPECTUS ALSO ASSUMES NO
EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION.
ART RENAISSANCE, INC.
OUR BUSINESS
We are a retailer and auctioneer of fine art and decorative art products. We
currently have 12 art galleries in premiere destination cities throughout the
United States operating under the Merrill Chase-Registered Trademark-,
Dyansen-Registered Trademark- or Galerie Renaissance names. We have also hosted
auctions in cities nationwide and maintain a Website where we market fine art,
specialty collectibles and related items. To build on our excellent reputation
as a source for premium art and to take advantage of the rapid growth in
Internet retail sales, we are currently expanding our on-line presence through
the development of a full-service on-line gallery and e-commerce business.
In August 1999, we engaged Razorfish San Francisco, Inc. ("Razorfish"), a
wholly owned subsidiary of Razorfish, Inc., a leading e-commerce solution
provider, to assist us to clarify our business needs and to determine our
long-term goals with the objective of further developing our Internet strategy
and implementing appropriate solutions early in the year 2000.
By combining our expertise and experience in art and our commitment to
excellent customer service with the benefits of Internet retailing, we believe
we are well positioned to offer a unique shopping experience to consumers. We
believe art and related items are well suited for e-commerce because of the wide
range of unique items available, the dispersed locations of potential customers
and the relatively low operating costs associated with Internet retailing.
OUR MARKET OPPORTUNITY
We believe that shopping for art and related products will be more
convenient to potential buyers who have access to extensive selection,
information, convenient shopping hours, knowledgeable sales professionals,
responsive customer service and broad geographic coverage. Our "Click & Brick"
e-commerce model is designed to provide consumers with a convenient and
enjoyable shopping experience in either an Internet or traditional retail
environment. The key components of the Art Renaissance experience include:
BROAD PRODUCT SELECTION. We offer a wide variety of art and related items
targeted to our identified demographic audience.
EXTENSIVE PRODUCT INFORMATION AND KNOWLEDGE. Our goal is to promote
increased sales by assisting people in making informed purchasing decisions. We
provide desirable and attractive merchandise and detailed, easy-to-understand
information including answers to customers' individual questions.
COMPETITIVE PRICES AND COMPELLING VALUE. We believe we offer our customers
unique products at competitive prices and, combined with our high-quality
shopping experience, we provide compelling value.
3
<PAGE>
COMMITMENT TO PERSONALIZED CUSTOMER SERVICE. Our art buyers, like most
luxury and premium goods consumers, demand high levels of customer service. Our
goal is to provide superior and personalized customer service through our
proprietary database of customer preferences, readily available product
consultations and engaging interactive promotions and events.
REWARDING SHOPPING EXPERIENCE. Our "Click & Brick" model combines the
advantages of both in-person and Internet-based shopping and collecting services
and features intended to make our customer's experience pleasant and rewarding.
Such features include:
- interactive kiosks to integrate Internet and in-gallery audio and visual
presentations;
- hand-held personal digital assistants to provide guided gallery tours,
while gathering customer demographic data; and
- Internet "virtual living rooms" where customers can visualize products in
a decorated living environment before buying.
WORLDWIDE GEOGRAPHIC COVERAGE. We will be able to offer an extensive
selection of products in locations where our products would not otherwise be
readily available by selling on-line as well as in our galleries.
OUR STRATEGY
Our objective is to be one of the leading on-line retailers of art and other
related premium products. Key elements of our strategy include:
- FOCUS ON THE PREMIUM ART MARKET. We intend to capitalize on our many years
of experience to become a leading on-line destination for consumers
seeking to learn about and purchase art. Our "Click & Brick" model is also
designed to augment sales in our galleries by providing product and other
information to consumers through our Website.
- EXPAND RETAIL ART CATEGORIES. We intend to enhance our sales by expanding
our product offerings to include a broad line of lower-priced related
items such as art glass and decorative art objects.
- CONTINUE TO BUILD OUR REPUTATION AND BRAND NAME. We continue to develop
brand identity development by providing leading artists with a powerful
distribution channel for their work which introduces them to an audience
they could not otherwise reach.
- PURSUE WAYS TO INCREASE OUR SALES. Our goal is to use our proposed
e-commerce platform to attract new customers.
- DEVELOP OUR OPERATIONAL AND SYSTEMS INFRASTRUCTURE. We plan to devote
significant resources to develop our systems and operational
infrastructure to handle e-commerce activity and to enhance our customer
service capabilities.
RISK FACTOR
An investment in our common stock involves a high degree of risk. Since our
inception in May 1993, we have incurred significant losses, including a net loss
of $1,732,943 in the six months ended July 31, 1999; and as of July 31, 1999, an
accumulated deficit of $15,129,352. Sales have declined during fiscal 1999
compared to fiscal 1998. For the six months ended July 31, 1999 sales have
declined compared to the six months ending July 31, 1998, primarily as a result
of continued working capital constraints. We expect operating losses and
negative cash for the foreseeable future. Before deciding whether to invest in
shares of our common stock, you should carefully consider the risks and
uncertainties described in "Risk Factors" beginning on page 7 of this
prospectus.
4
<PAGE>
CORPORATE INFORMATION
We were incorporated in the state of Delaware on May 4, 1993. Our executive
offices are located at 156 William Street, Suite 1204, New York, NY 10038, and
our telephone number is (212) 571-4400.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 3,400,000 shares
Common stock to be outstanding after the
offering................................... 8,400,000 shares
Use of proceeds.............................. Internet marketing/advertising, e-commerce
development, debt repayment, accounts
payable, art purchases, and working capital
and general corporate purposes
Proposed NASDAQ National Market Symbol....... ARTS
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial information should be read in conjunction
with our financial statements and the related notes appearing elsewhere in this
prospectus, except that statements of operations data for the years ended
January 31, 1995 and 1996 are not included in this prospectus. You should also
read "Use of Proceeds", "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JANUARY 31, ENDED JULY 31,
----------------------------------------------------- --------------------
1995 1996 1997 1998(A) 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.......................................... $ 12,964 $ 12,682 $ 12,072 $ 23,690 $ 23,128 $ 12,848 $ 10,800
Loss from operations........................... (2,985) (2,699) (2,281) (624) (2,350) (686) (1,078)
Interest expense............................... 545 373 452 958 1,286 645 655
Income (loss) before extraordinary gain........ (3,530) (3,072) (2,732) (1,582) (3,636) (1,332) (1,733)
Extraordinary gain from early extinguishment of
debt......................................... -- -- 3,781 -- -- -- --
Net income (loss).............................. (3,530) (3,072) 1,049 (1,582) (3,636) (1,332) (1,733)
Net income (loss) per share--basic and
diluted...................................... $ (1.36) $ (1.19) $ 0.41 $ (0.61) $ (1.40) $ (0.51) $ (0.45)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average common shares
outstanding--basic and diluted............... 2,589 2,589 2,589 2,589 2,589 2,589 3,836
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(a) Includes the results of operations of Merrill Chase galleries from June 1,
1999.
<TABLE>
<CAPTION>
JULY 31, 1999
(UNAUDITED)
----------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......................................... $ -- 22,540
Working capital (deficit)................................................................. $ (7,857) 22,829
Total assets.............................................................................. $ 10,082 32,622
Related party debt........................................................................ $ 2,285 2,285
Notes payable and other debt.............................................................. $ 7,463 3,109
Total liabilities......................................................................... $ 17,577 9,431
Total stockholders' equity (capital deficit).............................................. $ (7,494) 23,192
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES FROM OPERATIONS, OUR FUTURE VIABILITY REMAINS
UNCERTAIN, WE HAVE DECLINING SALES AND OUR ACCOUNTANTS HAVE ISSUED A GOING
CONCERN EXPLANATORY PARAGRAPH
We have a history of significant losses, negative working capital and
significant indebtedness and expect to incur substantial net losses in the
future. If we do not achieve profitability, our financial condition and our
stock price could suffer.
We incurred losses of $1.6 million, $3.6 million and $1.7 million in fiscal
1998, fiscal 1999 and for the six months ended July 31, 1999, respectively. As
of July 31, 1999, we have incurred cumulative net losses of $15.1 million, had a
working capital deficit of $7.9 million and had total debt outstanding of $9.8
million. We expect to experience operating losses and negative cash flow for the
foreseeable future. We anticipate our losses will increase significantly from
current levels because future sales may not offset additional costs and expenses
associated with our business in general and our proposed Internet business in
particular. Such costs and expenses are related to brand development, marketing
and other promotional activities, content development and technology and
infrastructure development. We do not have sufficient cash to indefinitely
sustain these operating losses. Further, we will need to generate significant
sales to achieve and maintain profitability.
Sales have declined from fiscal 1998 to 1999 despite the inclusion in fiscal
1999 of a full year of operations for the Merrill Chase galleries versus the
inclusion of only eight months of operations for fiscal 1998. For the six months
ended July 31, 1999 sales declined compared to the six months ended July 31,
1998 primarily as a result of continued working capital constraints resulting in
declining same store sales and profit margins.
We have been unable to fund our operations with the cash generated from our
business. If we do not generate cash sufficient to fund our operations, we may
need additional financing to continue our growth or our growth may be limited.
Further, we may not be able to obtain financing on satisfactory terms. Our
inability to finance our growth, either internally or externally, may limit our
growth potential and our ability to execute our business strategy. To date, we
have funded our operations from the sale of equity securities and loans, some of
which have been guaranteed or made by our Chief Executive Officer and Director,
Eugene I. Schuster ("Mr. Schuster"), and by entities controlled by him (certain
of which are our principal stockholders) and members of his family including his
children (one of whom is one of our vice presidents).
You should be aware that the report of our independent certified public
accountants contains an explanatory paragraph expressing substantial doubt about
our ability to continue as a going concern.
ARREARAGES ON LEASES AND ACCOUNTS PAYABLE
We have been named as a defendant in two lawsuits by certain of our
landlords for nonpayment of rent in the aggregate amount of $195,000. In
addition, we are in arrears on aproximately $186,000 of other leasehold
payments. We have reached settlements in some instances in which payment of the
arrears has been deferred. In other instances, discussions are being held in an
attempt to resolve the
7
<PAGE>
issues before trial. For matters that are not resolved, there is no assurance
that we will be able to cure the defaults on our leases or maintain our presence
at those locations.
As of July 31, 1999, we were more than 90 days past due on approximately
$3.3 million of accounts and trade payables, a portion of which relates to
payments owed to our artists or their agents. We have negotiated the
restructuring of approximately $1.7 million of these payables and expect to
continue to work with vendors to restructure the balance. These arrearages may
adversely affect our ability to make future purchases from such vendors, artists
or agents.
NO ON-LINE COMMERCE OPERATING HISTORY
We were incorporated in 1993 by present management. Although we currently
have a Website, we are only now initiating our on-line e-commerce operations and
have no prior history with on-line e-commerce operations on which you can base
an evaluation of our business and prospects. As a specialty retailer and on-line
e-commerce company in an early stage of development, we face increased risks,
uncertainties, expenses and difficulties. To address these risks and
uncertainties, we must:
- introduce and attract a larger number of retail and business customers to
our retail and on-line galleries;
- enhance our brand recognition;
- successfully execute our business and marketing strategy;
- develop our e-commerce site and integrate it with our retail business;
- upgrade and develop our computer systems and infrastructure to effectively
manage anticipated expanding operations and traffic on our Website;
- continue to enhance our retail and on-line services to meet the needs of
changing markets;
- provide superior customer service;
- respond to competitive developments; and
- continue to attract and retain prominent artists and personnel.
We may be unable to accomplish one or more of these goals, which could cause
our business to suffer. In addition, accomplishing one or more of these
objectives might be very expensive, which could harm our financial results.
OPERATING RESULTS
Our operating results have fluctuated in the past and may fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. It is likely that in one or more future quarters our
operating results may fall below the expectations of securities analysts and
investors which may cause our stock price to decline significantly. Factors that
may harm our business or cause our operating results to fluctuate include those
discussed in greater detail elsewhere in this section and the following:
- our ability to obtain new customers or encourage purchases;
- the ability of our competitors to offer new or enhanced Websites, services
or products;
- our ability to maintain or increase gross margins;
- our ability to obtain desirable products for sale on our Website;
- our failure to develop strategic marketing relationships which give us
exposure to traffic on third party Websites;
8
<PAGE>
- our ability to develop and maintain a Website;
- the success of our brand building;
- the level of use of the Internet and on-line services in general and
consumer confidence in the security of transactions on our Website;
- our ability to upgrade and develop our systems and infrastructure to
accommodate growth;
- our ability to attract new personnel in an effective manner;
- the timing, cost and availability of advertising in traditional media and
on the Internet;
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business operations and infrastructure;
- trends and popularity of specific artists; and
- general economic conditions specific to the Internet and electronic
commerce industries.
Our limited operating history and the emerging nature of the markets in
which we compete make it difficult for us to forecast our sales or earnings
accurately. We believe that period-to-period comparisons of our operating
results may not be meaningful and you should not rely upon them as an indication
of future performance.
RECOGNITION OF OUR BRAND AND WEBSITE
We believe that broader recognition and a favorable consumer perception of
our brand identity and Website are essential to our future success. Accordingly,
we intend to initiate a substantial advertising and marketing campaign to
establish our brand and Website. This campaign will involve significant expense.
If we are unable to reach our objectives, we may be unable to increase future
sales. In addition, even if brand identity and Website recognition increases,
the number of new customers or the number of sales or average dollars per sale
may not increase. In this situation, our sales may not increase.
DEPENDENCE ON KEY ARTISTS OR PERSONNEL
We depend upon the services and popularity of our artists. We have
agreements with several of our artists to sell their art through us in certain
territories or with respect to certain works of art. However, we are currently
in arrears on some of our agreements with our current artists. This has
adversely affected our ability to make purchases from these artists or agents
and may continue to have the same effect in the future. Although we have not
been advised by any of these artists that they will no longer sell or consign
their work to us, our business might be harmed if these artists ceased dealing
with us.
OUR CHIEF EXECUTIVE OFFICER AND DIRECTOR AND RELATED PARTIES WILL DERIVE
BENEFITS FROM YOUR INVESTMENT
Mr. Schuster, our Chief Executive Officer and Director, and certain entities
in which he has an interest and which are also our principal stockholders, have
guaranteed several of our obligations aggregating $8,700,000. In one instance a
creditor sued Mr. Schuster personally as a guarantor of one of our past due
debts, in lieu of instituting an action directly against us. Adam Schuster, one
of our employees and Mr. Schuster's son, has loaned us $1,327,000. To the extent
we utilize proceeds from this offering to repay certain debt which Mr. Schuster
and/or his related entities or family members guaranteed, Mr. Schuster and/or
such related parties or family members will benefit from this offering.
9
<PAGE>
YEAR 2000 READINESS ISSUES
The Year 2000 issue is the result of computer programs being written 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. We are currently unable to predict the extent to which the Year 2000
issue will affect these third parties, or the extent to which we would be
vulnerable to these third parties' failure to remediate any Year 2000 issues on
a timely basis. The failure of a major supplier subject to the Year 2000 to
convert its systems on a timely basis or a conversion that is incompatible with
our systems could have a material adverse effect on our business, results of
operations and financial conditions. We will depend on the integrity and
stability of the Internet to provide our services. In addition, we expect that
most of the purchases from our Website will be made with credit cards. Our
operations therefore may be materially adversely affected to the extent our
customers are unable to use their credit cards due to the Year 2000 issues.
MANAGING OUR GROWTH EFFECTIVELY
Growth is likely to strain our management, resources and systems. If we
cannot effectively manage our growth, our business could be harmed. To manage
our growth, we must improve our existing systems or implement new systems for
operational and financial management and effectively train and manage our
growing employee base.
FUTURE CAPITAL REQUIREMENTS
We believe that our current cash resources, combined with the net proceeds
from this offering, will meet our anticipated working capital and capital
expenditure requirements for at least 12 months following the date of this
prospectus. After that time, we may need to raise additional capital.
Alternatively, we may need to raise additional funds sooner to:
- fund more rapid expansion;
- respond to competitive pressures;
- acquire complementary businesses; or
- finance our operations if sales are lower than expected or expenses are
greater than expected.
We may not be able to obtain the additional financing we may require on
favorable terms, or at all. If adequate capital is not available on acceptable
terms, we may not be able to fund expansion, take advantage of opportunities,
respond to competitive pressures or acquire complementary businesses.
FUTURE DILUTION
We may need to issue equity or convertible debt securities to fund future
capital requirements. If we do so, the percentage ownership of our then current
stockholders will be reduced. In addition, the holders of these securities may
have rights, preferences or privileges senior to those of our current
stockholders.
FUTURE ACQUISITIONS
As part of our business strategy, we expect to review acquisition prospects
that complement our current products, increase our market share or offer growth
opportunities. However, to date we have had limited experience in these types of
transactions and have no current agreements or commitments
10
<PAGE>
with respect to any acquisitions. These acquisitions may harm our operating
results or cause our stock price to decline because we may:
- issue equity or equity related securities that dilute our current
stockholders' percentage ownership of our company;
- incur substantial debt or assume contingent liabilities of an acquired
business;
- be required to amortize a significant amount of intangible assets acquired
in an acquisition;
- have difficulty assimilating acquired operations, technologies or
products;
- experience diversion of our management's attention from other business
operations; or
- lose key employees of acquired businesses or of our company.
POTENTIAL LOSS OF NET OPERATING LOSS CARRYFORWARD
Our tax net operating loss carryforward of approximately $12,188,000, if not
utilized, will expire between 2008 and 2019. Internal Revenue Code Section 382
provides for the limitation on the use of net operating loss carryforwards in
years subsequent to significant changes in ownership, which limitations could
significantly impact our ability to utilize our net operating loss carryforward.
As a result of this offering, changes in ownership may occur which might result
in limitations on the use of net operating loss carryforwards. We have not
determined the extent of any limitations as a result of significant changes in
ownership.
RISKS RELATED TO OUR PROPOSED INTERNET BUSINESS
GROWTH OF INTERNET COMMERCE
Our success is highly dependent upon continued growth in the use of the
Internet generally and as a medium of electronic commerce. If Internet usage
does not grow or grows slower than expected, our business will suffer. Internet
use by consumers is in an early stage of development and a sufficiently broad
base of consumers may not adopt, or continue to use, the Internet as a medium
for commerce. Factors which may inhibit Internet usage include:
- failure to develop an adequate network infrastructure to support
substantial growth in usage;
- increased governmental regulation and taxation;
- consumer concerns about security of electronic commerce transactions; and
- inconsistent quality of service and limited availability of cost
effective, high speed access.
INTERNET INFRASTRUCTURE
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend on the development and maintenance of the Internet infrastructure
required to support these increased demands and still perform reliably. If the
Internet infrastructure is not adequately developed or maintained, use of our
Website may be reduced, and we may not be able to generate sales. Even if the
Internet infrastructure is adequately developed and maintained, we may incur
substantial expenditures to adapt our services and products to changing Internet
technologies. The Internet has experienced a variety of outages and other delays
as a result of damage to portions of its infrastructure and could face outages
and delays in the future. Outages and delays could reduce the level of Internet
usage and traffic on our Website. In addition, the Internet could lose its
viability if the development or adoption of new standards and protocols to
handle increased levels of activity is delayed or governmental regulation is
increased.
11
<PAGE>
ON-LINE SECURITY
We will rely on encryption and authentication technology licensed from third
parties to provide secure transmission of confidential information, such as
customer credit card numbers. However, our security procedures for protecting
customer transaction data may be compromised or breached as a result of
developments in computer capabilities or in the field of cryptography. A party
who is able to circumvent our security measures could misappropriate proprietary
information, including customer credit card information, or cause interruptions
in the operation of our Website. A security breach could result in litigation
against us and potential liability and damage to our reputation, any of which
could severely harm our business.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. In addition, publicized security breaches could increase
consumer concerns over the security of electronic commerce and may inhibit the
growth of the Internet as a means of conducting commercial transactions.
RAPID TECHNOLOGICAL CHANGES
The Internet and the e-commerce industry are rapidly changing. To remain
competitive, we must:
- adapt to rapidly changing technologies;
- adapt our business to evolving industry standards; and
- continually improve the performance, features and reliability of our
Website.
If we face material delays in introducing new products, services or
enhancements, customers may not shop in our proposed on-line galleries.
Developing our Website and other proprietary technology entails significant
technical and business risks. We may use new technologies ineffectively or fail
to adapt our Website, order processing systems and computer network to customer
requirements or emerging industry standards.
SYSTEM FAILURE
We expect that substantially all of our computer and communications hardware
operations for our Website will be located in a single third party facility. We
will select this third party provider on the basis of backup systems, security
and disaster preparedness contingency plans. Third party systems and operations
are vulnerable to damage or interruption from fire, floods, earthquakes, power
loss, telecommunications failure, break-ins and other events. Computer viruses,
electronic break-ins or other disruptive problems could cause users to stop
visiting our Website. If any of these circumstances occurred, we would incur
substantial replacement costs, would be unable to generate revenue during the
downtime and could lose customers. As a result, our business would be harmed.
Our insurance policies may not adequately compensate us for any losses that may
occur due to any failures of or interruptions in our systems.
Some of the Internet service providers and operators that our customers will
use to access our proposed Website have experienced outages in the past, and
could experience outages, delays and other difficulties in the future due to
system failures unrelated to our systems. Any of these system failures could
cause us to lose sales or customers and harm our business.
COMPETITION
The market for Internet commerce is new, rapidly changing and intensely
competitive. We expect future competition to intensify because:
- barriers to entry are minimal;
- competitors can launch new Websites at a relatively low cost; and
12
<PAGE>
- we do not have exclusive relationships with our suppliers.
Some of our present and potential competitors are likely to enjoy
substantial competitive advantages, including:
- larger customer bases;
- greater brand recognition;
- better access to content;
- longer operating histories; and
- substantially greater financial, marketing, technical and other resources.
As a result, it is possible we may not be able to compete effectively in our
market.
MARKETING AND STRATEGIC ALLIANCES
We plan to use marketing and strategic alliances with other Internet
companies to create traffic on our Website. The success of these relationships
will depend on the amount of increased traffic we receive from the alliance
partners' Websites. These arrangements may not generate the number of new
customers we expect. If we are unable to consummate any of these agreements or
find additional alliance partners, the traffic on our Website could decrease.
LIABILITY FOR THE CONTENT ON OUR WEBSITE
While we currently provide a limited amount of content on our Website, we
anticipate increasing the content in the future. We could be subject to legal
liability for defamation, negligence, indecency, copyright, patent or trademark
infringement, or other claims based on the nature and content of materials that
we publish or distribute on our Website. If we face liability, our reputation
and business may suffer.
GOVERNMENT REGULATION OF THE INTERNET
Government regulation of communications and commerce on the Internet varies
greatly from country to country. In the United States and Canada, the federal
governments have not adopted many laws and regulations to specifically regulate
on-line communications and commerce. However, the U.S. Congress recently enacted
legislation addressing such issues as the transmission of certain materials to
children, intellectual property protection, taxation and the transmission of
sexually explicit material. The European Union recently enacted privacy
regulations. The governments of some countries other than the United States and
Canada are more active in regulating these areas. There is also risk that the
United States and other countries will increase their regulation of the Internet
in the future. An increase in regulation or the application of existing laws to
the Internet may require us to modify the manner in which we conduct our
business and could significantly increase our costs of operations or harm our
business. Internet law remains largely unsettled, and it may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. Several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and on-line service providers
in a manner similar to long distance telephone carriers and to impose access
fees on these companies. Imposition of access fees could increase the cost of
transmitting data over the Internet which would reduce Internet usage and
possibly reduce our profit margins. The Federal Trade Commission has also
initiated action against at least one on-line service regarding the manner in
which this service collects personal information from users and provides it to
third parties. We do not currently provide personal information regarding our
users to third parties, and we do not intend to do so in the foreseeable future.
However, the adoption of additional consumer protection laws could create
uncertainty in Web usage and reduce the demand for our products and services.
13
<PAGE>
STATE SALES TAX AND OTHER TAXES
We currently pay sales tax only in states in which we operate galleries and
traveling auctions. One or more states may seek to impose sales tax collection
obligations on out-of-state companies, including us, which engage in or
facilitate electronic commerce. A number of proposals have been made at the
state and local level that would impose additional taxes on the sale of goods
and services through the Internet. These proposals, if adopted, could
substantially impair the growth of electronic commerce and could reduce our
sales.
RISKS RELATED TO THE OFFERING
STOCK PRICE MAY BE HIGHLY VOLATILE
The market price for our common stock is likely to fluctuate because the
market prices of securities of Internet related companies have been highly
volatile. You may not be able to resell your shares of our common stock
following periods of volatility. In addition, you may not be able to resell your
shares at or above the initial offering price.
Our stock price will be affected by the following factors, many of which are
outside of our control:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations or new products or services by
us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet or on-line commerce industries;
- changes in the economic performance or market valuations of other Internet
or electronic commerce companies;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures, or capital commitments;
- additions or departures of key personnel and artists; and
- sales of our common stock.
In the past, securities class action litigation has often been instituted
against a company following periods of volatility in its stock price. If we were
sued in this type of litigation we could incur substantial costs and our
management's attention and resources would be diverted from our operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terms such as "may," "will," "should," "expect," "plan," "intend,"
"forecast," "anticipate," "believe," "estimate," "predict," "potential,"
"continue" or the negative of these terms or other comparable terminology. The
forward-looking statements contained in this prospectus involve known and
unknown risks, uncertainties and other factors that may cause our or our
industry's current results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. These factors include,
among others, those listed under "Risk Factors" and elsewhere in this
prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
forward-looking statements.
14
<PAGE>
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will experience immediate and substantial dilution of their
investment.
YOU MAY NOT BE ABLE TO SELL YOUR COMMON STOCK IF A PUBLIC TRADING MARKET DOES
NOT DEVELOP
Prior to the offering there has been no public market for our common stock.
We cannot be certain that an active trading market will develop. We also cannot
be certain that purchasers of the common stock in this offering will be able to
resell their common stock at prices equal to or greater than the initial public
offering price. The initial public offering price was determined through
negotiations between us and the Underwriter and may not reflect the market price
of the common stock after the offering. The development of a public market
having the desirable characteristics of depth, liquidity and orderliness depends
upon the presence in the marketplace of a sufficient number of willing buyers
and sellers at any given time. We do not have any control as to whether or not
there will be sufficient numbers of buyers and sellers. Accordingly, we cannot
be certain that an established and liquid market for the common stock will
develop or be maintained. The market price of the common stock could experience
significant fluctuations in response to our operating results and other factors.
In addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of individual companies. These fluctuations, and general
economic and market conditions, may hurt the market price of the common stock.
CONTROL BY PRESENT MANAGEMENT
Our outstanding shares of common stock are currently held by approximately
23 stockholders of record. Of these stockholders, Mr. Schuster will beneficially
own after the offering approximately 42% of the outstanding shares. Accordingly,
Mr. Schuster will be able to influence the outcome of any matter submitted to a
vote of stockholders, including the election of directors and approval of
significant corporate transactions (such as acquisition of our stock or assets).
Such influence could delay or prevent a change of control of our company.
MAINTAINING A PUBLIC MARKET
We will apply to have our common stock listed on the NASDAQ National Market
under the symbol "ARTS". An approval of the listing application will contain
various conditions, including sale of the stock and the presence of at least
four registered and active market makers. We will seek to encourage and assist
at least four market makers to make a market in our common stock following the
offering. Making a market involves maintaining bid and ask quotations and being
able, as principal, to effect transactions in reasonable quantities to those
quoted prices, conditioned on compliance with various securities laws and other
regulatory requirements. Auerbach, Pollak & Richardson, Inc. has agreed to make
a market in the common stock, although it has no obligation to do so.
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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,400,000 shares of
common stock we are offering will be approximately $30,340,000, at an assumed
initial public offering price of $10.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
Underwriter's over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $34,981,000.
We expect to use net proceeds from this offering in the manner and
approximate amounts indicated below. The uses specified are listed in order of
their priority. Pending our use of the net proceeds, we intend to invest them in
short-term, interest bearing, investment grade securities.
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
USE AMOUNT NET PROCEEDS
- ---------------------------------------------------------------- ------------- ---------------
<S> <C> <C>
Internet marketing/advertising.................................. $ 10,000,000 32.96%
Debt repayment.................................................. $ 4,600,000 15.16%
Art purchases................................................... $ 4,000,000 13.18%
Accounts payable................................................ $ 3,200,000 10.55%
E-commerce development.......................................... $ 2,000,000 6.59%
Working capital and general corporate purposes(1)............... $ 6,540,000 21.56%
------------- -----
Total:...................................................... $ 30,340,000 100.0%
------------- -----
------------- -----
</TABLE>
- ------------------------
(1)Include amounts which may be used, among other uses, to pay salaries of
our executives, rent, trade payables, professional fees, directors and officers
liability insurance and other operating expenses.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not anticipate paying cash dividends in the foreseeable future. We currently
anticipate that we will retain all of our future earnings, if any, for use in
the development and expansion of our business and for general corporate
purposes. Any determination to pay dividends in the future will be at the
discretion of our Board of Directors and will depend upon our financial
condition, operating results and other factors as the Board of Directors, in its
discretion, deems relevant. Additionally, we have entered into loan agreements
with creditors that restrict our ability to pay dividends.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of July 31, 1999
(assuming the filing of an amendment to our certificate of incorporation to
provide for authorized capital stock of 40,000,000 shares of common stock and
2,000,000 shares of undesignated preferred stock, and the approximate 58.138 to
1 forward split of our common stock.) on an actual, pro forma, and pro forma as
adjusted basis. The "Actual" column reflects our capitalization as of July 31,
1999 on an historical basis. The pro forma column reflects our capitalization as
of July 31, 1999 with adjustments for the issuance in September 1999 of 53,205
shares of common stock as satisfaction of $345,840 of accrued interest and
188,016 shares of common stock in cancellation of ourstanding warrants plus an
interest charge of $168,855 relating to those issuances and the as adjusted
column reflects our capitalization as of July 31, 1999 with the preceding pro
forma adjustments plus the receipt of the estimated net proceeds from our sale
of 3,400,000 shares of common stock at an assumed initial offering price of
$10.00 per share.
<TABLE>
<CAPTION>
AS OF JULY 31, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term notes payable......................... $ 3,319 $ 3,319 $ 2,128
Current portion of long term debt................ 4,144 4,144 980
Due to related parties, current portion.......... 475 475 475
------------ ------------ ------------
$ 7,938 $ 7,938 $ 3,583
------------ ------------ ------------
------------ ------------ ------------
Due to related parties, net of current portion... $ 1,810 $ 1,810 $ 1,810
------------ ------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized, as adjusted; -0- shares issued and
outstanding, as adjusted.......................
Common stock, $.01 par value; 40,000,000 shares
authorized; 4,758,779 shares issued and
outstanding, 5,000,000 shares issued and
outstanding pro forma, and 8,400,000 shares
issued and outstanding pro forma as adjusted... 48 50 84
Additional paid-in capital....................... 7,587 8,100 38,406
Deficit.......................................... (15,129) (15,298) (15,298)
------------ ------------ ------------
Total stockholders' equity (capital deficit)..... (7,494) (7,148) 23,192
------------ ------------ ------------
Total capitalization............................. $ (2,254) $ 2,600 $ 28,585
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted by the
difference between the public offering price per share of our common stock and
the net tangible book value per share of our common stock after this offering.
In the table below, we have calculated net tangible book value (deficit) per
share by dividing the net tangible book value, tangible assets less total
liabilities, by the number of outstanding shares of common stock. If you
participate in this offering, you could pay as much as $10.00 per share, which
substantially exceeds $(1.60) deficit per share, which is the pro forma per
share value of our tangible assets after deducting our liabilities. You and
other participants in this offering will contribute 81% of the total amount of
the funds we have raised but will own only 40.4% of our stock.
After giving effect to the receipt of the estimated net proceeds from this
offering, based upon an assumed initial public offering price of $10.00 per
share and after deducting the estimated underwriting discounts and commissions
and estimated offering expenses, our as adjusted net tangible book value as of
July 31, 1999 would have been approximately $22,316,000, or $2.66 per share.
This represents an immediate increase in pro forma as adjusted net tangible book
value of $4.26 per share to existing stockholders and an immediate dilution of
$7.34 per share to investors purchasing common stock in this offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................ $ 10.00
Net tangible book deficit per share as of July 31, 1999.............. $ (1.60)
Increase per share attributable to new stockholders.................. 4.26
------
As adjusted net tangible book value per share after this offering...... 2.66
---------
Dilution per share to new stockholders................................. $ 7.34
---------
---------
</TABLE>
The following table summarizes, as of July 31, 1999, the number of shares of
common stock purchased from us, the total consideration paid and the average
price per share paid by existing stockholders and by investors purchasing shares
of common stock in this offering, before deducting the estimated underwriting
discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
TOTAL AVERAGE
SHARES PURCHASED CONSIDERATION PRICE
----------------------- -------------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................... 5,000,000 59.6% $ 7,980,891 19% $ 1.60
New stockholders......................................... 3,400,000 40.4 $ 34,000,000 81 $ 10.00
---------- --- ------------- ---
Total................................................ 8,400,000 100% $ 41,980,891 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected data has been derived from financial statements
audited by BDO Seidman, LLP, independent certified public accountants (whose
report contains an explanatory paragraph regarding our ability to continue as a
going concern), except for the data for the six month period ended July 31,
1999, which is unaudited. Balance sheets at January 31, 1998 and 1999 and at
July 31, 1999, the related statements of operations and of cash flows for the
years ended January 31, 1997, 1998 and 1999 and the six months ended July 31,
1999 and notes thereto appear elsewhere in this prospectus. Balance sheets at
January 31, 1995, 1996 and 1997 and the statement of operations data for the
years ended January 31, 1995 and 1996 are derived from audited financial
statements not included in this prospectus.
The selected financial data set forth below contains only a portion of our
financial statements and should be read in conjunction with the Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JANUARY 31, ENDED JULY 31,
------------------------------------------------------- --------------------
1995 1996 1997 1998(A) 1999 1998 1999
--------- --------- --------- ----------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales........................................... $ 12,964 $ 12,682 $ 12,072 $ 23,690 $ 23,128 $ 12,848 $ 10,800
--------- --------- --------- ----------- --------- --------- ---------
Gross profit.................................... 6,877 7,282 6,583 13,428 12,853 7,271 5,802
Selling expenses................................ 2,422 2,565 2,183 4,988 4,792 2,847 2,223
General and administrative expenses............. 7,078 7,109 6,392 8,568 9,758 4,796 4,264
Depreciation and amortization................... 362 307 288 496 653 315 393
Total operating expenses........................ 9,862 9,981 8,863 14,052 15,203 7,958 6,880
--------- --------- --------- ----------- --------- --------- ---------
Loss from operations............................ (2,985) (2,699) (2,281) (624) (2,350) (686) (1,078)
Interest expense................................ 545 373 452 958 1,286 645 655
--------- --------- --------- ----------- --------- --------- ---------
Net loss before extraordinary gain.............. (3,530) (3,072) (2,732) (1,582) (3,636) (1,332) (1,733)
Extraordinary gain from early extinguishment of
debt.......................................... -- -- 3,781 -- -- -- --
--------- --------- --------- ----------- --------- --------- ---------
Net income (loss)............................... $ (3,530) $ (3,072) $ 1,049 $ (1,582) $ (3,636) $ (1,332) $ (1,733)
--------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- ----------- --------- --------- ---------
Net income (loss) per share--basic and
diluted....................................... $ (1.36) $ (1.19) $ 0.41 $ (.61) $ (1.40) $ (.51) $ (.45)
--------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- ----------- --------- --------- ---------
Weighted average common shares
outstanding--basic and diluted................ 2,589 2,589 2,589 2,589 2,589 2,589 3,836
--------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- ----------- --------- --------- ---------
</TABLE>
- ------------------------
(a) Includes the results of operations of Merrill Chase galleries from June 1,
1997.
<TABLE>
<CAPTION>
JULY 31, 1999
(UNAUDITED)
JANUARY 31, ------------------------
----------------------------------------------------- PRO FORMA
1995 1996 1997 1998 1999 ACTUAL AS ADJUSTED
--------- --------- --------- --------- --------- --------- -------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.............................. $ -- $ -- $ -- $ -- $ -- $ -- $ 22,540
Working capital (deficit).................. (5,676) (9,227) (8,179) (5,085) (10,772) (7,857) 22,829
Total assets............................... 5,948 6,439 5,272 11,544 9,505 10,082 32,622
Related party debt......................... 609 2,853 3,580 3,180 3,183 2,285 2,285
Notes payable and other debt............... 5,667 10,863 7,921 6,599 9,905 7,463 3,109
Total liabilities.......................... 10,153 13,716 11,501 19,355 20,951 17,577 9,431
Total stockholders' equity (capital
deficit)................................. (4,205) (7,277) (6,229) (7,811) (11,446) (7,494) 23,192
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We intend to build on our expertise and brand identity to become a leading
on-line retailer of art and other related premium products. To that end, we
recently engaged Razorfish to assist us in clarifying our business needs and to
determine our long term goals with the objective of developing our Internet
strategy and implementing the proper solutions. We also host auctions in cities
nationwide and maintain a Website where we market fine art, specialty
collectibles and related items. To build on our reputation as a source for
premium art and to take advantage of the growth of Internet retail sales, we are
currently expanding our on-line presence through the development of a
full-service on-line gallery and e-commerce business.
COMPARISON OF SIX MONTHS ENDED JULY 31, 1999 AND 1998
Net sales decreased 15.9% to $10.8 million for the six months ended July 31,
1999 compared to $12.8 million in the prior comparable period. On a comparable
store basis, net sales decreased by 14.6%. We believe that business disruptions
(including temporary closings due to a fire in one location, flooding in another
and construction for earthquake retrofitting in a third) resulted in a decline
of $540,000 in our gallery sales. The closing of our Beverly Hills gallery due
to a lost lease decreased sales by $180,000 during the comparable six month
period. In the 1998 period we had $620,000 in sales at auctions of our close-out
inventory. We did not sponsor any auctions during the first six months of the
current year due to a lack of older, close-out inventory that was designated for
auction sales. A reduction due to working capital shortages in exhibitions for
our prominent artists and programs accounted for the remainder of the sales
decrease.
Gross margin decreased to 53.7% for the six months ended July 31, 1999
compared to 56.6% in the prior year comparable period. Due to working capital
shortages, we were not able to produce our higher gross margin art publications.
During the six months ended July 31, 1998 sales included approximately $1.0
million of newly published product which yielded a gross margin of 70%.
Throughout the current period, gallery margins were unfavorably impacted by
sales of some of our published sculpture at discounted prices.
Selling and marketing expenses decreased to $2.2 million (20.6% of sales)
for the six months ended July 31, 1999 from $2.8 million (22.2% of sales) in the
prior year comparable period. Lower advertising and freight expenses (due to an
increase in the amount passed on to the buyer), contributed to the reduction.
Although total compensation for sales personnel decreased as a result of the
decline in sales, as a percentage to sales these costs increased because of
fixed compensation amounts and minimum draws against commissions.
General and administrative expenses decreased to $4.3 million (39.4% of
sales) for the six months ended July 31, 1999 from $4.8 million (37.3% of sales)
in the prior year comparable period. The decrease resulted from a cost cutting
plan instituted by management, including a reduction in corporate and warehouse
staff and management fees.
Depreciation and amortization increased to $393,000 for the six months ended
July 31, 1999 from $315,000 in the prior year comparable period primarily as a
result of an increase in capital expenditures.
Interest expense increased to $655,000 for the six months ended July 31,
1999 from $645,000 in the comparable period of the prior year as a result of the
increase in borrowings.
As a result of the foregoing, we recognized a loss of $1,733,000 for the six
months ended July 31, 1999 compared to a loss of $1,332,000 for the six months
ended July 31, 1998.
20
<PAGE>
We made no provision for income taxes because we have net operating loss
carry forwards.
COMPARISON OF YEAR ENDED JANUARY 31, 1999 AND 1998
Net sales decreased 2.3% to $23.1 million in fiscal 1999 compared to $23.7
million in fiscal 1998. The 1999 fiscal year included the operations of Merrill
Chase galleries for 12 months while fiscal 1998 included their operations for
eight months. Comparable store, net sales declined by 13.5%. We sponsored fewer
auctions in fiscal 1999 than in the prior year due to a lack of older, close-out
inventory that was designated for auction sales, resulting in a 33% decline in
auction sales of $507,000. Due to working capital shortages, we were unable to
obtain inventory from popular artists and to promote works from available
inventory to the extent we would have desired. Therefore, compared to our prior
year, there was a $900,000 decrease in sales of works of our best selling
artists. In addition, we were unable to obtain the work of more popular artists
to replace the sales of those artists whose works were discontinued because they
were underperforming.
Gross margin decreased to 55.6% in fiscal 1999 compared to 56.7% in fiscal
1998. Throughout the period, gallery margins decreased due to discounted sales
of some of our published sculpture and a reduction in the sales of our most
popular artist. Sales increased for artists with lower margins and decreased for
artists with higher margins.
Selling and marketing expenses decreased to $4.8 million in fiscal 1999 from
$5.0 million in fiscal 1998 or to 20.7% from 21.1%. Lower advertising expenses
and auction commissions accounted for the decrease.
General and administrative expenses increased to $9.8 million (42.2% of
sales) for fiscal 1999 from $8.6 million (36.1% of sales) in fiscal 1998. The
increase resulted from the inclusion of the cost of the Merrill Chase operations
for 12 months in the 1999 fiscal year versus eight months in the prior fiscal
year.
Depreciation and amortization increased to $653,000 for fiscal 1999 from
$496,000 in fiscal 1998 primarily as a result of the acquisition of the Merrill
Chase galleries.
Interest expense increased to $1.3 million in fiscal 1999 from $1.0 million
in fiscal 1998 as a result of the increase in borrowings, a significant portion
of which was attributable to our acquisition of the Merrill Chase galleries.
As a result of the foregoing, we recognized a loss of $3,636,000 for fiscal
1999 as compared to a loss of $1,582,000 for fiscal 1998.
We made no provision for income taxes because we have net operating loss
carry forwards.
COMPARISON OF YEAR ENDED JANUARY 31, 1998 AND 1997
Net sales increased 96.2% to $23.7 million in fiscal 1998 compared to $12.1
million in fiscal 1997. The higher sales for fiscal 1998 reflected an increase
in comparable Dyansen galleries sales of $5.1 million or 53.7% and the inclusion
of $6.5 million in sales of the Merrill Chase galleries, which we acquired on
May 31, 1997. These increases were partially offset by a decrease of $400,000 in
sales at our sponsored auctions. During this period we promoted the works of
artists which we felt would have wide appeal and strong potential. We stopped
the works of artists whose works were discontinued because they were under
performing. The success of this policy accounted for the increase in comparable
gallery sales.
Gross margin increased to 56.7% in fiscal 1998 compared to 54.5% in fiscal
1997. Throughout the year, gallery margins increased because of a change in the
sales discounting policy and lower inventory costs. Gross margin also improved
due to our acquisition of the Merrill Chase galleries inventory at lower than
historical costs. These improvements were partially offset by an increase in
production costs
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at our sculpture foundry because of a decrease in production resulting from the
end of the production contract with one of our prominent artists and employee
layoffs in the prior year.
Selling and marketing expenses increased to $5.0 million in fiscal 1998 from
$2.2 million in fiscal 1997, an increase of $2.8 million or to 21.1% of sales in
fiscal 1998 from 18.1% of sales in fiscal 1997. Our acquisition of Merrill Chase
galleries on May 31, 1997 accounted for $1.6 million of the increase. The
balance of the increase was related to higher compensation costs associated with
the increase in sales volume and to advertising costs for exhibitions of our
prominent artists.
General and administrative expenses increased to $8.6 million or 35.3% of
sales in fiscal 1998 from $6.4 million or 52.9% in fiscal 1997, an increase of
$2.2 million. Our acquisition of the Merrill Chase galleries accounted for $1.8
million of the increase in expenditures. The balance of the increase in general
and administrative expenses was related to costs associated with the sales
increase.
Depreciation and amortization increased to $496,000 in fiscal 1998 from
$288,000 in fiscal 1997 primarily as a result of our acquisition of the Merrill
Chase galleries.
Interest expense increased from $452,000 in fiscal 1997 to $958,000 in
fiscal 1998 as a result of the increase in borrowings, a portion of which is
attributable to our acquisition of the Merrill Chase galleries.
Upon our early extinguishment of debt at a significant discount we
recognized extraordinary gain of $3.8 million in fiscal 1997. As a result of the
foregoing, we recognized a loss of $1,582,000 for fiscal 1998 as compared to net
income of $1,049,000 for fiscal 1997.
We made no provision for income taxes because we have net operating loss
carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements have been significant since our inception due to,
among other things, the costs to operate and provide support for our high-end
destination galleries. We have met our liquidity needs over the last three years
through funds provided by operations, borrowings, vendor financing and inventory
liquidation.
Net cash used in operating activities for the years ended January 31, 1997,
1998, 1999 and the six months ended July 31, 1999 was $1.0 million, $2.0
million, $700,000 and $1.0 million, respectively.
Net cash used in investing activities was $1.1 million in the year ended
January 31, 1998 primarily as a result of the acquisition of the Merrill Chase
galleries. For the year ended January 31, 1999 net cash used in investing
activities was $300,000. For the year ended January 31, 1997 and the six months
ended July 31, 1999, net cash used in investing activities was not significant.
Our financing activities include borrowings and repayments with banks,
related parties and private lenders. Our financing activities resulted in net
cash provided by financing activities of $1 million, $3 million and $1 million
for the years ended January 31, 1997, 1998 and 1999, respectively and $1.0
million for the six months ended July 31, 1999.
As of January 31, 1999, we had approximately $5.6 million of bank loans, all
of which were guaranteed and secured by Mr. Schuster or his affiliates. See
"Certain Relationships and Related Transactions." In July 1999, Mr. Schuster
repaid $2.3 million of the loans on our behalf in exchange for 511,867 shares of
our common stock. We signed an agreement with our bank to extend the due date
for the remaining loans to December 31, 1999. There can be no assurances that we
will be successful in either extending the maturity date or in arranging for the
refinancing of these loans through an alternative lender. Mr. Schuster and his
affiliates continue to guarantee these loans. An agreement covering $1.3 million
of loans made to us by Adam Schuster provides for the repayment of 50% of the
debt from an equity offering of $5 million or more. We have renegotiated this
loan with Adam Schuster
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to provide that the principal amount is due and payable on the second
anniversary of this offering, subject to earlier prepayment on the 18 month
anniversary of this offering in the event we are at such time not more than 90
days past due on our artists payables and subject to the approval of our
independent Board of Directors.
As of January 31, 1999 and July 31, 1999, we owed approximately $2.65
million to private lenders, all of which loans have been guaranteed by Mr.
Schuster and/or his affiliates and will be repaid from the proceeds of this
offering.
As of January 31, 1999, we owed $3 million for loans from entities
controlled by Mr. Schuster, family members of Mr. Schuster, and corporations
controlled by the family members. During the six months ended July 31, 1999, we
borrowed an additional $200,000 from the related parties. In July 1999,
approximately $1.6 million of the debt to related parties was converted into
358,953 shares of our common stock.
As of July 31, 1999 we had accrued an aggregate of $5.8 million of accounts
and trade payables and accruals of which $3.3 million of accounts and trade
payables were 90 days or more past due. We have negotiated the restructuring of
approximately $1.7 million of these payables and expect to continue to work with
vendors to restructure the balance.
Our working capital requirements in the foreseeable future will change
depending on the rate of our expansion, operating results and any other
adjustments in our operating plan as needed in response to competition,
expansion, acquisition opportunities or unexpected events. We are dependent upon
the proceeds of this offering to implement our business plan and finance our
working capital requirements and we believe that these proceeds will be
sufficient to meet our requirements through our fiscal 2001. There can be no
assurance that we will not seek additional capital in the future as a result of
expansion or otherwise.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and
Hedging Activities", which establishes accounting and reporting standards for
derivatives instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. We do not expect the adoption of this statement
to have a significant impact on our results of operations, financial position or
cash flows.
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
phenomenon. For example, we are dependent on the financial institutions involved
in processing our customers' credit card payments for Internet services and a
third party that hosts our servers. We are also dependent on telecommunications
vendors to maintain our network and third-party carriers to deliver orders to
customers.
The year 2000 readiness of the general infrastructure and non-information
technology which is necessary to support our operations is difficult to
determine. Other than reviewing our information systems, including our phone
systems, servers, switches, routers and other communications equipment, as well
as our third-party vendors, we have not assessed non-information technology
systems. We
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depend on the integrity and stability of the Internet to provide some of our
services. We also depend on the year 2000 compliance of the computer systems and
financial services used by consumers. We believe that our most likely worst-case
year 2000 scenario would be a significant disruption in the ability of consumers
to reliably access the Internet or portions of it or to use their credit cards.
This scenario, if not quickly remedied, would have an adverse effect on demand
for our services and would have a material adverse effect on our sales and
operating results. As for other non-information technology systems that we have
not assessed, we do not believe that we are any more or less vulnerable to a
failure of non-information technology systems than other businesses of our size
or in our physical vicinity.
Based upon our assessment to date, we believe that our internally developed
proprietary software is year 2000 compliant.
At this time, we have not yet developed a contingency plan to address
situations that may result if our vendors or we are unable to achieve year 2000
compliance because we currently do not believe that a contingency plan is
necessary. The cost of developing and implementing a plan, if necessary, could
be material and we may not have enough time to implement it before 2000. Any
failure of our material systems, our vendors' material systems or the Internet
to be year 2000 compliant could include difficulties in operating our Website
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business.
INFLATION
We do not believe that inflation has had a material adverse effect on net
sales or results of operations. However, there can be no assurance that our
business will not be affected by inflation in the future.
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BUSINESS
OVERVIEW
We are a retailer and auctioneer of fine art and decorative art products. We
currently have 12 art galleries in premiere destination cities throughout the
United States under either the Merrill Chase, Dyansen or Galerie Renaissance
names. We have also hosted auctions in cities nationwide and maintain a Website
where we market fine art, specialty collectibles and related items. To build on
our reputation as a source for premium art and to take advantage of the rapid
growth in Internet retail shares, we are currently expanding our on-line
presence through the development of a full-service on-line gallery and
e-commerce business.
In August 1999, we engaged Razorfish, a leading e-commerce solution provider
to assist to clarify our business needs and to determine our long term goals
with the objective of developing our interactive strategy and implementing the
appropriate solutions early in the year 2000.
By combining our expertise and experience in art and our commitment to
excellent customer service with the benefits of Internet retailing, we believe
we are well positioned to offer a unique shopping experience to consumers. We
believe art and related items are well suited for e-commerce because of the wide
range of unique items available, the dispersed locations of potential customers
and the relatively low operating costs associated with Internet retailing.
INDUSTRY OVERVIEW: TRADITIONAL ART MARKET
The art market has historically been characterized by "brick and mortar"
gallery and auction businesses organized as single galleries or small art store
chains, each representing different artists and products. Individual art
retailers must attract customers by offering products with consumer appeal and
name brand recognition of artists, price competitiveness, quality and services.
In addition, the traditional business channels of art retailers have
historically been challenged with:
- INVENTORY COSTS: The unpredictable appeal and high cost of acquiring art
inventory creates slow inventory cycles;
- LIMITED SELECTIONS: Selection is limited due to scarcity of original and
limited edition art and physical retail space constraints;
- HIGH OPERATING COST STRUCTURES: Traditional brick and mortar galleries
have a high cost of operations as most leading galleries are located in
either expensive shopping locales or in high-cost retail outlets and
malls; and
- HIGH COST OF CUSTOMER SERVICE: Luxury goods buyers demand personalized
customer service and sales people must be well trained and highly
educated. Sales people must devote considerable time to each customer.
These factors combine to create a high cost in time and resources to
maintain an effective gallery sales force.
The art and collectibles market is a multi-billion dollar industry which
includes products such as artwork, vases, trays, mugs, picture frames and
ornaments sold by galleries and speciality stores. Consumers tend to purchase
art, decorative accessories and collectibles from specialty stores. We believe
that the increased demand for art and collectible products through specialty
retail stores presents a significant business opportunity for us.
We believe our "Click & Brick" solution successfully meets the challenges
posed to the traditional art retailing market.
INDUSTRY OVERVIEW: INTERNET ART MARKET
The widespread consumer acceptance of e-commerce presents an enormous
opportunity for art retailers to conduct business over the Internet. In
addition, demographic trends, a strong economy, and the increase in home
ownership have all contributed to greater spending on private collections of
art, collectibles and home decorations.
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The expansion into the Internet by art retailers and auctioneers has greatly
expanded the typical consumer's access to high quality art and to information
about art, including history and pricing. It has also fueled an increase in
total on-line transaction dollar amounts and overall spending on art products.
Further, the Internet has provided art retailers with the opportunity to develop
one-to-one relationships with customers worldwide from a central location
without making the significant investments required to build a number of local
retail presences. It has also reduced the printing and mailing requirements
associated with traditional worldwide marketing activities. We believe art and
related items are well suited for e-commerce because of the wide range of unique
items available, the dispersed locations of potential customers and the
relatively low operating costs. There are now a number of on-line art galleries
and collectibles retailers. These can be categorized broadly as:
- UPSCALE AUCTION HOUSES which are attempting to extend their reach and
margins by offering items for auction on-line;
- ON-LINE COMPANIES which focus exclusively on Internet sales of art and
art-related items, ranging from high quality original work to collectibles
and posters; and
- "BRICK AND MORTAR" COMPANIES which are seeking either to supplement store
sales with Website business or to shift to a full Internet model.
OUR STRATEGY
Our objective is to be one of the world's leading retailers of fine art
products, focusing on popular modern and contemporary art and artists. We plan
to strengthen our brands and expand our sales and distribution through the
addition of an aggressive e-commerce business strategy. At the same time we will
continue to build on the strong reputation we have established through our
galleries and auctions. We believe that the art buying environment we have
nurtured in our galleries is transferable to the Internet. This environment
includes:
- An educational and enjoyable shopping experience;
- Access to consultants who can assist in the shopping process;
- Superior customer service;
- Order tracking efficiency; and
- A wide range of available products.
We are currently implementing a "Click & Brick" model that melds the
advantages of both in-person and Internet shopping. Retail environments will
preserve the best elements of the art buying experience, while the Website will
add value in enhanced customer service, access to extensive information about
art and artists, a wide variety of inventory on hand and proprietary art works
by leading artists available exclusively through our company.
Many Internet shoppers still use the Internet as a research tool and then
make their actual purchase at a physical store. We also expect potential
customers to our stores to "revisit" art pieces that caught their eye on our
Website and then purchase these items over the Internet. Our "Click & Brick"
model positions the Internet to drive additional sales in the galleries, and the
galleries to stimulate Internet purchasing activity. For both Internet and
traditional galleries, the key elements of our strategy emphasize:
- FOCUS ON THE ART MARKET. We intend to capitalize on our substantial
experience in selling art to the public in the retail gallery environment
to become a leading e-commerce destination for consumers seeking to learn
about and purchase art. Our "Click & Brick" e-commerce model is also
designed to augment sales in our galleries by providing product and other
information to consumers through our Website;
- EXPAND RETAIL ART CATEGORIES. In addition to continuing to provide a broad
range of art work aimed at our target markets, we intend to enhance our
product offerings by expanding to lower-priced related items such as art
glass and decorative art objects;
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- CONTINUE TO BUILD OUR BRAND NAME AND DISTRIBUTION CHANNEL. We intend to
continue the development of a brand identity and provide leading artists
with a powerful new distribution channel for their work that is consistent
with their images and brings them an audience that would otherwise be
unavailable to them;
- PURSUE WAYS TO INCREASE OUR SALES. Our goal is to pursue new opportunities
to increase our sales by expanding into new product categories while
increasing product selection in our existing areas. We will continue to
take steps to add new customers and to promote repeat purchases through
special promotions, development of new artistic talent and education in
art appreciation and history; and
- DEVELOP OUR OPERATIONAL AND SYSTEMS INFRASTRUCTURE. We will devote
significant resources to develop our systems and operational
infrastructure to fully-support our e-commerce activity, and to enhance
our customer service and customer management capabilities.
OUR STRENGTHS
Our experience and knowledge in art retailing provides advantages when
compared to our competitors who rely solely on Internet sales. Our Merrill
Chase, Dyansen and Galerie Renaissance galleries generate more than $20 million
in annual sales, evidencing considerable brand recognition and a significant and
ongoing platform on which to build interactive sales. In addition to the general
advantages of e-commerce vs. traditional retailing, we also enjoy a number of
advantages resulting from our existing businesses, including:
- A strong reputation in our industry and among our target customers;
- An established customer base with significant repeat buying potential;
- Our customer base has strong demographic appeal and a significant
correlation with profiles of the typical Internet user;
- A knowledge of the art-buying public and their tastes; and
- Significant understanding of the art market.
WIDE RANGE OF ART. Our customers have the opportunity to purchase a wide
range of art in many fine art product categories. These include Old Master
prints, 19(th) and 20(th) century prints, serigraphs, etchings, silkscreens,
sculptures, collectibles, etc. and works by such artists as:
<TABLE>
<S> <C>
- - Erte - Andre Renoux
- - Angelo Basso - Alexandra Nechita
- - H.R.H. The Prince of Wales - Andy Lakey
- - Tom Perkinson - Peter Max
- - Chagall - Dali
- - Miro - Rembrandt
- - Leroy Neiman - Toulouse-Lautrec
</TABLE>
COMPLEMENTARY BUT DISTINCT PRODUCT LINES. We also plan to expand our
Artique line of collectible merchandise. These are complementary product lines
which contribute additional sales in the form of accessories to art pieces. They
also serve as introduction pieces to first time buyers and allow us to reach a
broader audience unfamiliar with our main product lines. We distinguish between
higher priced gallery art (popular, fine and decorative framed and unframed art
and sculpture), Artique collectible merchandise (collectibles, crafts and
multiple hand-made items) and ancillary items (art related mass produced items).
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OUR ON-LINE SOLUTION
We have engaged Razorfish, a leading e-commerce solution provider, to assist
us to clarify our business needs and to determine our long term goals with the
objective of developing our Internet strategy and implement the appropriate
solutions.
WEBSITE DESIGN. The "look and feel" of the Website will be designed to be
playful and entertaining. Navigation will be intuitive and consistent throughout
the various modules. Consumers will be able to browse different product
categories such as Modern Art, Abstract, Landscape, etc. as well as specify
other sorting mechanisms such as price points, artist, color, size and the like.
Highlighted subject areas and special features will be arranged in a simple
format intended to enhance product search, selection and discovery. A keyword
search can be used to locate a specific product.
CUSTOMIZED, INTERACTIVE APPROACH. Interactive sales modules will identify
customers by prior purchase records and/or log-on questionnaires with the goal
of making appropriate product recommendations. With increased usage, data-driven
sales engines will offer works based on past buying preferences, demographic
data and an intelligent buying profiler.
We plan to improve a visitor's shopping experience and increase sales by
implementing several different design characteristics in our on-line galleries:
- VIRTUAL GALLERIES We will feature several versions of on-line galleries in
which a customer will browse a large selection of fine art by price,
style, artist, color, size, etc. Upon entering the virtual gallery, a
customer will find walls hung with works much like in a physical gallery.
By clicking on the desired art work, a customer will be able to examine it
from different angles and magnifications, learn more about the artist,
style, history, and find links to similar items of interest;
- FOUR-WALL MODEL This gallery will offer framed works at different fixed
price points, such as $50, $100, $250, $500 and over. The framed original
artwork will appear on the wall while a timer clicks down. The artwork
will be replaced by another piece, creating a sense of urgency to buy
while items are offered and generating anticipation of what will be
displayed next;
- VIRTUAL LIVING ROOM An environment in which customers build a space
on-line that fits their personal taste in which to preview their artwork
to compare scale to furniture, styles, colors, etc;
- ON-LINE BOUTIQUES On-line boutiques will offer lower priced items from our
Artique line such as art glass and other decorative art objects. These
items are often a less intimidating introduction to art for the first time
buyer. Decorative objects also represent lower-priced product lines which
can serve as add-on sales to the framed art and sculpture sales;
- CHAT We intend to provide a regular schedule of interviews, question and
answer sessions, and presentations on particular artists. These will
stimulate interest in art and increase product awareness;
- ON-LINE ARTIST LECTURES These events will allow artists to talk about the
history of their works and the current trends in their work. Links will
pop on screen of art available for purchase;
- VIRTUAL ART CONSULTANT Knowledgeable and trained consultants will be
available to answer questions and promote sales;
- E-MAIL NEWSLETTERS These publications will be distributed via e-mail to
selected contacts highlighting new releases and upcoming events;
- DIGITAL POSTCARDS This aspect of our Website will feature a selection of
color images for sale. Web site users personalize and send these
electronic greetings to their friends and associates;
- IMAGE OF THE WEEK A promotion of a certain artist or sale item will be
delivered by e-mail with hot links to the story behind the art; and
- INTERACTIVE KIOSK These attractive and easy-to-use kiosks, initially to be
located at our retail galleries, will integrate Internet and in-gallery
audio and visual presentations.
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Each of these planned features reflects the potential synergy of our "Click
& Brick" strategy. As Internet visitors learn more about art and available
products, traffic and sales in both the on-line and retail galleries should
increase.
COMPETITION
The on-line commerce market is new, rapidly evolving and intensely
competitive, with a growing number of established art retailers offering
merchandise over the Internet. Additionally, new companies have arisen which do
business solely on-line. Our potential competitors include a variety of
marketers of collectible art products, graphic arts, sculptures and fine arts
and auctioneers. Barriers to entry are low and new competitors can launch
Websites at a relatively low cost.
We are currently positioned at the high end of the worldwide collectibles
market. We are expanding that base to include product lines that appeal to a
wider audience. Our competition includes:
- UPSCALE AUCTION HOUSES that have recently begun transacting sales on-line
such as Sothebys.com, Christies.com and Butterfield & Butterfield;
- INTERNET ART PORTALS such as Art.com, Prints.com, Guild.com and
Artnet.com; and
- TRADITIONAL BRICK AND MORTAR GALLERIES who may have introduced Websites
such as Caldwell Snyder, Martinlawrence.com and Wentworth Galleries.
We believe that the following are principal competitive factors in our
market:
<TABLE>
<S> <C>
- - Price - Brand recognition
- - Name Recognition of Artists - Product Quality
- - Service - Selection
</TABLE>
Some of our current and potential traditional store-based and on-line
competitors have larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Some
of these competitors can devote substantially more resources to Website and
systems development than we can. In addition, larger, better-established and
better-financed entities may acquire, invest in or form joint ventures with
on-line competitors.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing than we can. Our on-line competitors may be able to use the
Internet more effectively as a marketing medium than we can to reach significant
numbers of potential customers.
CURRENT OPERATIONS
Our "Click & Brick" model encompasses a full-service, fully-integrated range
of operations including e-commerce, traditional galleries, on-line and live
auctions, sculpture foundry, framing, sales and marketing, including
telemarketing.
Each of our galleries has a director and one or two associate directors.
They are responsible for the sales of their gallery. The sales staff is either
compensated by a draw against commission or by salary and commission. We sell
art work of world renowned artists obtained by us directly from the artists and
through publishers. Our average selling price per piece is approximately $2,800.
In the past three years, over 500 clients have purchased art from us valued at
$20,000 or more.
Our galleries are open seven days a week, 365 days a year with normal
business hours running from 10:00 a.m. through 7:00 p.m., with longer hours in
mall locations. Marketing, art manufacture and selection is done through the
corporate office in New York City. Art acquisition decisions are made by
experienced art buyers. Exhibition schedules and related marketing materials are
produced by the marketing staff in the corporate headquarters.
We obtain our products from a network of large and small vendors,
manufacturers and distributors. Our distribution operations are located in Los
Angeles, CA, Schaumburg, IL and New York, NY.
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RETAIL GALLERY BUSINESS
Our traditional retail gallery business operates under the Merrill Chase,
Dyansen and Galerie Renaissance names. The 12 galleries are located in:
<TABLE>
<S> <C> <C> <C>
Boston, MA Chicago, IL (4) Carmel, CA Waikoloa, Hawaii
Las Vegas, NV New Orleans, LA New York, NY (2) San Francisco, CA
</TABLE>
The galleries display and sell the works of artists represented by us, as
well as art from other publishers and artists that we either purchase or display
on a consignment basis. Our galleries are situated in high-profile malls or
upscale tourist destinations. Galleries are designed to present a pleasant
atmosphere emphasizing sophistication. Each location is typically twenty-five
hundred square feet or larger, occupies a highly visible location, and is
luxuriously appointed. We plan to open an Artique store in Chicago in the fourth
quarter of calendar year 1999, expanding our already strong presence in Chicago.
E-COMMERCE BUSINESS OPERATIONS
We intend to send orders from our Website to our distribution facilities
over a secure connection. A warehouse management system, which we anticipate
developing internally, will provide our Website with data on inventory
receiving, shipping, inventory quantities and inventory location. This system
will enable us to display information about the availability of the products on
our Website. In addition, we intend to offer an on-line order-tracking service
for our customers.
AUCTION BUSINESS
We have hosted between 50 and 150 live auctions per year in upscale hotels
around the country during the past four years generating sales in excess of $12
million. We anticipate expanding our auction program, initially instituted to
sell excess inventory, to a program in which we will act as an agent accepting
pieces on consignment as well as selling our own inventory. Many of the auction
attendees are drawn from our proprietary mailing lists of past customers and
visitors. The touring auctions provide an opportunity to serve a nationwide
clientele not currently located near our gallery locations.
BRONZE FOUNDRY
We operate a "lost wax" method bronze foundry to produce sculptures for our
galleries and auction network. Our strong reputation for producing high quality
cast bronze sculpture is based upon meticulous attention to detail and our
commitment to ongoing input from the artist throughout the casting process.
FRAMING OPERATIONS
We have custom framing operations located in Los Angeles and New York,
exclusively devoted to framing works purchased through our galleries. We offer
standard framing in a wide variety of the most popular styles. The current
capacity of our framing operation exceeds 5,000 pieces a year. A moderate
investment in equipment and additional personnel would allow us to double this
capacity.
SALES, MARKETING AND TELEMARKETING
We administer a national sales training program for our in-gallery staff. In
addition to comprehensive training under the supervision of our National Sales
Director, we also conduct weekly sales meetings and special seminars. Focused
training is presented in advance of shows in a particular gallery. Other aspects
of our overall sales and marketing program include:
- Special sales, shows and events scheduled up to a year in advance for each
gallery location. These shows and events can include: artist openings
featuring new collections of art with local and national advertising;
discounted sales, promotions, and in-gallery auctions; charity benefits
with celebrity tie-ins, public relations and press coverage; evening
"rentals" of the gallery to affluent convention groups; and special
exhibitions of rarer historical fine art (for example
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Picasso, Chagall, Renoir, Rembrandt) and featured art (for example H.R.H.
The Prince of Wales lithographs). Our events are typically well-attended
and usually create both pre- and post-event sales, in addition to the
sales increases during the actual events.
- Mailing lists and telemarketing detailed customer and visitor profiles are
maintained by our galleries. Demographic and past purchase information is
carefully recorded for use in follow-up calls about new releases by
favorite artists or upcoming events. Repeat sales via telephone account
for a significant and growing portion of overall sales. This program can
be readily integrated into an e-mail format as part of our transition to a
full "Click & Brick" model.
We currently intend to establish a credit department for the purpose of
evaluating and potentially financing purchases by our customers. We believe that
such a program will increase customer loyalty.
FACILITIES
Our corporate headquarters are located in New York, New York and we have
additional corporate offices in Chicago and Detroit. We have a warehouse, a
distribution center and a foundry located in California and a warehouse in
Hawaii. Our galleries range in size from approximately 1,000 square feet to
8,000 square feet. The total aggregate leasehold payments, excluding payments
based on gross sales, for all the facilities in 1998 was approximately
$3,600,000. Two facilities provide for increased rent based on gross sales.
We are in default under the leases for the facilities located in San
Francisco, CA, Waikoloa, HI, Los Angeles, CA, and New York, NY. There can be no
assurances that these defaults will be cured. We have been named as a defendant
in various lawsuits by certain landlords for nonpayment of rent. We have reached
settlements in some instances in which payment has been deferred. In other
instances, discussions are being held in an attempt to resolve the issues before
trial. For matters that are not resolved, there can be no assurance that we will
be able to maintain our presence in those locations.
EMPLOYEES
At September 30, 1999, we had 161 full-time employees. We are not subject to
any collective bargaining agreements and we believe that we maintain good
relationships with our employees.
LEGAL PROCEEDINGS
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of business. Such claims,
even if lacking merit, could require the use of significant financial and
managerial resources.
MCM Limited Partnership ("MCM"), the prior owner of Merrill Chase galleries
filed a lawsuit in the Circuit Court of Cook County, Illinois on December 29,
1998 against Mr. Schuster, as guarantor of our obligations, alleging that as of
January 31, 1999, we had not made the required payment under the Asset Purchase
and Consignment Agreement dated May 31, 1997, as amended on January 29, 1998
(the "Consignment Agreement"). Pursuant to the Consignment Agreement, the
liability for consigned inventory was guaranteed by Mr. Schuster. On September
10, 1999, we signed a compromise agreement with Mr. Schuster and MCM whereby we
will pay a compromise amount of $1,933,606 by January 31, 2000. We plan to pay
this amount from the proceeds of the initial public offering.
In June 1999, a penalty judgment was entered in favor of the landlord at our
former Beverly Hills gallery in the Superior Court of the State of California
for the amount of $360,000. We believe we have defenses against the enforcement
of this judgement, but rather than litigating the matter, a settlement has been
reached in the amount of $65,000 and as of September 30, 1999, $30,000 remains
unpaid.
The landlord of our San Francisco gallery, Swanson Art Galleries, Ltd.,
filed a lawsuit in Superior Court of California in June 1999 against Art
Renaissance California, Inc., one of our wholly owned subsidiaries, for
non-payment of rent. The Court granted our Motion for Summary Judgment and
settlement discussions are being held.
31
<PAGE>
The landlord for our Hawaiian gallery, Hilton Recreation, Inc., filed a
lawsuit in the District Court of the Third Circuit, South Kohola Division State
of Hawaii in July 1999 against Art Renaissance Hawaii, Inc., one of our wholly
owned subsidiaries, for non-payment of rent. The landlord is also claiming that
the lease has been terminated. We believe the lease does not expire until August
31, 2000. An October 3, 1999 trial date has been set and we will attempt to
reach a settlement before trial.
The landlord for our Los Angeles warehouse, Westchester Industrial Tract,
filed a lawsuit in Municipal Court of California in August 1999 against Art
Renaissance, Inc. Los Angeles, one of our wholly owned subsidiaries, for
non-payment of rent. The case was scheduled for trial on September 14, 1999 but
was dismissed by the plaintiff upon our payment of outstanding rent.
The landlord for our Soho New York gallery, Ernst Abei, filed a lawsuit in
Civil Court of the City of New York against Art Renaissance Eclipse, Inc., one
of our wholly owned subsidiaries, in August 1999 for non-payment of rent. Mr.
Abei has agreed to a settlement whereby the arrears will be paid from the
proceeds of this offering or other sources by March 31, 2000.
32
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME: AGE: POSITION:
- ----------------------------------- --------- ---------------------------------------------------------------------
<S> <C> <C>
Eugene I. Schuster................. 62 Chairman of the Board of Directors, Chief Executive and Operating
Officer and President
John E. McConnaughy, Jr............ 70 Director
John M. Addario.................... 57 Chief Financial Officer
Lise S. Krantz..................... 37 Vice President of Marketing
Joseph A. Schuster................. 35 Vice President of Corporate Development
Hoon Won........................... 39 Vice President of Internet Operations
Michael J. Miller.................. 40 Vice President of Sales
Robert Feldman..................... 62 Director--Nominee
Leonard Toboroff................... 66 Director--Nominee
</TABLE>
EUGENE I. SCHUSTER Mr. Schuster has served as our Chairman of the Board,
Chief Executive Officer, Chief Operating Officer, and President since its
inception in 1993. Since May 1993, Mr. Schuster has been Chairman of the Board,
President and Chief Executive Officer of Venture Funding, Inc. Mr. Schuster has
been a Vice President and Director of Mego Financial Corp. since January 1998.
From January 1990 until its sale in May 1992, he served as Chairman and Chief
Executive Officer of Imperial Midwest Insurance Company. Mr. Schuster was the
Chief Executive Officer of Cellex Biosciences, Inc. from 1988 until 1996 and
from 1988 until December 1998 he was Chairman of its Board of Directors. From
1994 until 1999 Mr. Schuster was the President of Wavemat Inc. From 1986 until
1999, Mr. Schuster was a Director of Wavemat Inc. From 1986 until 1999, Mr.
Schuster was Chairman of the Board of Directors, President and Chief Executive
Officer of Quest Bio Technology, Inc. From 1980 to May 1983, Mr. Schuster was
self-employed and independently involved in venture capital activities. Mr.
Schuster received a B.A. in History and an M.A. in Art History from Wayne State
University. He was a Fulbright Scholar in England from 1962 to 1965.
JOHN MCCONNAUGHY, JR. Mr. McConnaughy has been one of our Directors since
1993 and has been Chairman and Chief Executive Officer of JEMC Corp. since 1988.
Mr. McConnaughy is a Director of Riddell Sports, Inc., DeVlieg Bullard Inc.,
Mego Financial Corporation, Transact International, Inc., Levcor International,
Inc., Wave Systems, Inc. and Adrien Arpel, Inc. Mr. McConnaughy is the Chairman
of the Board of the Excellence Group, LLC, which filed a petition for bankruptcy
under Chapter 11 of the Bankruptcy Code on January 13, 1999. The Excellence
Group's subsidiaries produced labels for a variety of customers. From 1969 to
1986, Mr. McConnaughy served as Chairman and Chief Executive Officer of Peabody
International Corp. ("Peabody"). From 1981 to 1992, he served as Chairman and
Chief Executive Officer of GEO International Corp. when it was spun off from
Peabody in 1981. Mr. McConnaughy received a B.A. from Dennison University and an
M.B.A. from Harvard University.
JOHN M. ADDARIO Mr. Addario, a certified public accountant, has served as
our Chief Financial Officer since June 1993. Prior to joining us, Mr. Addario
was Vice President of Finance and Director of Dyansen Corporation, the former
owner of Dyansen Galleries, from September 1983-1993. From 1980 to 1983, Mr.
Addario was assistant Corporate Controller and Divisional Controller for
Vornado, Inc. Before 1980 Mr. Addario was an audit manager at Touche Ross & Co.
Mr. Addario received a B.B.A. from St. John's University.
LISE S. KRANTZ Ms. Krantz has served as our Vice President of Marketing
since September 1999. From June 1997 until September 1999, she was our National
Director of Marketing. Prior to joining us, she was Director of Marketing
Operations at Dyansen Corporation (the former owner of our Dyansen Galleries)
from 1991 to 1993. From 1991 to 1993 Ms. Krantz worked with Dyansen Corporation
as
33
<PAGE>
Manager of the Art Department and from 1989-91 was Professor of Art History at
John Abbott College, Montreal, Canada. From 1986 until 1989 she worked as the
Sales and Marketing Manager of the Canadian Guild of Crafts, Montreal, Canada.
Ms. Krantz received a B.A., with Honors, in Art History from McGill University
in 1984 and a M.A., with Honors, in Art History from the Courtauld Institute of
Art in England in 1986.
JOSEPH A. SCHUSTER Mr. Schuster has been our Vice President of Corporate
Development since September 1999, and prior to that he was our Director of
Corporate Development since 1997 and from 1994 until 1996. Mr. Schuster was one
of our Directors until September 1999. Prior to joining us, Mr. Schuster served
as Chief Operating Officer of Pro For Athletes, Inc., a direct marketing
company, from 1996 until 1997. Mr. Schuster has served as Director of Venture
Funding, Ltd. since 1995. From 1990 through 1996, Mr. Schuster was involved in
the film industry, producing, researching and writing feature films and
documentary television projects. Mr. Schuster received his B.A., with Honors, in
a multi-disciplinary program in Science, Technology and Society from Vassar
College in 1986. He also did post-graduate work at Stanford University in
History and Philosophy. Joseph A. Schuster is Mr. Schuster's son.
HOON WON Mr. Won has agreed to join us in October 1999 as Vice President of
Internet Operations to manage the development of our e-commerce business. Until
he joined us this year, Mr. Won was an Independent business consultant and
advisor beginning in October 1997 until joining us this year. From August 1996
to September 1997 he was the Chief Executive Officer of Twist Clothing Company.
From October 1995 to August 1996 he was a trader for Hambrecht & Quist. From
September 1994 to October 1995 he was a Managing Director for Group One, Ltd.
Mr. Won received a B.S. in Biology from M.I.T. in 1982 and an M.S. in Science
and Public Policy in 1984 from M.I.T.
MICHAEL J. MILLER Mr. Miller has been our Vice President of Sales since
September 1999. From July 1993 until September 1999, he was our National
Director of Sales. Prior to joining us, Mr. Miller worked from 1985 to 1993 in a
variety of positions as: Art Consultant, Senior Art Consultant, Assistant
Director, National Training Director and Western Regional Sales Director for
Dyansen Corporation. From 1983 to1985 Mr. Miller was the Copychief of the
Creative Department for Bentley Industries, Inc. Mr. Miller received his B.A.,
CUM LAUDE, in General Studies at Harvard University in 1983.
ROBERT FELDMAN Mr. Feldman has agreed to serve as a Director effective upon
the close of this offering. Mr. Feldman has been the President of Parasol Press,
Ltd., a publisher of original photographs and contemporary artists prints, since
1970. Mr. Feldman received a B.A., MAGNA CUM LAUDE, Phi Beta Kappa from Brown
University in 1958 and a L.L.B. from Yale Law School in 1961.
LEONARD TOBOROFF Mr. Toboroff has agreed to serve as a Director effective
upon the close of this offering. Mr. Toboroff has been a Director and Vice
President of Riddell Sports, Inc., a provider of sporting goods and school
spirit products and services since April 1988. In May 1989, Mr. Toboroff became
a Vice President and Vice Chairman of the Board of Allis-Chalmers Corp. Mr.
Toboroff has been Director of Banner Aerospace, Inc., a supplier of aircraft
parts, since September 1992. He has also been a Director of Engex, Inc. and
Saratoga Beverage Co. since 1993. Mr. Toboroff also joined the Board of
Directors of Hi Rise Recycling in March 1999. Mr. Toboroff has been a practicing
attorney since 1961 and from January 1988 to December 1990, was counsel to
Summit Solomon & Feldesman in New York City. Mr. Toboroff became a Director in
August 1987 of Ameriscribe Corp. and served as Chairman and Chief Executive
Officer of that company from December 1987 to May 1988. Mr. Toboroff served as
Chairman and Chief Executive Officer from May through July 1982, and Vice
Chairman from July 1982 through September 1988 of American Bakeries Company. Mr.
Toboroff received a B.A. degree from Syracuse University, an L.L.B. and J.D.
from the University of Michigan and did post-graduate studies at Luberon College
in Aix-en-Provence, France.
34
<PAGE>
BOARD OF DIRECTORS
Following this offering, our Board of Directors will consist of five
Directors. Directors are elected at each annual meeting of stockholders to serve
until the next annual meeting of stockholders or until their successors are duly
elected and qualified. Our certificate of incorporation provides that, effective
upon the closing of this offering, the Board will be divided into three classes:
Class I, Class II and Class III, with each class serving three-year terms. The
Class I Directors, initially Robert Feldman, will stand for election at the 2000
annual meeting of stockholders. The Class II Directors, initially John
McConnaughy and Leonard Toboroff will stand for election at the 2001 annual
meeting of stockholders. The Class III Director, initially Mr. Schuster, will
stand for election at the 2002 annual meeting of stockholders.
BOARD COMMITTEES
Following this offering, the Board of Directors will have an audit committee
and a compensation committee. The audit committee will be comprised of Leonard
Toboroff and a Director to be named and will review our internal accounting
procedures and consult with and review the services provided by our independent
certified public accountants. The compensation committee will be comprised of
Leonard Toboroff and a Director to be named and will determine the compensation
and benefits we offer. The compensation committee will also administer the
issuance of stock options and other awards under our Stock Option Plan.
DIRECTOR COMPENSATION
Directors will not receive any cash compensation for their services as
members of the Board of Directors, although they are reimbursed for certain
expenses incurred in connection with attendance at Board and committee meetings.
We will give non-management Directors annual grants of options to purchase
shares of our common stock. See "--The Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, we did not have a compensation committee, and the
entire Board participated in our compensation decisions concerning executive
officers. Eugene J. Schuster, Chief Executive Officer, and Joseph Schuster, Vice
President of Corporate Development, participated in all compensation decisions.
In September 1999, the Board formed the compensation committee to determine the
compensation and benefits for our executive officers and administer our stock
incentive plans. We strive to apply a uniform practice regarding compensation
for all of our employees, including the members of our senior management. This
practice is based upon the premise that our achievements result from the
combined and coordinated efforts of all employees working toward common goals
and objectives in a competitive, evolving market place.
The goals of our compensation program are to align remuneration with
business objectives and performance, and to enable us to retain and
competitively reward executive officers who contribute to our long-term success.
We attempt to pay our executive officers competitively in order to retain the
most capable people in the industry. Information with respect to levels of
compensation being paid by comparable companies is obtained from various
publications and surveys. See "Certain Relationships and Related Transactions"
and "Principal Stockholders."
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid or accrued by
us for services rendered during the last three fiscal years to Mr. Schuster, our
Chief Executive Officer and Michael Miller, our Vice President of Sales. No
other executive officer earned more than $100,000 in total salary and bonus
during such years.
35
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ALL OTHER -----------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK OPTIONS
- ------------------------------------------------------- --------- ---------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Eugene I. Schuster, Chairman of the Board, Chief
Executive Officer, and President(1).................. 1999 $ -- $ -- $ -- $ --
1998 -- -- -- --
1997 -- -- -- --
Michael Miller, Vice President of Sales................ 1999 102,072 -- -- --
1998 113,971 -- -- --
1997 104,457 -- -- --
</TABLE>
- ------------------------
(1) Mr. Schuster was a principal of Venture Funding, Ltd. until July 1999 which
until October 1, 1999 had a management agreement with us.
EMPLOYMENT AGREEMENTS
In September 1999, we entered into a three year employment agreement with
Mr. Schuster commencing on October 1, 1999, with a one year renewal term. Mr.
Schuster will serve as our President and Chief Executive Officer at a base
salary of $200,000 (subject to subsequent increases at the discretion of the
Board of Directors), and such annual bonuses of up to 50% of the base salary
based upon achievement of certain objectives which objectives shall be defined
by the compensation committee. In addition, Mr. Schuster will receive an annual
automobile allowance of $6,000. In the event of a change of control (as defined
in the Agreement), Mr. Schuster will receive one year's base salary if he is
terminated within two years following such change of control. In addition, if
Mr. Schuster's employment is terminated without cause (as defined in the
Agreement), we are required to pay Mr. Schuster the balance of his base salary
to the end of the term of the contract and a pro rata bonus calculated to the
date of termination. Mr. Schuster's employment agreement requires him to devote
substantially all of his business time to us.
In October 1999, we entered into a four year employment agreement with Hoon
Won commencing on October 1, 1999, with a one year renewal term. Mr. Won will
serve as the Vice President of Internet Operations at a base salary of $84,000
per year which is reviewable after six months. Mr. Won will also be granted an
option under our Stock Option Plan to purchase 60,000 shares of our common stock
at the lower of $10.00 per share or the initial public offering price, which
options will vest in four equal annual installments. Mr. Won is also eligible to
receive warrants for up to an additional 90,000 shares of our common stock based
upon the achievement of certain performance objectives. In the event of a change
of control, all of Mr. Won's options and warrants will vest.
THE STOCK OPTION PLAN
Our Board of Directors adopted our 1999 Stock Option Plan ("Stock Option
Plan") effective as of September 1999. We will also seek stockholder approval of
this plan prior to the completion of this offering. We have reserved 2,000,000
shares of our common stock for issuance under the Stock Option Plan.
Under the Stock Option Plan, the individuals eligible to receive stock
option awards are:
- employees;
- members of the Board of Directors; and
- consultants.
36
<PAGE>
Options may be incentive stock options that qualify for favorable tax
treatment under Section 422 of the Internal Revenue Code of 1986 or nonstatutory
stock options not designed to qualify for favorable tax treatment. With limited
restrictions, shares forfeited under the Stock Option Plan will again become
available for new awards in 1999.
The compensation committee of our Board of Directors will administer the
Stock Option Plan. The committee will have complete discretion to make all
decisions relating to the interpretation and operation of our Stock Option Plan.
The committee will have the discretion to determine which eligible individuals
are to receive any award, and to determine the type, number, vesting
requirements and other features and conditions of each award.
The exercise price for incentive stock options and for options intended to
qualify as performance-based compensation under Section 162(m) o the Internal
Revenue Code may not be less than 100% of the fair market value of our common
stock on the option grant date. The exercise price for nonstatutory options
granted under the Stock Option Plan may be exercisable for less than 85% of the
fair market value of our common stock on the option grant date.
The exercise price may be paid with:
- cash; or
- outstanding shares of common stock.
The committee may reprice options and may modify, extend or assume
outstanding options. The committee may accept the cancellation of outstanding
options in return for the grant of new options. The new option may be
exercisable for the same or a different number of shares and the same or a
different exercise price.
In specific circumstances, the committee may adjust the number of options,
and shares covered by options, or reprice options rights to protect against
dilution. If we have a change in control, an option will become fully
exercisable and fully vested if the option is not assumed by the surviving
corporation or its parent or if the surviving corporation or its parent does not
substitute comparable awards for the awards granted under the Stock Option Plan.
A change in control includes:
- a merger or consolidation after which our then-current stockholders own
less than 50% of the surviving corporation;
- a sale of all or substantially all of our assets;
- a change in the composition of the Board that results in replacement of
more than one-half of the Directors who were Directors on the date 24
months prior to the date of the event that may be a change in control; or
- an acquisition of 50% or more of our outstanding stock by a person other
than a person related to us, including a corporation owned by our
stockholders.
Each non-employee Director will be granted an option for 40,000 shares of
our common stock immediately following the completion of this offering.
Our Board of Directors may amend or terminate the Stock Option Plan at any
time. If our Board amends the plan, stockholder approval of the amendment will
be sought only if required by an applicable law or regulation. The Stock Option
Plan will continue in effect until September 2009 unless the Board terminates
the plan.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of the shares of our common stock as of September 30, 1999, and as
adjusted to reflect the sale of 8,400,000 shares of common stock in this
offering by:
- each person we know to be the beneficial owner of 5% or more of the
outstanding shares of common stock;
- each executive officer listed in the summary compensation table above;
- each of our Directors; and
- all executive officers and Directors (including nominees) as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF SHARES OF
OWNED(1) COMMON STOCK OWNED
-------------------- ----------------------------------
NAME AND ADDRESS PRIOR TO OFFERING AFTER OFFERING
- ----------------------------------------------------------- ----------------- ---------------
<S> <C> <C> <C>
Eugene I. Schuster (2)..................................... 3,513,730 70.27% 41.83%
Venture Funding Holdings, LLC (3).......................... 2,697,238 53.94% 32.11%
Venture Funding Ltd (4).................................... 467,663 9.35% 5.57%
John E. McConnaughy........................................ 517,779 10.36% 6.16%
Joseph A. Schuster (5)..................................... 207,668 4.15% 2.47%
Leonard Toboroff........................................... 25,871 0.52% .31%
Robert Feldman............................................. 0 0% 0%
JAS Interest, LLC (5)...................................... 207,146 4.14% 2.47%
Growth Realty Holdings, LLC (6)............................ 116,276 2.33% 1.38%
All executive officers and Directors (including nominees)
as a group (5 persons)................................... 4,265,048 85.30% 50.77%
</TABLE>
- ------------------------
(1) Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, the address of each
individual listed below is 156 William Street, Suite 1204, New York, New
York 10038.
(2) Includes 232,553 shares of common stock owned directly by Mr. Schuster and
2,697,238 shares held by Venture Funding Holdings, LLC, 467,663 shares held
by Venture Funding, Ltd. and 116,276 shares held by Growth Realty Holdings,
LLC all of which are attributable to Mr. Schuster because of his
affiliations with these entities. See footnotes (3), (4), and (5).
(3) The owners of Venture Funding Holdings LLC are Eugene I. Schuster (20%),
Joseph A. Schuster (20%), Sarah Schuster (20%), Adam Schuster (20%), Monis
Schuster (10%) and Venture Funding, Ltd. (10%).
(4) The owners of all of the outstanding stock of Venture Funding Ltd. are
Eugene I. Schuster (49.70%), Joseph A. Schuster (13.08%), Sarah Schuster
(.03%), Adam Schuster (13.08% in addition to 13.05% which he holds
beneficially for Sarah Schuster) and Monis Schuster (11.06%). Venture
Funding Ltd. owns 100% of the outstanding stock of Growth Funding Ltd.
Growth Funding Ltd. owns 100% of the outstanding stock of Growth Realty Ltd.
(5) Joseph A. Schuster, Sarah Schuster and Adam Schuster each own 33 1/3% of JAS
Interest, LLC.
(6) The owners of Growth Realty Holdings, LLC are Eugene I. Schuster (20%),
Joseph A. Schuster (20%), Sarah Schuster (20%), Adam Schuster (20%), Monis
Schuster (10%) and Growth Realty, Ltd. (10%).
38
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A number of the transactions described in this section involve inherent
conflicts of interest because they were with an officer, director, significant
stockholder, promoter or other person with a material business or professional
relationship with us. All future transactions, including loans, between us and
our officers, Directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested Directors, and will be on terms no less favorable
to us than could be obtained from unaffiliated third parties.
On August 24, 1995, we entered into a short-term note with the Bank of
Bloomfield Hills ("BBH") for the principal amount of $500,000. This note was
extended annually and the principal amount was increased to $750,000. The note
bore interest at a rate of 9% per year and was repaid by Mr. Schuster in July
1999. The collateral for this note represented personal assets of Mr. Schuster.
In December 1998, we agreed to reimburse Mr. Schuster, Venture Funding, Ltd.
("Venture"), Growth Realty, Inc. ("Growth"), Growth Funding, Ltd., Growth Realty
Holdings, LLC, and Adam Schuster (the "Reimbursed Parties"), to the extent any
of them makes payment on behalf of us under this loan. We also agreed to grant a
security interest in our assets to Reimbursed Parties in consideration for them
to guarantee this loan.
On March 29, 1996, we entered into a loan agreement with BBH for the
principal amount of $1,550,000. This note bears interest of 2.5% above prime per
year and is payable in monthly installments of $15,000 with payment of the
principal plus accrued interest due on April 1, 1999. In July 1999, BBH waived
the existing defaults and extended the maturity date on this loan through
December 31, 1999. This loan is secured by a first priority interest in our
assets, is guaranteed by Mr. Schuster, Venture, Venture Funding Holdings Ltd.,
Growth Realty Holdings, L.L.C. and Growth, and is secured by a first priority
security interest in certain Growth assets related to Mego Financial Corp.
("Mego") (Mr. Schuster owns approximately 9% of the outstanding stock of Mego).
See footnote to the Principal Stockholder Table on page 38. In December 1998 we
agreed to repay the Reimbursed Parties to the extent any of them makes payment
on behalf of us under this loan. We also agreed to grant a security interest in
our assets to the Reimbursed Parties in consideration for them to guarantee this
loan.
On October 14, 1996, we entered into a loan agreement with BBH for the
principal amount of $500,000. The loan bears interest of 2% above prime. The
original maturity date of October 15, 1997 had been extended to March 1, 1999.
In July 1999, BBH waived the existing defaults and extended the maturity date to
December 31, 1999. The loan is secured by a first priority interest in our
assets granted to BBH, guaranteed by John E. McConnaughy, Jr., Venture, Venture
Funding Holdings Ltd., Growth Realty Holdings, L.L.C. and Growth, and secured by
a first priority security interest in certain Growth assets related to Mego.
On February 6, 1997, we entered into a loan agreement with BBH, for the
principal amount of $1,563,946.69. In 1998, the loan was renewed and the
principal amount increased to $1,642,997.72. The original principal amount was
evidenced by a 90 day note for $400,000 that was repaid in 1998. The term note
bears interest of 2.5% above prime and was due on April 1, 1999. This loan was
secured by a first priority interest in our assets granted to BBH guaranteed by
Eugene Schuster, Venture, and Growth Funding, Ltd., Growth, and secured by a
first priority security interest in certain Growth assets related to Mego. This
note was repaid in July 1999. In December 1998, we agreed to reimburse the
Reimbursed Parties, to the extent any of them makes payment on behalf of us
under this loan. We also agreed to grant a security interest in our assets to
the Reimbursed Parties in consideration to guarantee this loan.
On May 2, 1997, we entered into a loan, evidenced by a Convertible
Debenture, to pay Willora Company, Inc. ("Willora") the principal amount of
$600,000 with interest at a rate of 10% per year which is guaranteed by Mr.
Schuster and Venture. The principal amount is due and payable on May 1,
39
<PAGE>
1999. This Convertible Debenture is convertible into shares of our common stock
subject to adjustment. On May 25, 1997, we entered into a short term note with
Willora Company, Inc. in the principal amount of $400,000 which is guaranteed by
Mr. Schuster. This note bears interest of 10%. This note was originally due and
payable on August 31, 1997. The collateral for both the May 2, 1997 loan for the
principal amount of $600,000 and the May 25, 1997 loan for the principal amount
of $400,000 represented personal assets of Mr. Schuster and assets of Venture
Funding, Ltd. In September 1999 we agreed to issue to Willora 173,465 fully paid
shares of our common stock for cancellation of unexercised warrants and full
payment for and satisfaction of the accrued interest on both the $400,000 loan
and the $600,000 loan. Immediately following receipt of the proceeds from this
offering, we will pay Willora $1,000,000 in full satisfaction of both loans.
Also, Mr. Schuster will issue to Willora 34,203 fully paid shares of common
stock as full payment for and satisfaction of all services rendered by Willora
to Venture. In December 1998, we agreed to reimburse the Reimbursed Parties to
the extent any of them makes payment on behalf of us under this loan. We also
agreed to grant a security interest in our assets to the Reimbursed Parties in
consideration for them to guarantee this loan.
On October 30, 1997, we entered into a loan agreement with BBH for the
amount of $1,128,534. The loan bears interest of 2.5% above prime. The original
maturity date of October 30, 1998 was extended to January 29, 1999. In July
1999, BBH waived the existing defaults and extended the maturity date on the
loan originally dated October 30, 1997 through December 31, 1999. The loan is
secured by a first priority interest in our assets granted to BBH guaranteed by
Eugene I. Schuster, Venture, and Growth, Venture Funding Holdings, LLC and
Growth Realty Holdings, LLC, and is additionally secured by a first priority
security interest in certain Growth assets related to Mego and a pledge by
Venture of certain other securities. In December 1998, we agreed to reimburse
the Reimbursed Parties, to the extent any of them makes payment on behalf of us
under this loan. We also agreed to grant a security interest in our assets to
the Reimbursed Parties in consideration for them to guarantee this loan.
In January 1994, Venture Funding Ltd. entered into a management agreement to
provide us with consultation and direct management assistance with respect to
strategic planning and other aspects of our business. We were billed $300,000
for each of the years ended January 31, 1997, 1998, and 1999, respectively. Of
this amount, approximately $668,000 remained unpaid at January 31, 1999. This
management agreement was terminated effective October 1, 1999. All of the unpaid
management fees were exchanged for warrants to acquire 232,553 shares of our
common stock.
During 1997, we entered into short term notes with BBH for the principal
amounts of $250,000, $98,000 and $152,000. These notes have been replaced by one
short term note dated January 12, 1998 for the principal amount of $500,000. The
loan dated January 12, 1998 bears interest of 8.5% and is due and payable on
January 12, 1999. The collateral for this note represents personal assets of Mr.
Schuster and is secured by certain assets of Venture Funding Ltd., Joseph
Schuster, Adam Schuster and Sara Schuster, Mr. Schuster's children ("Affiliate
Guarantors"). In December 1998, we agreed to reimburse the Reimbursed Parties,
to the extent any of them makes payment on behalf of us under this loan. We also
agreed to grant a security interest in our assets to the Reimbursed Parties in
consideration for them to guarantee this loan.
On January 30, 1998, we entered into a loan, evidenced by a Convertible
Debenture, to pay to Willora the principal amount of $500,000 with interest at a
rate of 10% per year. This loan is guaranteed by Mr. Schuster. The principal
amount was originally due and payable on June 30, 1999. The Convertible
Debenture is convertible into shares of our common stock subject to adjustment.
The collateral for this loan represented personal assets of Mr. Schuster. In
September 1999 we agreed to issue to Willora 45,154 fully paid shares of our
common stock for cancellation of unexercised warrants and in full payment for
and satisfaction of the accrued interest on the $500,000 loan and cancellation
of warrants granted. Immediately following receipt of the proceeds from this
offering, we will pay Willora $500,000 in full satisfaction of the loan. In
December 1998, we agreed to reimburse the Reimbursed
40
<PAGE>
Parties, to the extent any of them makes payment on behalf of us under this
loan. We also agreed to grant a security interest in our assets to the
Reimbursed Parties in consideration for them to guarantee this loan.
On April 10, 1998 we entered into a loan, evidenced by a Convertible
Debenture, to pay to Gross Foundation, Inc. ("Gross") the principal amount of
$375,000 with interest at a rate of 10% per year. The principal amount was
originally due and payable on June 30, 1999. The Convertible Debenture is
convertible into shares of our common stock subject to adjustment. The
collateral for this loan represented personal assets of Mr. Schuster and assets
of Venture Funding, Ltd. Mr. Schuster and Venture have guaranteed the
obligations under this loan and have pledged certain assets to secure payment.
In September 1999, we agreed to issue to Gross 22,603 fully paid shares of our
common stock for cancellation of unexercised warrants and in full payment for
the accrued interest on the $375,000 loan. Immediately following receipt of the
proceeds from this offering, we will pay Willora $375,000 in full satisfaction
of the loan. In December 1998, we agreed to reimburse the Reimbursed Parties, to
the extent any of them makes payment on behalf of us under this loan. We also
agreed to grant a security interest in our assets to the Reimbursed Parties in
consideration for them to guarantee this loan.
On April 21, 1999, we entered into a loan agreement with Parasol Press, Ltd.
("Parasol"), for the principal amount of $250,000. This note bears interest of
19% per year and is due and payable on April 21, 2001 and is guaranteed by Mr.
Schuster. The President of Parasol Press, Ltd. is Robert Feldman, Director-Elect
of our company.
On March 9, 1998, we entered into a loan agreement with HDA Homecare Pension
Fund for the principal amount of $790,000 which was guaranteed by the Reimbursed
Parties. This loan bore interest of 11% per year and was due and payable on
March 9, 1999. In December 1998, we agreed to reimburse the Reimbursed Parties,
to the extent any of them makes payment on behalf of us under this loan. We also
agreed to grant a security interest in our assets to the Reimbursed Parties in
consideration for them to guarantee this loan.
On March 11, 1999, we entered into a loan agreement with John E.
McConnaughy, Jr. for the principal amount of $225,000. In addition to the
repayment of this note, we have paid $25,000 in interest and we will supply
artwork to Mr. McConnaughy, Jr. with a retail value of $25,000. This note is
guaranteed by Mr. Schuster. This note was due and payable on May 12, 1999.
On March 31, 1999, we entered into a loan agreement with John E.
McConnaughy, Jr. for the principal amount of $200,000. In addition to the
repayment of this note, we have paid Mr. McConnaughy $25,000 in interest and we
will supply artwork to Mr. McConnaughy with a retail value of $25,000. This note
is guaranteed by Mr. Schuster. This note was due and payable on June 1, 1999.
On December 15, 1998, we entered into a loan agreement with Adam Schuster
for the principal amount of $1,326,771.01. This loan bears interest at a rate of
2% above prime. The principal amount is due and payable on the second
anniversary of this offering, subject to earlier prepayment on the 18 month
anniversary of this offering in the event we are at such time not more than 90
days past due on our artists payables and subject to the approval of our
independent Board of Directors. The loan is secured by a third priority security
interest in our assets. In December 1998, we agreed to reimburse the Reimbursed
Parties, to the extent any of them makes payment on behalf of us under this
loan. We also agreed to grant a security interest in our assets to the
Reimbursed Parties in consideration for them to guarantee this loan.
41
<PAGE>
DESCRIPTION OF SECURITIES
AUTHORIZED STOCK
The following summarizes the terms of our common stock you will receive in
this offering. Please read our Certificate of Incorporation, which are included
as an exhibit to the Registration Statement of which this prospectus is a part.
OUR AUTHORIZED CAPITAL STOCK
- 40 million shares of common stock, par value $0.01 per share;
- two million shares of preferred stock, par value $0.01 per share; and
- Immediately after the sale of the shares of common stock in this offering,
we will have 8,400,000 shares of common stock outstanding and no shares of
preferred stock outstanding.
COMMON STOCK
VOTING:
- One vote for each share held of record on all matters submitted to a vote
of stockholders;
- No cumulative voting rights;
- Election of Directors by plurality of votes cast; and
- All other matters by majority of the votes cast.
DIVIDENDS:
- Subject to preferential dividend rights of outstanding shares of preferred
stock, common stockholders are entitled to receive ratably declared
dividends; and
- The Board may only declare dividends out of legally available funds.
ADDITIONAL RIGHTS:
- Subject to the preferential liquidation rights of outstanding shares of
preferred stock, common stockholder are entitled to receive ratably net
assets (available after payment of debts and other liabilities) upon our
liquidation, dissolution or winding up;
- No preemptive rights;
- No subscription rights;
- No redemption rights;
- No sinking fund rights; and
- No conversion rights.
The rights and preferences of common stockholders are subject to the rights
of any class of preferred stock we may issue in the future.
PREFERRED STOCK
By resolution of our Board of Directors, we may, without any further vote or
action by our shareholders, authorize and issue, subject to limitations
prescribed by law, an aggregate of two million shares of preferred stock. The
preferred stock may be issued in one or more classes or class. With respect to
any classes or class, the Board may determine the designation and the number of
shares,
42
<PAGE>
preferences, limitations and special rights, including dividend rights,
conversion rights, voting rights, redemption rights and liquidation preferences.
Because of the rights that may be granted, the issuance of preferred stock may
delay, defer or prevent a change of control. Prior to this offering, we had no
shares of preferred issued and outstanding.
DELAWARE ANTI-TAKEOVER LAW AND OUR CERTIFICATE OF INCORPORATION AND BY-LAW
PROVISIONS
Provisions of Delaware law and our certificate of incorporation and by-laws
could make more difficult our acquisition by a third party and the removal of
our incumbent officers and Directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of Art Renaissance to first
negotiate with us. We believe that the benefits of increased protection of our
ability to negotiate with the proponent of an unfriendly or unsolicited
acquisition proposal outweigh the disadvantages of discouraging these proposals
because negotiation could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
- the Board of Directors approved the transaction in which the stockholder
became an interested stockholder prior to the date the interested
stockholder attained that status;
- when the stockholder became an interested stockholder, he or she owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding shares owned by persons who are
Directors and also officers; or
- at or subsequent to the time the stockholder became an interested
stockholder the business combination is approved by the Board of Directors
and authorized at an annual or special meeting of stockholders.
A "business combination" generally includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our certificate of incorporation and by-laws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of Directors. In addition, our certificate of
incorporation permits the Board of Directors to issue preferred stock with
voting or other rights without any stockholder action. Our certificate of
incorporation provides for the Board of Directors to be divided into three
classes, with staggered three-year terms. As a result, only one class of
Directors will be elected at each annual meeting of stockholders. Each of the
two other classes of Directors will continue to serve for the remainder of its
respective three-year term. These provisions, which require the vote of
stockholders holding at least a majority of the outstanding common stock to
amend, may have the effect of deterring hostile takeovers or delaying changes in
our management.
TRANSFER AGENT
American Stock Transfer and Trust Company serves as our transfer agent.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this
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<PAGE>
offering because of contractual restriction on resale. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and impair our ability to
raise equity capital in the future.
Upon completion of the offering, we will have 8,400,000 outstanding shares
of common stock and options to purchase 60,000 shares of common stock and
warrants to purchase 120,500 shares of common stock, assuming no additional
option grants or exercises after September 30, 1999. Of these shares, the
3,400,000 shares sold in the offering, plus any shares issued upon exercise of
the underwriter's over-allotment option, will be freely tradable without
restriction under the Securities Act, unless purchased by our "affiliates" as
that term is defined in Rule 144 under the Securities Act. In general,
affiliates include officers, Directors or 10% stockholders.
The remaining 5,000,000 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted shares for sale, could adversely,
affect the market price of the common stock.
Our Directors, officers and security holders have entered into lock-up
agreements in connection with this offering. These agreements provide that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of one year after
the date of this prospectus. The shares subject to lock-up agreements may not be
sold without the prior written consent of Auerbach, Pollak & Richardson, Inc.
until these agreements expire, even if the shares are eligible for sale under
the provisions of Rules 144, 144(k) and 701. Transfer will be permitted in the
case of certain transfers to and among affiliates, and bona fide gifts. Taking
into account the lock-up agreements, and assuming Auerbach, Pollak & Richardson,
Inc. does not release stockholders from these agreements, the following shares
will be eligible for sale in the public market at the following times:
- Beginning on the effective date of this prospectus, the shares sold in the
offering will be immediately available for sale in the public market.
- Beginning one year after the effective date, 450,048 shares will be
eligible for sale pursuant to Rule 144(k), and 5,000,000 additional shares
will be eligible for sale from time to time pursuant to Rule 144.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding,
which will equal approximately 84,000 shares immediately after the
offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice, and the availability of current public information about us. A
person may sell shares under Rule 144(k) and not be subject to the Rule 144
requirements if the person has not been one of our affiliates at any time during
the three months preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the holding period of any
prior owner other than an affiliate, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k)"
shares may be sold immediately upon the completion of this offering.
44
<PAGE>
STOCK OPTIONS
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering 2,000,000 shares of common stock reserved for
issuance under our Stock Option Plan. As of September 30, 1999, options to
purchase 60,000 shares of common stock were issued and outstanding. The
registration statement is expected to become effective upon filing. Accordingly,
shares registered under the registration statement will, subject to vesting
provisions and Rule 144 volume limitations applicable to our affiliates, be
available for sale in the open market immediately after the one year lock-up
agreements expire.
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<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement Auerbach,
Pollak & Richardson, Inc. has agreed to purchase 3,400,000 shares of our common
stock.
The underwriting agreement provides that the obligations of the Underwriter
to purchase and accept delivery of the shares included in this offering are
subject to approval of legal matters by its counsel and to other specified
conditions. The Underwriter is obligated to purchase and accept delivery of all
the shares (other than those shares covered by the over-allotment option
described below) if it purchases any of the shares.
The Underwriter initially proposes to offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less a
concession not in excess of $ per share. The Underwriter may allow, and such
dealers may re-allow, a concession not in excess of $ per share on sales to
other dealers. After the initial offering of the shares to the public, the
Underwriter may change the public offering price and such concessions at any
time without notice.
We have granted the Underwriter an option, exercisable for 45 days from the
date of this prospectus, to purchase, from time to time, in whole or in part, up
to 510,000 additional shares at the public offering price less the underwriting
fees. The Underwriter may exercise such option solely to cover over-allotments,
if any, made in connection with this offering.
We have agreed to indemnify the Underwriter against specified civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriter may be required to make in respect of any of those
liabilities.
The Underwriter has reserved for sale, at the initial public offering price,
up to 50,000 shares of the common stock for employees, Directors and other
persons associated with us who have expressed an interest in purchasing such
shares of common stock in this offering. The number of shares of common stock
available for sale to the general public in this offering will be reduced to the
extent such persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the Underwriter to the general public on the same
terms as the other shares offered hereby.
We estimate that expenses of the offering will total $600,000.
We have agreed to pay the Underwriter a non-accountable expense allowance of
2% of the aggregate offering price of the common stock offered by this
prospectus (including any common stock purchased pursuant to the Underwriter's
over-allotment option), of which we will have already paid $50,000 at filing. We
have also agreed to pay all expenses in connection with qualifying the common
stock offered by this prospectus for sale under the laws of such states as the
Underwriter may designate, if required, including the expenses of counsel
retained for such purposes by the Underwriter.
We have also agreed pursuant to the Underwriting Agreement to allow the
Underwriter to designate an observer to the Board of Directors for a period of
three years. The individual selected by the Underwriter will be entitled to
attend all our Board of Directors' meetings.
We have agreed to sell to the Underwriter and its designees, Underwriter's
Warrants to purchase up to 238,000 shares of common stock at an exercise price
per share equal to 125% of the initial public offering price per share of the
common stock offered hereby. The Underwriter's Warrants may not be transferred,
except during a one year period commencing on the Effective Date to officers of
the Underwriter, and thereafter to officers or employees who are stockholders of
the Underwriter, and are exercisable during the four-year period commencing one
year from the date of the Prospectus (the "Warrant Exercise Term.")
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<PAGE>
During the Warrant Exercise Term, the holders of the Underwriter's Warrants
are given, at nominal cost, the opportunity to profit from a rise in the market
price of the common stock. To the extent that the Underwriter's Warrants are
exercised or exchanged, dilution to the interests of our stockholders will
occur. Further, the terms upon which we will be able to obtain additional equity
capital may be adversely affected since the holders of the Underwriter's
Warrants can be expected to exercise them at a time when we would, in all
likelihood, be able to obtain any needed capital on terms more favorable to us
than those provided in the Underwriter's Warrants. Any profit realized by the
Underwriter on the sale of the Underwriter's Warrants or the underlying shares
of common stock may be deemed additional underwriting compensation. The
Underwriter's Warrants provide for reductions, which in certain circumstances
could be material, in the exercise price of the Underwriter's Warrants upon the
occurrence of certain events, including adjustment of the type of securities
issuable upon exercise of the Underwriter's Warrants to reflect changes in the
common stock and to reflect stock dividends, stock splits and mergers,
recapitalizations or sale of assets. We have agreed to register the
Underwriter's Warrants and the underlying shares of common stock under the
Securities Act on one occasion during the Warrant Exercise Term and to include
such Underwriter's Warrants and shares in any appropriate registration statement
that is filed by us during the Warrant Exercise Term.
We have agreed to grant the Underwriter for three years from this offering a
right of first refusal to act as manager, placement agent or investment banker
for proposed public or private offerings of our securities and certain other
transactions. In addition, we will pay the Underwriter a finder's fee if the
Underwriter introduces potential strategic partners to us during the three year
period and we consummate a transaction with any of them.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price has been arbitrarily determined by
negotiation between us and the Underwriter. In determining the offering price,
we and the Underwriter considered, among other things, market prices of similar
securities of comparable publicly traded companies, the financial condition and
operating information of companies engaged in activities similar to ours, our
financial condition and prospects and the general condition of the securities
market.
In connection with the offering, the Underwriter and selling group members
(if any) and its affiliates may engage in transactions that stabilize, maintain
or otherwise affect the market price of our common stock. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase common
stock for the purpose of stabilizing its market price. The Underwriter also may
create a short position for the account of the Underwriter by selling more
common stock in connection with this offering than it is committed to purchase
from us, and in such case may purchase common stock in the open market following
completion of this offering to cover all or a portion of such short position. In
addition, the Underwriter may impose "penalty bids" under contractual
arrangements whereby it may reclaim from a dealer participating in this offering
for its account, the selling concession with respect to the common stock that is
distributed in this offering but subsequently purchased for its account in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the common stock at a level about that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if any is undertaken, may be discounted at
any time.
The Underwriter has advised us that it does not intend to confirm sales to
any account over which it exercises discretionary authority.
Other than in the United States, no action has been taken by us or the
Underwriter that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in
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<PAGE>
connection with the offer and sale of any such shares be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Morrison Cohen Singer & Weinstein, LLP, New York, New York.
Certain legal matters will be passed upon for the Underwriter by Coleman, Rhine
& Goodwin LLP, New York, New York.
EXPERTS
The consolidated financial statements of Art Renaissance, Inc. and
subsidiaries at January 31, 1998 and 1999 and for each of the three years in the
period ended January 31, 1999 and the financial statements of MCM Limited
Partnership at and for each of the years ended January 31, 1996 and 1997
contained in this prospectus and registration statement have been audited by BDO
Seidman, LLP, independent certified public accountants, as set forth in their
reports (both of which contain an explanatory paragraph regarding the ability to
continue as a going concern), which are included in this prospectus and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 for the common stock we
are offering by this prospectus with the Securities and Exchange Commission,
Washington, D.C. This prospectus does not include all of the information
contained in the registration statement. Statements contained in this prospectus
as to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference. For
further information with respect to our company and our common stock offered
hereby reference is made to the registration statement, exhibits and schedules.
A copy of the registration statement may be inspected by anyone without charge
at the Public Reference Room at 450 fifth Street, N.W., Washington, D.C. 20549,
and copies of all or any part thereof may be obtained from the Commission upon
the payment of certain fees prescribed by the Commission. Additional information
may also be obtained by calling the Commission at 1-800-SEC-0330 and on-line at
the Commission's Website at WWW.SEC.GOV.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm.
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INDEX TO FINANCIAL STATEMENTS
ART RENAISSANCE, INC. AND SUBSIDIARIES
YEARS ENDED JANUARY 31, 1997, 1998 AND 1999
AND THE SIX MONTHS ENDED JULY 31, 1998 AND 1999
<TABLE>
<S> <C>
Report of independent certified public accountants.............................. F-2
Consolidated financial statements:
Balance sheets................................................................ F-3
Statements of operations...................................................... F-4
Statements of capital deficit................................................. F-5
Statements of cash flows...................................................... F-6
Notes to consolidated financial statements.................................... F-7-F-19
</TABLE>
MCM LIMITED PARTNERSHIP (CERTAIN ASSETS ACQUIRED BY ART RENAISSANCE, INC. ON MAY
31, 1997)
YEARS ENDED JANUARY 31, 1996 AND 1997
AND THE FOUR MONTHS ENDED MAY 31, 1996 AND 1997
<TABLE>
<S> <C>
Report of independent certified public accountants.............................. F-20
Financial statements
Balance sheets................................................................ F-21
Statements of operations...................................................... F-22
Statements of changes in partners' capital.................................... F-23
Statements of cash flows...................................................... F-24
Notes to financial statements................................................. F-25-F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Art Renaissance, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of Art
Renaissance, Inc. and Subsidiaries as of January 31, 1998 and 1999, and the
related consolidated statements of operations, capital deficit and cash flows
for each of the three years in the period ended January 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Art
Renaissance, Inc. and Subsidiaries as of January 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1999, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has incurred significant
losses. At January 31, 1999, the Company had a deficiency in working capital and
a capital deficit. These conditions raise substantial doubt as to the ability of
the Company to continue as a going concern. Management's plans in regard to
these matters are discussed in Note 1. These consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
New York, New York
September 24, 1999
F-2
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------
1998 1999 JULY 31, 1999
------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT:
Receivables from credit card companies.......................... $ 197,799 $ 236,295 $ 346,551
Inventories (Notes 2, 5, 6(e) and 13(b))........................ 7,819,615 6,470,127 7,091,818
Prepaid expenses and other current assets....................... 795,246 339,790 471,360
------------- -------------- --------------
Total current assets.......................................... 8,812,660 7,046,212 7,909,729
Property and equipment, at cost, less accumulated depreciation and
amortization (Note 3)........................................... 1,589,899 1,287,019 939,420
Goodwill, less accumulated amortization of $20,964, $52,410 and
$68,133 (Note 9)................................................ 922,409 890,963 875,240
Security deposits and other....................................... 219,525 280,640 358,027
------------- -------------- --------------
$ 11,544,493 $ 9,504,834 $ 10,082,416
------------- -------------- --------------
------------- -------------- --------------
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Checks drawn against future deposits............................ $ 546,219 $ 266,845 $ 229,389
Accounts payable and accrued expenses........................... 4,442,830 5,396,162 5,902,086
Short-term notes payable (Note 4)............................... 4,914,932 5,711,532 3,318,534
Current portion of long-term debt (Note 5)...................... 1,683,986 4,193,062 4,144,463
Due to related parties, current portion (Note 6)................ 50,004 50,004 475,004
Customer deposits............................................... 2,259,326 2,200,321 1,697,287
------------- -------------- --------------
Total current liabilities..................................... 13,897,297 17,817,926 15,766,763
Long-term debt (Note 5)........................................... 2,328,102 -- --
Due to related parties (Note 6)................................... 3,129,790 3,133,317 1,809,954
------------- -------------- --------------
Total liabilities............................................. 19,355,189 20,951,243 17,576,717
------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 14)
CAPITAL DEFICIT:
Preferred stock, $.01 par value--shares authorized 2,000,000;
none issued and outstanding................................... -- -- --
Common stock, $.01 par value--shares authorized 40,000,000;
issued and outstanding 2,589,068, 2,589,068 and 4,758,779
(Notes 6(a), 6(c) and 8)...................................... 25,891 25,891 47,588
Additional paid-in capital...................................... 1,924,109 1,924,109 7,587,463
Deficit......................................................... (9,760,696) (13,396,409) (15,129,352)
------------- -------------- --------------
Capital deficit............................................... (7,810,696) (11,446,409) (7,494,301)
------------- -------------- --------------
$ 11,544,493 $ 9,504,834 $ 10,082,416
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1997 1998(A) 1999 1998 1999
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................................ $ 12,072,450 $ 23,689,721 $ 23,127,507 $ 12,848,259 $ 10,799,740
Cost of goods sold (Note 10)......... 5,489,917 10,261,768 10,274,413 5,577,154 4,998,160
------------- ------------- ------------- ------------- -------------
Gross profit................... 6,582,533 13,427,953 12,853,094 7,271,105 5,801,580
------------- ------------- ------------- ------------- -------------
Operating expenses:
Selling expenses................... 2,182,624 4,988,228 4,792,435 2,847,415 2,222,629
General and administrative expenses
(Note 6(a))...................... 6,392,426 8,567,930 9,757,757 4,795,562 4,263,716
Depreciation and amortization...... 288,134 496,174 653,049 314,560 393,415
------------- ------------- ------------- ------------- -------------
Total operating expenses....... 8,863,184 14,052,332 15,203,241 7,957,537 6,879,760
------------- ------------- ------------- ------------- -------------
Loss from operations........... (2,280,651) (624,379) (2,350,147) (686,432) (1,078,180)
Interest expense..................... 451,823 957,792 1,285,566 645,218 654,763
------------- ------------- ------------- ------------- -------------
Loss before extraordinary
gain......................... (2,732,474) (1,582,171) (3,635,713) (1,331,650) (1,732,943)
Extraordinary gain from early
extinguishment of debt (Note 11)... 3,781,073 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income (loss).................... $ 1,048,599 $ (1,582,171) $ (3,635,713) $ (1,331,650) $ (1,732,943)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Basic and diluted net income (loss)
per share:
Loss before extraordinary gain..... $ (1.06) $ (.61) $ (1.40) $ (.51) $ (.45)
Extraordinary gain from early
extinguishment of debt........... 1.47 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income (loss).............. $ .41 $ (.61) $ (1.40) $ (.51) $ (.45)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average common shares
outstanding--basic and diluted..... 2,589,068 2,589,068 2,589,068 2,589,068 3,835,818
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
- ------------------------
(a) Includes the results of operations of Merrill Chase galleries from June 1,
1997 (see Note 9).
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
YEARS ENDED JANUARY 31, 1997, 1998 AND 1999 AND SIX MONTHS ENDED JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
---------- ----------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1996.................. 2,589,068 $ 25,891 $ 1,924,109 $ (9,227,124) $ (7,277,124)
Net income for the year.................... -- -- -- 1,048,599 1,048,599
---------- ----------- ------------ -------------- --------------
BALANCE, JANUARY 31, 1997.................. 2,589,068 25,891 1,924,109 (8,178,525) (6,228,525)
Net loss for the year...................... -- -- -- (1,582,171) (1,582,171)
---------- ----------- ------------ -------------- --------------
BALANCE, JANUARY 31, 1998.................. 2,589,068 25,891 1,924,109 (9,760,696) (7,810,696)
Net loss for the year...................... -- -- -- (3,635,713) (3,635,713)
---------- ----------- ------------ -------------- --------------
BALANCE, JANUARY 31, 1999.................. 2,589,068 25,891 1,924,109 (13,396,409) (11,446,409)
Exercise of warrants (Notes 6(a) and
13(b))................................... 439,699 4,397 373,753 -- 378,150
Shares issued as deferred
financing costs (Note 13(b))............. 25,871 259 21,991 -- 22,250
Shares issued for the purchase of inventory
(Notes 6(e) and 13(b))................... 833,321 8,333 1,357,629 -- 1,365,962
Shares issued as repayment of
long-term debt (Notes 4(a) and 13(b)).... 511,867 5,119 2,298,281 -- 2,303,400
Shares issued as repayment of
amounts due to a related party
(Notes 6(a) and 13(b))................... 358,953 3,589 1,611,700 -- 1,615,289
Net loss for the six months................ -- -- -- (1,732,943) (1,732,943)
---------- ----------- ------------ -------------- --------------
BALANCE, JULY 31, 1999 (UNAUDITED)......... 4,758,779 $ 47,588 $ 7,587,463 $ (15,129,352) $ (7,494,301)
---------- ----------- ------------ -------------- --------------
---------- ----------- ------------ -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 13)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY
YEAR ENDED JANUARY 31, 31,
--------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1997 1998(A) 1999 1998 1999
--------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $1,048,599 $(1,582,171) $(3,635,713) $(1,331,650) $(1,732,943)
--------- ---------- ---------- ---------- ----------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization................. 288,134 496,174 653,049 314,560 393,415
Gain from early extinguishment of debt........ (3,781,073) -- -- -- --
Changes in assets and liabilities, net of
acquisition of business in 1998:
Decrease (increase) in:
Receivables from credit card companies.... 154,598 (75,292) (38,496) (132,998) (110,256)
Inventories............................... 648,564 (1,328,156) 1,349,488 557,760 744,271
Prepaid expenses and other current
assets.................................. (187,208) (331,935) 455,456 (196,296) (64,197)
Security deposits and other............... 8,997 (28,887) (61,115) (31,017) (77,387)
Increase (decrease) in:
Checks drawn against future deposits...... 250,840 84,529 (279,374) 173,485 (37,456)
Accounts payable and accrued expenses..... 297,162 625,715 953,332 (264,607) 460,801
Customer deposits......................... 241,698 157,518 (59,005) 12,735 (503,034)
--------- ---------- ---------- ---------- ----------
TOTAL ADJUSTMENTS....................... (2,078,288) (400,334) 2,973,335 433,622 806,157
--------- ---------- ---------- ---------- ----------
NET CASH USED IN OPERATING ACTIVITIES... (1,029,689) (1,982,505) (662,378) (898,028) (976,786)
--------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (9,198) (44,757) (318,723) (3,388) (30,093)
Acquisition of business......................... -- (1,020,586) -- -- --
--------- ---------- ---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES... (9,198) (1,065,343) (318,723) (3,388) (30,093)
--------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term notes payable.......... -- 3,664,932 925,134 875,000 --
Proceeds from long-term debt.................... 500,000 600,000 875,000 790,000 46,360
Repayments of short-term notes payable.......... -- -- (128,534) -- --
Repayments of long-term debt.................... (188,449) (553,963) (694,026) (606,411) (94,959)
Due to related parties.......................... 727,336 (663,121) 3,527 (157,173) 1,005,478
--------- ---------- ---------- ---------- ----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................ 1,038,887 3,047,848 981,101 901,416 956,879
NET CHANGE IN CASH................................ -- -- -- -- --
CASH, BEGINNING OF PERIOD......................... -- -- -- -- --
--------- ---------- ---------- ---------- ----------
CASH, END OF PERIOD............................... $ -- $ -- $ -- $ -- $ --
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(a) Includes the cash flows of Merrill Chase galleries from June 1, 1997 (see
Note 9)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
Art Renaissance, Inc. and Subsidiaries (the "Company") markets original fine
art, limited edition sculptures and limited edition serigraphs, and promotes
artists through its twelve Company-owned galleries in premier destination cities
throughout the United States, operating under either Merrill Chase, Dyansen or
Galerie Renaissance names. The Company has also hosted auctions in cities
nationwide and maintains a website where it markets fine art, specialty
collectibles and related items. A substantial portion of inventory is produced
at the Company's foundry or under contract specifically for the Company.
OPERATING CYCLE
The period of time from the acquisition to the sale of certain inventory
customarily exceeds one year. Additionally, a portion of inventory is subject to
holding periods in excess of one year. Accordingly, the operating cycle of the
business is in excess of one year.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has experienced significant losses and negative
cash flows from operations for the years ended January 31, 1997, 1998 and 1999
and the six months ended July 31, 1999, which have resulted in a deficiency in
working capital of approximately $7,857,000 and a capital deficit of
approximately $7,494,000 as of July 31, 1999.
There can be no assurance that the Company will be able to continue as a
going concern in view of its weakened financial condition. The Company's
continued existence is dependent upon a capital infusion either through a
private placement or the successful completion of its contemplated initial
public offering (the "IPO"). Any inability to obtain additional financing will
have a material adverse effect on the Company, including possibly requiring the
Company to significantly contract or cease operations. The Company is dependent
upon the proceeds of the IPO to further develop its long-term business plan.
Until the IPO can be concluded, the Company will continue to seek financing for
working capital.
These factors raise substantial doubt about the ability of the Company to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated financial statements as of July 31, 1999 and for the six
months ended July 31, 1998 and 1999 are presented as unaudited but, in the
opinion of management, include all adjustments necessary to present fairly the
information set forth therein. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for a full year.
F-7
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories, consisting primarily of finished artwork, are valued at the
lower of cost (specific identification method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using accelerated
methods over prescribed periods for tax purposes and the straight-line method
for financial reporting purposes over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
---------------
<S> <C>
Furniture, fixtures and equipment............................................ 5-7
Leasehold improvements....................................................... Term of lease
</TABLE>
REVENUE RECOGNITION AND CUSTOMER DEPOSITS
Revenue is recognized after orders are (i) paid in full and (ii) merchandise
is either shipped to customers or available for pick up by customers. Customer
deposits included in current liabilities represent prepayments for merchandise
subject to orders on which sales have not yet been recorded.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
NET LOSS PER SHARE
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which provides for the calculation of "basic" and "diluted" earnings
(loss) per share. This statement is effective for financial statements issued
for periods ending after December 15, 1997. Basic earnings (loss) per share
includes no dilution and is computed by dividing income (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share reflects, in periods in which
they have a dilutive effect, the effect of common shares issuable upon exercise
of stock options. As required by this statement, all periods presented have been
restated to comply with the provisions of SFAS No. 128. The computation of basic
net income (loss) per share is based on the weighted average number of common
shares outstanding during the period. The common stock equivalents which would
arise from the exercise of warrants are excluded from calculation of diluted
income (loss) per share since their effect is anti-dilutive. Therefore, the
amounts reported for basic and diluted income (loss) per share are the same.
LONG-LIVED ASSETS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" as of January 1,
1996.
F-8
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
ACQUISITIONS
The net assets of businesses purchased are recorded at their fair value at
the acquisition date and the consolidated financial statements include their
operations from that date. Any excess of acquisition costs over the fair value
of identifiable net assets acquired is included in goodwill and is amortized on
a straight-line basis over its estimated useful life. As discussed in Note 9,
goodwill arising from the acquisition of the Merrill Chase galleries is
amortized over 30 years.
INCOME TAXES
The Company recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax bases of assets and liabilities at enacted statutory tax rates in effect for
the years in which the differences are expected to reverse. The Company has
provided a full valuation allowance for deferred tax assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including short-term notes
payable, long-term debt and amounts due to related parties, approximate fair
value as of January 31, and July 31, 1999 due to the relatively short maturities
of the instruments.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company adopted SFAS in 1998; however, as of July 31, 1999 there
were no components of comprehensive income for disclosure for any of the periods
presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of this
statement to have a significant impact on the Company's results of operations,
financial position or cash flows.
F-9
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------- JULY 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials....................................... $ 87,393 $ 40,194 $ 38,063
Work-in-process..................................... 490,804 389,577 271,910
Finished goods...................................... 7,241,418 6,040,356 6,781,845
------------ ------------ ------------
$ 7,819,615 $ 6,470,127 $ 7,091,818
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Finished goods consist primarily of sculptures, paintings and graphics. The
inventories are held as collateral in connection with the Company's short-term
notes payable and long-term debt (see Notes 4 and 5).
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------- JULY 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Furniture, fixtures and equipment................... $ 980,711 $ 1,150,030 $ 1,143,623
Leasehold improvements.............................. 2,051,450 2,200,854 2,237,354
------------ ------------ ------------
3,032,161 3,350,884 3,380,977
Less: Accumulated depreciation and amortization..... 1,442,262 2,063,865 2,441,557
------------ ------------ ------------
$ 1,589,899 $ 1,287,019 $ 939,420
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
4. SHORT-TERM NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------- JULY 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Notes payable--banks(a)............................. $ 4,514,932 $ 4,521,532 $ 2,128,534
Note payable(b)..................................... 400,000 400,000 400,000
Note payable(c)..................................... -- 790,000 790,000
------------ ------------ ------------
$ 4,914,932 $ 5,711,532 $ 3,318,534
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- ------------------------
(a) Represents short-term notes payable to banks which have been refinanced from
time to time and on which interest is payable monthly or quarterly at rates
ranging from 8.5% to prime plus 3.0%. On July 19, 1999, short-term notes
payable aggregating approximately $2,393,000 were repaid by the Chief
Executive Officer via cash of approximately $90,000 and proceeds from the
issuance of 511,867 shares of the Company's common stock, based on a price
of $4.50 per share.
Short term notes payable of approximately $1,629,000 and $500,000 are due in
December 1999 and January 2001, respectively. The notes are secured by
substantially all of the assets of the Company
F-10
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SHORT-TERM NOTES PAYABLE (CONTINUED)
and are guaranteed by the Chief Executive Officer and companies affiliated
with the Chief Executive Officer. In addition, the notes of approximately
$1,629,000 are further secured by the personal assets of the Company's Chief
Executive Officer and the note of approximately $500,000 is further secured
by the personal assets of a minority shareholder and Director of the
Company.
(b) Represents a short-term note payable that was originally signed in May 1997
and has been refinanced from time to time. The note currently bears interest
at 10% and is due on the earlier of the receipt by the Company of the
proceeds from the proposed IPO or March 2000. The note is guaranteed by the
Chief Executive Officer and is collateralized by personal assets of both the
Chief Executive Officer and companies affiliated with the Chief Executive
Officer. Accrued interest of approximately $71,000 was paid via the issuance
of the Company's common stock in September 1999 (see Note 5(b)).
(c) Represents a one-year note payable that was originally signed in May 1998.
The note currently bears interest at 11% and the Company is attempting to
negotiate an extension of the loan to provide for repayment on the earlier
of the receipt by the Company of the proceeds from the proposed IPO or June
2000.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------- JULY 31,
1998 1999 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Loan payable to bank in monthly installments of
$15,000 plus interest at 2.5% above the bank's
prime rate with a final payment of $905,000 due
on December 31, 1999 in accordance with
Amendment and Waiver Agreement signed July 30,
1999(a)........................................ $ 1,250,000 $ 1,070,000 $ 980,000
Notes payable with interest at 10% payable
quarterly(b)................................... 600,000 1,475,000 1,475,000
Amount payable under Merrill Chase acquisition
agreement with interest imputed at 10.5% plus
interest at 10% on late payments(c)............ 2,135,924 1,643,103 1,689,463
Other............................................ 26,164 4,959 --
------------- ------------- -------------
Total........................................ 4,012,088 4,193,062 4,144,463
Less: Current portion............................ (1,683,986) (4,193,062) (4,144,463)
------------- ------------- -------------
Long-term portion................................ $ 2,328,102 $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-11
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
- ------------------------
(a) The Amendment and Waiver Agreement provided for an increase in the interest
rate effective July 31, 1999 to prime plus 3%. The loan is secured by the
assets of the Company, as well as the personal assets of the Company's major
shareholder and Chief Executive Officer. It is also guaranteed by the Chief
Executive Officer.
(b) In September 1999, the Company entered into an agreement with one of the
note holders which provides for the repayment of $1,100,000 of the notes
from the proceeds of the proposed IPO and is attempting to negotiate a
similar settlement with the other holder of a note for $375,000. If the
offering does not occur within six months of the date of the Agreement, the
Company will be in default on these loans. The Company's major shareholder
and the Chief Executive Officer have guaranteed these notes and have pledged
certain assets to secure payment.
The agreements, including the agreement being negotiated, which encompass
the short-term note payable described in Note 4(c), provide for the payment
of interest of approximately $346,000 via the issuance in September 1999 of
53,205 shares of the Company's common stock. The agreements further provide
for the issuance in September 1999 of 188,016 shares of the Company's common
stock as satisfaction for the cancellation of all remaining outstanding
warrants held by the note holders. In September 1999, the Company incurred
an additional interest charge of $168,885 relating to these issuances.
(c) The liability for the consigned inventory (Notes 1 and 9) was guaranteed by
the Company's major shareholder and Chief Executive Officer. In January
1998, the amount payable under the acquisition agreement with MCM Limited
Partnership ("MCM") was modified to increase the amount of the installment
payments and reduce the remaining payment term from 54 months to 20 months.
As of January 31, 1999, the Company had not made the required payments under
the amended agreement. Accordingly, MCM filed a lawsuit against the
guarantor. The guarantor and MCM signed a Compromise Agreement on September
10, 1999, whereby the Company will pay weekly payments of $12,500 beginning
October 15, 1999 and such payments shall continue through January 28, 2000.
With the entire balance due on or before January 31, 2000, the compromise
amount is $1,933,606 and includes interest and plaintiff's legal fees of
approximately $211,000 and $60,000, respectively. The Company plans to pay
the balance due from the proceeds of the proposed IPO.
F-12
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DUE TO RELATED PARTIES
Due to related parties consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------- JULY 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Loan payable to Venture Funding Ltd. (a).......... $ 739,243 $ 776,198 $ --
Advances to Venture
Funding Ltd. (a)................................ 975,821 869,833 274,673
Note payable (b).................................. 1,202,137 1,328,868 1,151,865
Loan payable to Director nominee (f).............. 262,593 208,422 183,420
Note payable to Director nominee (h).............. -- -- 250,000
Note payable to Director (g)...................... -- -- 425,000
------------ ------------ ------------
Total......................................... 3,179,794 3,183,321 2,284,958
Less: Current portion............................. (50,004) (50,004) (475,004)
------------ ------------ ------------
Long-term portion................................. $ 3,129,790 $ 3,133,317 $ 1,809,954
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(a) Included in due to related parties at January 31, 1999 is approximately
$1,646,000 which is due to Venture Funding Ltd. and its subsidiary, which are
owned by the Chief Executive Officer of the Company. Of this amount,
approximately $776,000 represents interest-bearing loans at rates of prime plus
2% (approximately 10.5% at January 31, 1999).
Venture Funding Ltd. provides management services to the Company which
include consultation and direct management assistance with respect to strategic
planning, operations and other aspects of the business of the Company. Fees
billed to the Company amounted to $300,000 for each of the years ended January
31, 1997, 1998 and 1999, respectively and $150,000 for the six months ended July
31, 1999.
In February 1999, the Company repaid $200,000 of liabilities relating to
such services via the net issuance relating to the exercise of warrants to
purchase 232,553 shares of the Company's common stock.
In July 1999, liabilities aggregating approximately $1,615,000 were
converted into 358,953 shares of the Company's common stock.
(b) Represents a loan plus interest of approximately $1,329,000 at January
31, 1999 from a family member of the Chief Executive Officer of the Company. The
loan bears interest at prime plus 2%. The loan is due on the second anniversary
of the successful completion of the proposed IPO subject to prepayment on the
18th month anniversary of the successful completion of the proposed IPO, which
is subject to certain events.
(c) As described in Notes 4 and 5, short-term notes payable and long-term
debt plus accrued interest aggregating approximately $7,973,000 at July 31, 1999
is collateralized and guaranteed by the Chief Executive Officer of the Company.
(d) At July 31, 1999, the Chief Executive Officer of the Company has
guaranteed liabilities under contracts with various artists or their
representatives and vendors aggregating $635,000.
F-13
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DUE TO RELATED PARTIES (CONTINUED)
(e) In February 1999, the Company purchased inventories with fair market
value of $2,499,819 but is carried at $1,365,962 in the financial statements,
reflecting the transferor's historical cost of such inventories in exchange for
833,321 shares of the Company's common stock.
(f) The Company has a loan payable aggregating $208,422 and $183,420 at
January 31 and July 31, 1999, respectively, from a vendor whose president is a
Director-nominee of the Company. The loan payable relates to the purchase of art
and is payable in monthly installments of $4,167 through June 2003.
(g) In March 1999, the Company borrowed $425,000 from one of its Directors
for a sixty-day period. While all accrued interest has been paid, the Company
has not repaid the $425,000 principal and is therefore in default.
(h) In April 1999, the Company borrowed $250,000 from a vendor whose
president is a Director-nominee of the Company. The loan is due in April 2001,
with interest payable monthly at 19%.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases gallery, office, warehouse and manufacturing space under
noncancellable operating leases expiring at various dates through 2009. Certain
of these leases contain renewal options. Certain gallery leases provide for
contingent rents based on percentage of sales. Minimum rental commitments are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JANUARY 31, JULY 31,
- ------------------------------------------------------------ ------------- -------------
<S> <C> <C>
2000........................................................ $ 3,097,000 $ 1,610,000(a)
2001........................................................ 2,878,000 2,878,000
2002........................................................ 2,809,000 2,809,000
2003........................................................ 2,481,000 2,481,000
Thereafter.................................................. 6,847,000 6,847,000
------------- -------------
Total..................................................... $ 18,112,000 $ 16,625,000
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(a) Represents minimum lease commitments for the period August 1, 1999 through
January 31, 2000.
Leases provide for the payment of rent escalations and real estate taxes.
Total rent expense for the years ended January 31, 1997, 1998 and 1999 was
approximately $1,943,000, $2,873,000 and $3,516,000, respectively. Total rent
expense for the six months ended July 31, 1998 and 1999 was approximately
$1,734,000 and $1,738,000, respectively.
EMPLOYMENT AGREEMENTS
During September 1999, the Company executed employment contracts with two
senior executives for future services that vary in length up to four years, for
which the Company has a minimum commitment aggregating approximately $1 million.
F-14
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDINGS
From time to time the Company has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of business. Such
claims, even if lacking merit, could require the use of significant financial
and managerial resources.
MCM Limited Partnership ("MCM"), the prior owner of Merrill Chase galleries
filed a lawsuit in the Circuit Court of Cook County, Illinois on December 29,
1998 against the Chief Executive Officer, as guarantor of the Company's
obligations, alleging that as of January 31, 1999, the Company had not made the
required payment under the Asset Purchase and Consignment Agreement dated May
31, 1997, as amended on January 29, 1998 (the "Consignment Agreement"). Pursuant
to the Consignment Agreement, the liability for consigned inventory was
guaranteed by the Chief Executive Officer. On September 10, 1999, the Company
signed a compromise agreement with the Chief Executive Officer and MCM whereby
the Company will pay a compromise amount of $1,933,606 by January 31, 2000. The
Company plans to pay this amount from the proceeds of the initial public
offering.
In June 1999, a penalty judgment was entered in favor of the landlord at the
Company's former Beverly Hills gallery in the Superior Court of the State of
California for the amount of $360,000. The Company believes that it has defenses
against the enforcement of this judgement, but rather than litigating the
matter, a settlement has been reached in the amount of $65,000 and as of
September 30, 1999, $30,000 remains unpaid.
The landlord of the Company's San Francisco gallery filed a lawsuit in
Superior Court of California in June 1999 against a wholly-owned subsidiary of
the Company, for non-payment of rent. The Court granted the Company's Motion for
Summary Judgment and settlement discussions are being held.
The landlord for the Company's Hawaiian gallery filed a lawsuit in the
District Court of the Third Circuit, South Kohola Division State of Hawaii in
July 1999 against a wholly-owned subsidiary of the Company, for non-payment of
rent. The landlord is also claiming that the lease has been terminated. The
Company believes the lease does not expire until August 31, 2000. An October 3,
1999 trial date has been set and the Company will attempt to reach a settlement
before trial.
The landlord for the Company's Los Angeles warehouse filed a lawsuit in
Municipal Court of California in August 1999 against a wholly-owned subsidiary
of the Company for non-payment of rent. The case was scheduled for trial on
September 14, 1999 but was dismissed by the plaintiff upon the Company's payment
of outstanding rent.
The landlord for the Company's Soho New York gallery filed a lawsuit in
Civil Court of the City of New York against a wholly-owned subsidiary of the
Company, in August 1999 for non-payment of rent. The landlord has agreed to a
settlement whereby the arrears will be paid from the proceeds of this offering
or other sources by March 31, 2000.
In all landlord cases, the Company has included the liability for rent in
the financial statements. However, for matters not resolved, there is no
assurance that the Company will be able to maintain its presence in those
locations.
F-15
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
STOCK SPLIT
On September 24, 1999, the Company's Board of Directors approved a forward
split of the common stock. The financial statements retroactively reflect the
recording of the stock split as if it had occurred on February 1, 1996 and all
references in the consolidated financial statements to average number of shares
outstanding and per share amounts have been restated for all periods.
9. BUSINESS ACQUISITION
On May 31, 1997, the Company entered into an asset purchase and inventory
consignment agreement with MCM. The agreement provided that the Company purchase
certain assets, including the Merrill Chase galleries, for cash payment of
$1,020,586 plus the assumption of certain operating liabilities aggregating
$1,497,467. The agreement also provided for the consignment of the inventory to
the Company in exchange for guaranteed minimum payments of $2,791,581 over a
five-year period (Notes 1 and 5(c)).
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows:
<TABLE>
<S> <C>
Working capital................................................. $ 831,835
Property and equipment.......................................... 1,061,070
Goodwill........................................................ 943,373
Long-term debt.................................................. (1,815,692)
----------
$1,020,586
----------
----------
</TABLE>
The following unaudited pro forma summary presents consolidated results of
operations for the Company as if the acquisition had been consummated on
February 1, 1996. Pro forma adjustments primarily include additional
depreciation and amortization on excess purchase price allocated to property,
equipment and goodwill, and additional interest expense related to debt incurred
for the acquisition. The pro forma information does not necessarily reflect the
actual results that would have been achieved, nor is it necessarily indicative
of future consolidated results of the Company.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1997 1998
- -------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Sales......................................................... $ 21,996,245 $ 26,713,712
Loss before extraordinary gain................................ (4,056,262) (2,179,903)
Net loss...................................................... (275,189) (2,179,903)
Loss per share before extraordinary gain...................... ($1.57) ($.84)
Net loss per share (basic and diluted)........................ ($.11) ($.84)
</TABLE>
10. MAJOR SUPPLIERS
Purchases from one artist accounted for approximately 26%, 17% and 22% of
total art purchases for the years ended January 31, 1998 and 1999 and the six
months ended July 31, 1998, respectively. In addition, purchases from a second
artist accounted for approximately 13% of total art purchases during the six
months ended July 31, 1999.
F-16
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT
In March, 1996, the Company settled a loan with a financial institution for
the payment of $1,550,000, resulting in a gain on early extinguishment of debt
of $3,781,073.
12. INCOME TAXES
The Company reports the effects of income taxes under SFAS No. 109,
"Accounting for Income Taxes". The objective of income tax reporting is to
recognize (a) the amount of taxes payable or refundable for the current year
and, (b) deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the financial statements or tax returns.
Under SFAS No. 109, the measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized. Realization of deferred tax assets is
determined on a more-likely-than-not basis.
The Company considers all available evidence, both positive and negative, to
determine whether, based on the weight of that evidence, a valuation allowance
is needed for some portion or all of a net deferred tax asset. Judgment is used
in considering the relative impact of negative and positive evidence. In
arriving at these judgments, the weight given to the potential effect of
negative and positive evidence is commensurate with the extent to which it can
be objectively verified.
The Company had net deferred tax assets of approximately $4,391,000 at
January 31, 1999 primarily representing the tax consequences of benefits
attributable to net operating loss carryforwards. The Company has experienced
significant losses and negative cash flows from operations for the years ended
January 31, 1997, 1998 and 1999, which have resulted in a deficiency in working
capital of approximately $7,857,000 and a capital deficit of approximately
$7,494,000 as of July 31, 1999. In addition, there can be no assurance that the
Company will be able to continue as a going concern in view of its weakened
financial condition. Accordingly, the Company provided a valuation allowance
against its deferred tax assets for all periods presented.
Due to the Company's net operating loss carryforwards and the valuation
allowance provided against its deferred tax assets, no current or deferred
income tax provision has been provided for any of the periods presented.
A reconciliation of the Federal statutory rate to the provision for income
taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1997 1998 1999
- ----------------------------------------- ---------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes (recoveries)
computed at the statutory rate......... $ 367,010 35.0% $ (553,760) (35.0)% $ (1,272,500) (35.0)%
State income taxes, (recoveries) net of
Federal benefit........................ 45,090 4.3 (68,033) (4.3) (156,336) (4.3)
(Increase) decrease in valuation
allowance.............................. (414,660) (39.5) 617,584 39.0 1,417,929 39.0
Other.................................... 2,560 .2 4,209 .3 10,907 .3
----------- --------- ----------- --------- ------------- ---------
Total provision for
income taxes..................... $ -- --% $ -- --% $ -- --%
----------- --------- ----------- --------- ------------- ---------
----------- --------- ----------- --------- ------------- ---------
</TABLE>
F-17
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
12. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) at January 31, 1997, 1998 and 1999 are
comprised of the following elements:
<TABLE>
<CAPTION>
JANUARY 31, 1997 1998 1999
- ------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards................. $ 2,779,000 $ 3,113,000 $ 4,266,000
Depreciation and amortization.................... 56,000 113,000 123,000
Other............................................ -- 2,000 2,000
------------- ------------- -------------
Gross deferred tax assets........................ 2,835,000 3,228,000 4,391,000
Valuation allowance.............................. (2,835,000) (3,228,000) (4,391,000)
------------- ------------- -------------
Net deferred tax assets.......................... $ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At January 31, 1999, a valuation allowance has been provided against the
deferred tax assets since management cannot predict, based on the weight of
available evidence, that it is more likely than not that such assets will be
ultimately realized. The tax net operating loss carryforward of approximately
$12,188,000, if not utilized, will expire between 2008 and 2019. Internal
Revenue Code Section 382 provides for the limitation on the use of net operating
loss carryforwards in years subsequent to significant changes in ownership,
which limitations could significantly impact the Company's ability to utilize
its net operating loss carryforward. As a result of certain transactions,
including the Company's proposed IPO, changes in ownership may occur which might
result in limitations of the utilization of net operating loss carryforwards.
The extent of any limitations as a result of significant changes in ownership
has not been determined by the Company.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
------------------------------------ ----------------------
<S> <C> <C> <C> <C> <C>
1997 1998 1999 1998 1999
------------ ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(A) CASH PAID DURING THE PERIOD FOR:
Interest....................................... $ 263,151 $ 319,262 $ 645,292 $ 330,247 $ 363,561
Income taxes................................... -- -- -- -- --
(B) NONCASH FINANCING ACTIVITIES:
</TABLE>
As discussed in Note 11, in March 1996, the Company settled a loan with a
financial institution via the proceeds of a loan from a second financial
institution for $1,550,000.
As discussed in Note 9, in May 1997, the Company paid a portion of the purchase
price relating to the acquisition of MCM via the proceeds of a note payable for
$2,441,239.
As discussed in Note 6(a), in February 1999, amounts due to related parties were
paid via the issuance of 439,699 shares of the Company's common stock upon the
net issuance of outstanding stock warrants.
In February 1999, the Company issued 25,871 shares of the Company's common stock
as deferred financing costs valued at $22,250 to be recognized as expense upon
the successful completion of the proposed IPO.
F-18
<PAGE>
ART RENAISSANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED)
As discussed in Note 6(e) in February 1999, the Company purchased inventories
carried at $1,365,962 from the Chief Executive Officer of the Company in
exchange for 833,321 shares of the Company's common stock.
As discussed in Note 4(a), in July 1999, the Company repaid a portion of its
short-term notes payable via the issuance of 511,867 of the Company's common
stock valued at $2,303,400.
As discussed in Note 6(a), in July 1999, the Company repaid a portion of amounts
due to a related party via the issuance of 358,953 shares of the Company's
common stock valued at $1,615,289.
14. DEFINED CONTRIBUTION PLAN
The Company has a salary deferral plan (401(k)) for its employees. Because
of its losses to date, the Company has not made any matching contributions to
the plan.
15. SUBSEQUENT EVENTS
During August 1999, the Board of Directors of the Company adopted the 1999
Stock Option Plan. The Company has reserved 2,000,000 shares of common stock for
issuance under the Plan. In connection with an employment contract with a senior
executive, 60,000 options have been granted under the Plan.
F-19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
MCM Limited Partnership
Schaumburg, Illinois
We have audited the accompanying balance sheets of MCM Limited Partnership
as of January 31, 1996 and 1997, and the related statements of operations,
changes in partners' capital and cash flows for the years then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MCM Limited Partnership at
January 31, 1996 and 1997 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that MCM
Limited Partnership will continue as a going concern. As discussed in Note 2 to
the financial statements, the Partnership has suffered recurring losses from
operations that raise substantial doubt regarding the ability of MCM Limited
Partnership to continue as a going concern. Management's plans in regard to this
matter are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Chicago, Illinois
April 4, 1997, except for note 9, which is as of May 31, 1997
F-20
<PAGE>
MCM LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------- MAY 31,
1996 1997 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Assets (Note 6)
Current Assets
Cash.................................................................. $ 102,149 $ 408,335 $ 315,416
Accounts receivable................................................... 22,949 34,500 11,725
Miscellaneous receivables............................................. 11,569 5,483 19,240
Inventories........................................................... 4,753,401 4,419,528 4,133,492
Prepaid expenses...................................................... 309,040 260,596 90,743
------------ ------------ ------------
Total Current Assets.................................................... 5,199,108 5,128,442 4,570,616
------------ ------------ ------------
Properties, net (Note 5)................................................ 814,895 593,407 531,805
------------ ------------ ------------
Other Assets
Intangibles, net of accumulated amortization of $524,733, $609,141 and
635,649............................................................. 1,934,267 1,849,859 1,823,351
Deposits.............................................................. 100,548 88,548 73,986
------------ ------------ ------------
Total Other Assets...................................................... 2,034,815 1,938,407 1,897,337
------------ ------------ ------------
$ 8,048,818 $ 7,660,256 $ 6,999,758
------------ ------------ ------------
------------ ------------ ------------
Liabilities and Partners' Capital
Current Liabilities
Accounts payable...................................................... $ 265,230 $ 378,580 $ 261,741
Customers' deposits and credits....................................... 988,451 1,089,837 1,049,924
Gift certificates outstanding......................................... 47,869 77,425 59,717
Accrued liabilities................................................... 255,066 297,270 326,882
Liability due to lease abandonment--current portion................... 79,530 79,530 79,530
Notes payable (Note 6)................................................ 4,504,561 3,994,839 3,994,839
------------ ------------ ------------
Total Current Liabilities............................................... 6,140,707 5,917,481 5,772,633
Liability due to lease abandonment.................................... 263,084 124,115 64,642
------------ ------------ ------------
Total Liabilities....................................................... 6,403,791 6,041,596 5,837,275
------------ ------------ ------------
Commitments (Notes 7 and 8).............................................
Partners' Capital....................................................... 1,645,027 1,618,660 1,162,483
------------ ------------ ------------
$ 8,048,818 $ 7,660,256 $ 6,999,758
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
MCM LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS
JANUARY 31, ENDED MAY 31,
---------------------------- ----------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Sales............................................... $ 10,105,578 $ 10,649,784 $ 3,103,224 $ 3,292,101
Less refunds and exchanges.......................... 775,612 725,989 233,435 268,110
------------- ------------- ------------- -------------
Net sales........................................... 9,329,966 9,923,795 2,869,789 3,023,991
Cost of Sales....................................... 4,272,869 4,810,291 1,318,212 1,445,330
------------- ------------- ------------- -------------
Gross profit on sales............................... 5,057,097 5,113,504 1,551,577 1,578,661
Direct expenses..................................... 4,682,683 4,514,728 1,431,843 1,420,938
------------- ------------- ------------- -------------
Operating income before administrative expenses..... 374,414 598,776 119,734 157,723
Administrative expenses............................. 1,485,475 1,171,977 396,561 449,830
------------- ------------- ------------- -------------
Operating loss...................................... (1,111,061) (573,201) (276,827) (292,107)
------------- ------------- ------------- -------------
Other (Income) Expense
Interest income................................... (9,218) (5,882) -- (1,930)
Miscellaneous income.............................. (71,736) (31,562) -- --
Interest expense (Note 4)......................... 592,459 490,610 184,636 166,000
------------- ------------- ------------- -------------
Total other expenses................................ 511,505 453,166 184,636 164,070
------------- ------------- ------------- -------------
Net loss............................................ $ (1,622,566) $ (1,026,367) $ (461,463) $ (456,177)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
MCM LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS CAPITAL
<TABLE>
<CAPTION>
LIMITED
YEARS ENDED JANUARY 31, 1996 AND 1997 GENERAL LIMITED PREFERRED
AND THE FOUR MONTHS ENDED MAY 31, 1997 PARTNERSHIP PARTNERSHIP PARTNERSHIP TOTAL
- ------------------------------------------------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, February 1, 1995.............................. $ (37,460) $ (3,461,463) $ 4,716,516 $ 1,217,593
Capital Contribution................................... -- -- 2,050,000 2,050,000
Net Loss for the year.................................. -- -- (1,622,566) (1,622,566)
----------- ------------- ------------- -------------
Balance, January 31, 1996.............................. (37,460) (3,461,463) 5,143,950 1,645,027
Capital Contribution................................... -- -- 1,000,000 1,000,000
Net Loss for the year.................................. -- -- (1,026,367) (1,026,367)
----------- ------------- ------------- -------------
Balance, January 31, 1997.............................. (37,460) (3,461,463) 5,117,583 1,618,660
Net Loss for the four months (unaudited)............... -- -- (456,177) (456,177)
----------- ------------- ------------- -------------
Balance, May 31, 1997 (unaudited)...................... $ (37,460) $ (3,461,463) $ 4,661,406 $ 1,162,483
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
MCM LIMITED PARTNERSHIP
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
JANUARY 31, MAY 31,
---------------------------- ------------------------
<S> <C> <C> <C> <C>
1996 1997 1996 1997
------------- ------------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss............................................... $ (1,622,566) $ (1,026,367) $ (461,463) $ (456,177)
------------- ------------- ----------- -----------
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities
Gain from disposal of properties..................... (1,646) (4,725) -- --
Capitalized interest................................. 592,459 490,278 -- --
Depreciation and amortization........................ 551,370 330,312 133,873 89,988
(Increase) decrease in assets
Accounts receivable................................ 8,462 (11,551) 15,902 22,775
Miscellaneous receivables.......................... (7,018) 6,086 (18,509) (13,757)
Inventories........................................ 182,237 333,873 74,755 286,036
Prepaid expenses................................... (29,234) 48,444 (45,107) 169,853
Deposits........................................... (87,244) 12,000 (732) 14,562
Increase (decrease) in liabilities
Accounts payable................................... (158,411) 119,004 96,689 (116,839)
Customers' deposits/gift certificates.............. 48,144 130,942 122,871 (57,620)
Accrued liabilities................................ (63,358) 42,204 136,554 29,611
Liability due to lease abandonment................. (127,343) (138,969) (30,928) (59,472)
------------- ------------- ----------- -----------
Total adjustments.................................... 908,418 1,357,898 485,368 365,137
------------- ------------- ----------- -----------
Net cash provided by (used in) operating activities...... (714,148) 331,531 23,905 (91,040)
------------- ------------- ----------- -----------
Cash Flows From Investing Activities
Purchase of properties................................. (418,776) (30,345) (444) (1,879)
Proceeds on sale of fixed assets....................... 6,600 5,000 -- --
------------- ------------- ----------- -----------
Net cash used in investing activities.................... (412,176) (25,345) (444) (1,879)
------------- ------------- ----------- -----------
Cash Flows From Financing Activities
Capital contributions.................................. 800,000 -- -- --
------------- ------------- ----------- -----------
Net Increase (Decrease) in Cash.......................... (326,324) 306,186 23,461 (92,919)
Cash, beginning of period................................ 428,473 102,149 102,149 408,335
------------- ------------- ----------- -----------
Cash, end of period...................................... $ 102,149 $ 408,335 $ 125,610 $ 315,416
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Cash paid for
Interest............................................... -- -- -- --
Taxes.................................................. -- -- -- --
Supplemental disclosure of noncash financing activities
Conversion of liabilities to preferred partnership
capital............................................ $ 1,250,000 $ 1,000,000 -- --
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
MCM LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
1. Summary of A summary of the significant accounting policies utilized in the
Significant preparation of the accompanying financial statements follows.
Accounting Policies
Business MCM Limited Partnership (the "Partnership") operates in one
Description industry segment, the retail sale of various fine art. The
Partnership's products are sold through retail stores in the
Chicago, Illinois metropolitan area.
Inventories Inventories are stated at the lower of cost (specific
identification method) or market.
Properties Properties, which are stated at cost, are being depreciated or
amortized over the estimated useful lives of the assets on the
straight- line and accelerated methods. Leasehold improvements
are being amortized on a straight-line basis over the lives of
the respective leases. Repair and maintenance items are expensed
as incurred.
Intangibles Intangible assets are carried at cost less accumulated
amortization. Amortization is computed using the straight-line
method over an estimated useful life of 31.5 years.
Long-Lived Assets The Partnership reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. Any long-lived
assets held for disposal are reported at the lower of their
carrying amounts or fair value less cost to sell. Based upon the
Partnership's review for impairment, no adjustments to the
carrying value of long-lived assets was required for the years
ended January 31, 1996 and 1997 and the four months ended May 31,
1997.
Estimates The accompanying financial statements include estimated amounts
and disclosures based on management's assumptions about future
events. Actual results may differ from those estimates.
Income Taxes The net loss of the Partnership is taxed directly to the
partners, thus no income tax provision is provided for in these
financial statements.
Advertising Advertising costs are expensed as incurred and included in
"administrative expenses". Advertising expenses amounted to
approximately $674,000 and $641,000 for fiscal 1996 and 1997,
respectively, and approximately $203,000 and $195,000 for the
four months ended May 31, 1996 and 1997 respectively.
2. Going Concern The following conditions raise substantial doubt about the
Partnership's ability to continue as a going concern:
1) The Partnership has accumulated substantial losses for the
period from February 1, 1990 through May 31, 1997.
2) Unaudited financial information for the four months ended May
31, 1997 indicates losses are continuing.
</TABLE>
F-25
<PAGE>
MCM LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
In order to reduce costs, the Partnership is continuing its
efforts to reduce costs and expenses at all levels. The partners
and the majority partner of the Limited Partnership are unwilling
to commit to finance further substantial losses, and the
Partnership does not currently have alternative sources of
capital. The Partnership's ability to continue as a going concern
remains in doubt. As discussed in Note 9, the net assets of the
Partnership were sold to an independent third party.
3. Concentrations of The Partnership operates art galleries targeting middle- and
Credit Risk upper-class clientele in the metropolitan area of Chicago,
Illinois. Generally, art sold at the galleries is delivered to
customers only after full payment.
4. Related Parties During the years ended January 31, 1996 and 1997, and the four
months ended May 31, 1996 and 1997, the Partnership incurred
interest expense of approximately $592,000, $490,000, $185,000
and $166,000 respectively, with the majority partner of the
Limited Partnership.
During the years ended January 31, 1996 and 1997, the majority
partner of the Limited Partnership contributed portions of its
assets from the Partnership to the Limited Partnership, who in
turn contributed these assets to the Partnership in exchange for
additional limited preferred partnership interest. This interest
is preferred over the other partnership interests as to profits,
losses and operating and dissolution distributions as specified
in the partnership agreement. At January 31, 1996 and 1997, the
Partnership had issued preferred limited partnership interests
totalling $21,995,000 and $22,995,000, respectively.
5. Properties Depreciation and amortization of properties amounted to $341,962
and $245,904 for the years ended January 31, 1996 and 1997, and,
$105,760 and $63,481 for the four months ended May 31, 1996 and
1997 respectively.
The following is a summary of properties and related accumulated
depreciation and amortization at:
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, MAY 31,
-------------------------- ------------
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C> <C>
Construction-in-progress............... $ 911 -- 1,878
Furniture and equipment................ 1,318,431 1,317,361 1,317,361
Vehicles............................... 25,493 27,531 27,552
Leasehold improvements................. 1,426,995 1,426,995 1,426,995
------------ ------------ ------------
$ 2,771,830 $ 2,771,907 $ 2,773,786
Accumulated Depreciation and
Amortization 1,956,935 2,178,500 2,241,981
------------ ------------ ------------
$ 814,895 $ 593,407 $ 531,805
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-26
<PAGE>
MCM LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
6. Notes Payable The notes payable are secured by all assets of the Partnership
and are due on demand. Interest is payable at prime plus 2%
(prime was 8.25% and 8.5% at January 31, 1996 and 1997,
respectively). One of the notes has related credit and security
agreements which contain various covenants, all of which have
been met.
7. Commitments The Partnership leases administrative facilities and four retail
facilities under noncancelable operating leases expiring at
various dates through 2003.
The future minimum rental payments required under these leases,
which have initial or remaining noncancelable lease terms in
excess of one year are as follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDING, JANUARY 31, MAY 31,
-------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
1998.............................................. $ 1,187,930 $ 803,263(a)
1999.............................................. 1,096,500 1,096,506
2000.............................................. 901,980 901,980
2001.............................................. 901,980 901,980
2002.............................................. 804,962 804,962
Thereafter........................................ 373,184 373,184
------------ ------------
Total............................................. $ 5,266,536 $ 4,881,869
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<S> <C>
(a) Represents minimum lease commitments for the period June 1,
1997 through January 31, 1998.
The leases require the Partnership to pay an allocated portion of
real estate taxes, operating costs of common areas and other
expenses. The leases for the retail locations also require payment
of monthly dues and fees to tenants' associations and participation
in certain joint advertising and promotional expenditures.
Additional rent is assessed based on a percentage of sales
established for each retail location over a base amount established
in each lease. Rent expense, including the above, amounted to
$1,365,433 and $1,325,076 for the years ended January 31, 1996 and
1997, and $446,064 and $436,300 or for the four months ended May
31, 1996 and 1997 respectively.
8. Employee Benefit The Partnership maintains a defined contribution profit-sharing
Plan plan for the benefit of substantially all employees. The plan
allows employee contributions under a deferred compensation
arrangement (401(k)). The plan provides for employer discretionary
profit-sharing and 401(k) bonus contributions and employer
discretionary matching contributions. There were no partnership
contributions for the years ended January 31, 1996 and 1997 or, for
the four months ended May 31, 1997.
</TABLE>
F-27
<PAGE>
MCM LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
<TABLE>
<S> <C>
9. Subsequent Event On May 31, 1997 the Partnership sold its net assets to Art
Renaissance, Inc. for $1,020,586 plus the assumption of certain
operating liabilities aggregating $1,497,467 and guaranteed minimum
payments of $2,791,581 over a five year period.
</TABLE>
F-28
<PAGE>
[INSIDE BACK COVER: ART TO COME.
The following text appears on the inside back cover:
Commitment to Excellence
A R T R E N A I S S A N C E , I N C.
P h i l o s o p h y
ART RENAISSANCE, INC., THROUGH ITS E-COMMERCE SALES AND THROUGH ITS DYANSEN,
MERRILL CHASE AND GALERIE RENAISSANCE GALLERIES, IS COMMITTTED TO PROVIDING ALL
OF OUR COLLECTORS THE EXPERIENCE OF ENJOYING LEARNING ABOUT, AND ACQUIRING THE
BEST IN FINE AND POPULAR ART.
M i s s i o n
FOR E-COMMERCE SALES AND DYANSEN, MERRILL CHASE AND GALERIE RENAISSANCE
GALLERIES TO BE KNOWN AS THE PREMIERE NATIONAL ART GALLERY COMPANY WITH
UNPARALLELED VALUES IN ART, OUTSTANDING CLIENT SERVICE AND 100 PERCENT CUSTOMER
SATISFACTION.
THIS IS PROVIDED THROUGH OUR EXPERIENCED SALES CONSULTANTS, TOGETHER WITH ALL
OPERATIONAL AND ADMINISTRATIVE BRANCHES OF THE COMPANY. EACH COLLECTOR'S ART
NEEDS ARE SATISFIED THROUGH OUR WIDE SELECTION OF THE HIGHEST QUALITY 19th AND
20th CENTURY MASTER WORKS AND CONTEMPORARY PAINTINGS, SCULPTURE AND GRAPHICS
PRESENTED IN RELAXED, EDUCATIONAL AND CONVENIENT GALLERY LOCATIONS, IN THE
COUNTRY'S MOST EXCITING VENUES.
V i s i o n
TO BE KNOWN AND VALUED AS AMERICA'S PREMIERE ART COMPANY.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON
ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO
SELL ONLY THE SHARES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN
JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 7
USE OF PROCEEDS........................................................... 16
DIVIDEND POLICY........................................................... 16
CAPITALIZATION............................................................ 17
DILUTION.................................................................. 18
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 20
BUSINESS.................................................................. 25
MANAGEMENT................................................................ 33
PRINCIPAL STOCKHOLDERS.................................................... 38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 39
DESCRIPTION OF SECURITIES................................................. 42
SHARES ELIGIBLE FOR FUTURE SALE........................................... 43
PLAN OF DISTRIBUTION...................................................... 46
LEGAL MATTERS............................................................. 48
EXPERTS................................................................... 48
ADDITIONAL INFORMATION.................................................... 48
INDEX TO FINANCIAL STATEMENTS............................................. F-1
- ------------------------------
Through and including , 1999 (the 25(th) day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an Underwriter and with respect to an unsold allotment or
subscription.
</TABLE>
3,400,000 SHARES
ART RENAISSANCE, INC.
COMMON STOCK
-------------------
[LOGO]
-------------------------
AUERBACH, POLLAK & RICHARDSON, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Art Renaissance in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fees and the NASDAQ National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC Registration Fee................................................... $ 12,867
NASD Fee............................................................... $ 5,128
NASDAQ National Market Initial Listing Fee............................. $ 72,875
Printing and Engraving................................................. $ 150,000
Legal Fees and Expenses................................................ $ 250,000
Accounting Fees and Expenses........................................... $ 75,000
Transfer Agent Fee..................................................... $ 5,000
Miscellaneous.......................................................... $ 29,130
-----------------
TOTAL.................................................................. $ 600,000
-----------------
-----------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents and in agreements between the corporation and
its Directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Art Renaissance's Amended and Restated Certificate of Incorporation to be
filed in connection with the offering, provides for indemnification of Directors
to the fullest extent permitted under Delaware Law.
The By-Laws of Art Renaissance provides for the indemnification of all
persons who Art Renaissance is empowered to indemnify pursuant to Section 145 of
the Delaware General Corporation Law to the fullest extent permitted under
Delaware Law.
Delaware Law permits Art Renaissance to purchase and maintain insurance on
behalf of any Director, officer, employee or agent of Art Renaissance against
any liability asserted against or incurred by them in such capacity or arising
out of their status as such whether or not Art Renaissance would have the power
to indemnify such Director, officer, employee or agent against such liability
under the applicable provisions of Delaware Law, the Amended and Restated
Certificate of Incorporation or the By-Laws.
The general effect of the foregoing provisions is to reduce the
circumstances in which an officer or Director may be required to bear the
economic burdens of the foregoing liabilities and expenses.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since 1996 Art Renaissance has sold and issued the following securities:
1. As of February 28, 1999, Art Renaissance issued 833,321 shares of common
stock at $3.00 per share to one accredited investor for aggregate
consideration of an exchange of inventory valued at approximately
$2,500,000. The issuance of the shares of common stock was made in a
transaction
II-1
<PAGE>
exempt from registration under the Securities Act of 1933 in reliance on
Section 4(2) of the Securities Act of 1933 as transactions by an issuer not
involving any public offering.
2. On July 17, 1999, Art Renaissance issued 511,867 shares of common stock at
$4.50 per share to an accredited investor in exchange for the elimination of
approximately $2,300,000 in loans due to the recipients of the shares. The
issuance of the shares of common stock was made in a transaction exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2) of
the Securities Act of 1933 as transactions by an issuer not involving any
public offering.
3. On March 22, 1996, Art Renaissance issued a warrant to purchase 207,146
shares of common stock at $.86 per share to one accredited investor in
exchange for the elimination of approximately $178,150 in loans due to the
recipient of the warrant. The issuance of the warrant to purchase shares of
common stock was made in a transaction exempt from registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act of
1933 as transactions by an issuer not involving any public offering.
4. On Feburary 1, 1999, Art Renaissance issued 25,871 share of common stock at
$4.50 per share to Leonard Toboroff. The issuance of the shares of common
stock was made in a transaction exempt from registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act of
1933 as transactions by an issuer not involving any public offering.
5. On February 1, 1999, Art Renaissance issued 4,000 warrants to purchase
232,553 shares of common stock at $.86 per share to Mr. Schuster in exchange
for the elimination of approximately $200,000 in loans due to the recipient
of the warrant. The issuance of the warrant to purchase shares of common
stock was made in a transaction exempt from registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act of
1933 as transactions by an issuer not involving any public offering.
6. On July 17, 1999, Art Renaissance issued 358,953 shares of common stock at
$4.50 per share to a related party in exchange for the elimination of
approximately $1,615,287 in loans due to the recipient of the shares. The
issuance of the shares of common stock was made in a transaction exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2) of
the Securities Act of 1933 as transactions by an issuer not involving any
public offering.
7. On September 24, 1999, Art Renaissance issued 45,154 shares of common stock
at $7.20 per share to Willora in exchange for the elimination of
approximately $71,000 in accrued interest on the $500,000 loan due to
Willora and for cancellation of outstanding warrants. The issuance of the
shares of common stock was made in a transaction exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) of the
Securities Act of 1933 as transactions by an issuer not involving any public
offering.
8. On September 24, 1999, Art Renaissance issued 22,603 shares of common stock
at $7.20 per share to Gross in exchange for the elimination of approximately
$50,000 in accrued interest on the $375,000 loan due to Gross and for
cancellation of outstanding warrants. The issuance of the shares of common
stock was made in a transaction exempt from registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act of
1933 as transactions by an issuer not involving any public offering.
9. On September 24, 1999, Art Renaissance issued 142,668 shares of common stock
at $7.20 per share to Willora in exchange for the elimination of
approximately $225,000 in accrued interest on the loans dated May 2, 1997
for the principal amount of $600,000 and May 25, 1997 for the principal
amount of $400,000, to Willora and for cancellation of outstanding warrants.
The issuance of the shares of common stock was made in a transaction exempt
from registration under the Securities Act of 1933 in reliance on Section
4(2) of the Securities Act of 1933 as transactions by an issuer not
involving any public offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
3.1+ Amended Restated Certificate of Incorporation of the Registrant
3.2+ Amended and Restated By-Laws of the Registrant
4.1+ Specimen Certificate of the Registrant's common stock
4.2 See Exhibit 3.1 for provisions of the Registrant's Amended and Restated
Articles of Incorporation defining the rights of the holders of common
stock
4.3 See Exhibit 3.2 for provisions of the Registrant's By-Laws defining the
rights of holders of common stock
4.4 Form of Underwriters Warrant
5.1+ Opinion of Morrison Cohen Singer & Weinstein, LLP, counsel to the
Registrant
10.1+ 1999 Stock Option Plan
10.2 Asset Purchase and Consignment Agreement by and among MCM Limited
Partnership (d/b/a Merrill Chase Galleries and Gallery Lara), Art
Renaissance, Inc. and Art Renaissance Chicago, Inc., dated as of May 31,
1997
10.3 Amendment No. 1 to the Asset Purchase and Consignment Agreement dated
January 29, 1998
10.4 Letter Agreement between Razorfish San Francisco, Inc. and Art Renaissance,
Inc. dated August 31, 1999
10.5+ Employment Agreement dated September 8, 1999 between the Registrant and
Eugene I. Schuster
10.6+ Employment Agreement between Art Renaissance, Inc. and Hoon Won
10.7 Compromise Agreement dated September 10, 1999 among Eugene I. Schuster and
MCM Limited Partnership
10.8 Loan Agreement dated March 29, 1996 among Art Renaissance, Inc. and Bank of
Bloomfield Hills
10.9+ Loan Agreement dated October 14, 1996 among Art Renaissance, Inc. and Bank
of Bloomfield Hills
10.10 Loan Agreement dated February 6, 1997 between Art Renaissance, Inc. and
Bank of Bloomfield Hills
10.11 Convertible Debenture dated May 2, 1997 among Art Renaissance, Inc. and
Willora Company, Inc.
10.12 Loan Agreement dated October 30, 1997 among Art Renaissance, Inc. and Bank
of Bloomfield Hills
10.13 Promissory Note dated May 25, 1997 among Art Renaissance, Inc. and Willora
Company, Ltd.
10.14 Convertible Debenture dated January 30, 1998 among Art Renaissance, Inc.
and Willora Company, Inc.
10.15 Promissory Note dated March 9, 1998 among Art Renaissance, Inc. and HDA
Homecare Pension Fund
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.16 Convertible Debenture dated April 10, 1998 among Art Renaissance, Inc. and
Gross Foundation, Inc.
10.17 Promissory Note dated September 18, 1998 among the Bank of Bloomfield Hills
and Art Renaissance, Inc.
10.18 Reimbursement Agreement dated December 14, 1998 among Art Renaissance,
Inc., Art Renaissance Chicago, Inc., Eugene I. Schuster, Venture Funding,
Ltd., Growth Realty, Inc., Growth Funding, Ltd., Growth Realty Holdings,
LLC and Adam Schuster
10.19 Promissory note dated December 15, 1998 among Adam Schuster and Art
Renaissance, Inc.
10.20 Amendment and Waiver Agreement dated July 30, 1999 among Bank of Bloomfield
Hills, Art Renaissance, Inc., Eugene I. Schuster, Venture Funding, Ltd.,
Venture Funding Holdings, Ltd., Growth Realty, Inc., Growth Realty
Holdings, L.L.C. and John E. McConnaughy
21.1 List of Subsidiaries of the Registrant
Art Renaissance Chicago, Inc.
Dyansen Fine Art Auction, Inc.
Art Renaissance Boston, Inc.
Art Renaissance California, Inc.
Art Renaissance Eclipse, Inc.
Art Renaissance Foundry, Inc.
Art Renaissance Los Angeles, Inc.
Art Renaissance New York, Inc.
Art Renaissance Hawaii, Inc.
23.1 Consents of BDO Seidman, LLP, independent certified public accountants
23.2+ Consent of Morrison Cohen Singer & Weinstein, LLP, counsel to the
Registrant Reference is made to Exhibit 5.1
24.1 Power of Attorney. On page II-5
27.1 Financial Data Schedule
</TABLE>
- ------------------------
+ To be supplied by amendment
B. FINANCIAL STATEMENT SCHEDULE
Schedules not listed above have been omitted because the information
required to be shown therein is not applicable or is shown in the financial
statements or notes thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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
of 1933, 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 of 1933 and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933
shall be deemed to be part of this registration statement as of the
time it was declared effective.
2. For the purpose of determining any liability under the Securities Act
of 1933, 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, County of
New York, State of New York, on the 1st day of October, 1999.
ART RENAISSANCE, INC.
By:
-----------------------------------------
Eugene I. Schuster, President, Chief
Executive Officer and Chairman of the
Board.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Eugene I.
Schuster his true and lawful attorney-in-fact and agent, each acting along, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Registration Statement, and to sign and
registration statement filed under Rule 462 under the Securities Act of 1933
including post-effective amendments thereto, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, each acting alone, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dated indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JOHN E. MCCONNAUGHY, JR.
- ------------------------------ Director October 1, 1999
John E. McConnaughy, Jr.
Vice President and Chief
/s/ JOHN M. ADDARIO Financial Officer
- ------------------------------ (principal accounting October 1, 1999
John M. Addario and financial officer)
President, Chief Executive
/s/ EUGENE I. SCHUSTER Officer, and Chairman of
- ------------------------------ the Board and (principal October 1, 1999
Eugene I. Schuster executive officer)
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1+ Amended Restated Certificate of Incorporation of the Registrant
3.2+ Amended and Restated By-Laws of the Registrant
4.1+ Specimen Certificate of the Registrant's common stock
4.2 See Exhibit 3.1 for provisions of the Registrant's Amended and Restated Articles of
Incorporation defining the rights of the holders of common stock
4.3 See Exhibit 3.2 for provisions of the Registrant's By-Laws defining the rights of holders of
common stock
4.4 Form of Underwriters Warrant
5.1+ Opinion of Morrison Cohen Singer & Weinstein, LLP, counsel to the Registrant
10.1+ 1999 Stock Option Plan
10.2 Asset Purchase and Consignment Agreement by and among MCM Limited Partnership (d/b/a Merrill
Chase Galleries and Gallery Lara), Art Renaissance, Inc. and Art Renaissance Chicago, Inc.,
dated as of May 31, 1997
10.3 Amendment No. 1 to the Asset Purchase and Consignment Agreement dated January 29, 1998
10.4 Letter Agreement between Razorfish San Francisco, Inc. and Art Renaissance, Inc. dated August
31, 1999
10.5+ Employment Agreement dated September 8, 1999 between the Registrant and Eugene I. Schuster
10.6+ Employment Agreement between Art Renaissance, Inc. and Hoon Won
10.7 Compromise Agreement dated September 10, 1999 among Eugene I. Schuster and MCM Limited
Partnership
10.8 Loan Agreement dated March 29, 1996 among Art Renaissance, Inc. and Bank of Bloomfield Hills
10.9+ Loan Agreement dated October 14, 1996 among Art Renaissance, Inc. and Bank of Bloomfield Hills
10.10 Loan Agreement dated February 6, 1997 between Art Renaissance, Inc. and Bank of Bloomfield Hills
10.11 Convertible Debenture dated May 2, 1997 among Art Renaissance, Inc. and Willora Company, Inc.
10.12 Loan Agreement dated October 30, 1997 among Art Renaissance, Inc. and Bank of Bloomfield Hills
10.13 Promissory Note dated May 25, 1997 among Art Renaissance, Inc. and Willora Company, Ltd.
10.14 Convertible Debenture dated January 30, 1998 among Art Renaissance, Inc. and Willora Company,
Inc.
10.15 Promissory Note dated March 9, 1998 among Art Renaissance, Inc. and HDA Homecare Pension Fund
10.16 Convertible Debenture dated April 10, 1998 among Art Renaissance, Inc. and Gross Foundation,
Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
10.17 Promissory Note dated September 18, 1998 among the Bank of Bloomfield Hills and Art Renaissance,
Inc.
10.18 Reimbursement Agreement dated December 14, 1998 among Art Renaissance, Inc., Art Renaissance
Chicago, Inc., Eugene I. Schuster, Venture Funding, Ltd., Growth Realty, Inc., Growth Funding,
Ltd., Growth Realty Holdings, LLC and Adam Schuster
10.19 Promissory note dated December 15, 1998 among Adam Schuster and Art Renaissance, Inc.
10.20 Amendment and Waiver Agreement dated July 30, 1999 among Bank of Bloomfield Hills, Art
Renaissance, Inc., Eugene I. Schuster, Venture Funding, Ltd., Venture Funding Holdings, Ltd.,
Growth Realty, Inc., Growth Realty Holdings, L.L.C. and John E. McConnaughy
21.1 List of Subsidiaries of the Registrant on page II-4
23.1 Consents of BDO Seidman, LLP, independent certified public accountants
23.2 Consent of Morrison Cohen Singer & Weinstein, LLP, counsel to the Registrant
Reference is made to Exhibit 5.1
24.1 Power of Attorney. On page II-6
27.1 Financial Data Schedule
</TABLE>
- ------------------------
+ To be supplied by amendment
<PAGE>
Exhibit 1.1
3,400,000 Shares of Common Stock
ART RENAISSANCE, INC.
UNDERWRITING AGREEMENT
______ _____, 1999
<PAGE>
Auerbach, Pollak & Richardson, Inc. _____ ___, 1999
450 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
Art Renaissance, Inc., a Delaware corporation (the "Company"), hereby
agrees with Auerbach, Pollak & Richardson, Inc. (hereinafter "you" or the
"Underwriter") with respect to the sale by the Company and the purchase by the
Underwriter of an aggregate of 3,400,000 shares (the "Shares") of the Company's
common stock, par value $.01 per share (the "Common Stock"). Such 3,400,000
Shares are referred to hereinafter as the "Firm Shares." Upon your request, as
provided in Section 2(b) of this Agreement, the Company shall also issue and
sell to the Underwriter up to an additional aggregate of 510,000 shares of
Common Stock for the purpose of covering over-allotments, if any. Such shares of
Common Stock are hereinafter referred to as the "Option Shares." The Company
also proposes to issue and sell to you warrants (the "Underwriter's Warrants")
pursuant to the Underwriter's Warrant Agreement (the "Underwriter's Warrant
Agreement") for the purchase of an additional 238,000 shares of Common Stock.
The shares of Common Stock issuable upon exercise of the Underwriter's Warrants
are hereinafter referred to as the "Underwriter's Shares." The Firm Shares,
Option Shares, the Underwriter's Warrants and the Underwriter's Shares are more
fully described in the Registration Statement and the Prospectus referred to
below.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriter as of the date hereof, and as
of the Closing Date and the Option Closing Date, if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-______), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Firm Shares, the Option Shares, the Underwriter's Warrants and the
Underwriter's Shares (collectively, hereinafter referred to as the "Registered
Securities") under the Securities Act of 1933, as amended (the "Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act, and the Regulations (as
defined below) of the Commission under the Act. The Company will not file any
other amendment thereto to which the Underwriter shall have objected in writing
after having been furnished with a copy thereof. Except as the context may
otherwise require, such registration statement, as amended, on file with the
Commission at the time the registration statement becomes effective (including
the prospectus, financial statements, schedules, exhibits and all other
documents filed as a part thereof or incorporated therein and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430(A) of the Regulations), is hereinafter called the "Registration Statement,"
and the form of prospectus in the form first filed with the Commission
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pursuant to Rule 424(b) of the Regulations, is hereinafter called the
"Prospectus." For purposes hereof, "Regulations" mean the rules and regulations
adopted by the Commission under either the Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as applicable. [Also included in the
Registration Statement are [insert security] (collectively defined as the
"Selling Stockholder Securities"), all of which are held by certain stockholders
(the "Selling Stockholders") of the Company.]
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus and no proceedings for a stop order
suspending the effectiveness of the Registration Statement have been instituted,
or, to the Company's knowledge, are threatened. Each of the Preliminary
Prospectus, the Registration Statement and the Prospectus at the time of filing
thereof conformed in all material respects with the requirements of the Act and
Regulations, and none of the Preliminary Prospectus, the Registration Statement
or the Prospectus at the time of filing thereof contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to statements made in reliance upon
and in conformity with written information furnished to the Company with respect
to the Underwriter by or on behalf of the Underwriter expressly for use in such
Preliminary Prospectus, Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined in Section 2(c)
hereof) and each Option Closing Date (as defined in Section 2(b) hereof), if
any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriter or a dealer, the
Registration Statement and the Prospectus, as amended or supplemented as
required, will contain all statements which are required to be stated therein in
accordance with the Act and the Regulations, and will conform in all material
respects to the requirements of the Act and the Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will 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 circumstances under which they were made,
not misleading, provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
conformity with information furnished to the Company in writing by or on behalf
of the Underwriter expressly for use in the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto.
(d) The Company and each of its subsidiaries, if any, have been duly
organized and are validly existing as corporations in good standing under the
laws of the respective states of their incorporation. The Company does not own
or control, directly or indirectly, any corporation, partnership, trust, joint
venture or other business entity other than the subsidiaries listed in Exhibit
21 of the Registration Statement, if any. Each of the Company and its
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subsidiaries is duly qualified and licensed and in good standing as a foreign
corporation (or other form of entity) in each jurisdiction in which its
ownership or leasing of any properties or the character of its operations
require such qualification or licensing. Each of the Company and its
subsidiaries has all requisite power and authority (corporate and other), and
has obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having jurisdiction
over environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company and each of its
subsidiaries have been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal, state, local and foreign laws, rules and regulations,
except where a failure to comply would not, singly or in the aggregate,
materially and adversely affect the condition, financial or otherwise, or the
business affairs, properties or results of operations of the Company and its
subsidiaries, taken as a whole; and neither the Company nor any of its
subsidiaries have received any notice of proceedings relating to the revocation
or modification of any such authorization, approval, order, license,
certificate, franchise, or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the business affairs,
operations, properties, or results of operations of the Company and its
subsidiaries, taken as a whole. The disclosures in the Registration Statement
concerning the effects of federal, state, local, and foreign laws, rules and
regulations on the Company's business as currently conducted and as contemplated
are correct in all material respects and do not omit to state a material fact
necessary to make the statements contained therein not misleading in light of
the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the headings
"Capitalization" and "Description of Securities" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option Closing
Date, if any, based upon the assumptions set forth therein, and the Company is
not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
Registered Securities[, the Selling Stockholder Securities] and all other
securities issued or issuable by the Company conform or, when issued and paid
for, will conform, in all material respects to all statements with respect
thereto contained in the Registration Statement and the Prospectus. All issued
and outstanding shares of capital stock of each subsidiary of the Company have
been duly authorized and validly issued and are fully paid and nonassessable.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company and the related notes thereto included in the
Prospectus, neither the Company nor any subsidiary has outstanding any options
to purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. The description of the Company's
stock option, stock bonus and other stock plans or arrangements and the options
or other rights granted and exercised thereunder as set forth in the Prospectus
conforms in all material respects with the requirements
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<PAGE>
of the Act. All issued and outstanding securities of the Company have been duly
authorized and validly issued and are fully paid and non-assessable, and the
holders thereof have no rights of rescission with respect thereto and are not
subject to personal liability by reason of being such holders; and 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.
(f) The Registered Securities are not and will not be subject to any
preemptive or other similar rights of any stockholder, have been duly authorized
and, when issued, paid for and delivered in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable and will conform in all
material respects to the description thereof contained in the Prospectus; the
holders thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the Registered Securities has been duly and validly taken; and the certificates
representing the Registered Securities will be in due and proper form. Upon the
issuance and delivery pursuant to the terms hereof of the Registered Securities
to be sold by the Company hereunder, the Underwriter will acquire good and
marketable title to such Registered Securities free and clear of any lien,
charge, claim, encumbrance, pledge, security interest, defect, or other
restriction or equity of any kind whatsoever. [Except for the Selling
Stockholders,] [N]o stockholder of the Company has any right which has not been
waived in writing to require the Company to register the sale of any shares
owned by such stockholder under the Act in the public offering contemplated by
this Agreement. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the issuance and sale of
the Shares, the Option Shares, the Underwriter's Warrants and the Underwriter's
Shares to be sold by the Company as contemplated herein.
(g) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, changes in stockholders' equity and the results of operations of the
Company at the respective dates and for the respective periods to which they
apply and such financial statements have been prepared in conformity with
generally accepted accounting principles and the Regulations, consistently
applied throughout the periods involved. There has been no material adverse
change or development involving a material prospective change in the condition,
financial or otherwise, or in the business, affairs, operations, properties, or
results of operation of the Company and its subsidiaries taken as a whole
whether or not arising in the ordinary course of business since the date of the
financial statements included in the Registration Statement and the Prospectus
and the outstanding debt, the property, both tangible and intangible, and the
business of the Company and its subsidiaries taken as a whole conform in all
material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus. Financial information set forth in the Prospectus
under the headings "Prospectus Summary - Summary of Financial Information,"
"Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," fairly present, on the basis stated in the
Prospectus, the information set forth therein and have
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<PAGE>
been derived from or compiled on a basis consistent with that of the audited
financial statements included in the Prospectus.
(h) The Company (i) has paid all federal, state, local, franchise,
and foreign taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through 24 of the
Internal Revenue Code of 1986, as amended (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it.
(i) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriter in connection with (i) the issuance by the
Company of the Registered Securities, (ii) the purchase by the Underwriter of
the Registered Securities from the Company and the purchase by the Underwriter
of the Underwriter's Warrants from the Company, (iii) the consummation by the
Company of any of its obligations under this Agreement, or (iv) resales of the
Registered Securities by the Underwriter in connection with the distribution
contemplated hereby.
(j) There is no action, suit, proceeding, inquiry, arbitration,
mediation, investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or circumstances
that may give rise to the same), or involving the properties or businesses of,
the Company which (i) questions the validity of the capital stock of the
Company, this Agreement or the Underwriter's Warrant Agreement, or of any action
taken or to be taken by the Company pursuant to or in connection with this
Agreement or the Underwriter's Warrant Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are accurately
summarized in all material respects), or (iii) might materially and adversely
affect the condition, financial or otherwise, or the business, affairs,
position, stockholders' equity, operation, properties, or results of operations
of the Company and its subsidiaries taken as a whole.
(k) The Company has the corporate power and authority to authorize,
issue, deliver, and sell the Registered Securities and to enter into this
Agreement and the Underwriter's Warrant Agreement, and to consummate the
transactions provided for in such agreements; and this Agreement and the
Underwriter's Warrant Agreement have each been duly and properly authorized,
executed, and delivered by the Company. Each of this Agreement and the
Underwriter's Warrant Agreement constitutes a legal, valid and binding agreement
of the Company enforceable against the Company in accordance with its respective
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law), and none of the
Company's issue and sale of the Registered Securities, execution, delivery or
performance of this Agreement
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<PAGE>
and the Underwriter's Warrant Agreement, its consummation of the transactions
contemplated herein and therein, or the conduct of its businesses as described
in the Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of (i) the
articles of incorporation or by-laws of the Company, as amended and restated,
(ii) any license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or by which it is or may
be bound or to which its properties or assets (tangible or intangible) is or may
be subject, or any indebtedness, or (iii) any statute, judgment, decree, order,
rule or regulation applicable to the Company of any arbitrator, court,
regulatory body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the Company of
any of their activities or properties.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Registered Securities pursuant to
the Prospectus and the Registration Statement, the performance of this
Agreement, the Underwriter's Warrant Agreement, and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have for
the issue and/or sale of any of the Registered Securities, except such as have
been or may be obtained under the Act or may be required under state securities
or Blue Sky laws in connection with the Underwriter's purchase and distribution
of the Registered Securities to be sold by the Company hereunder.
(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
against the Company in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law). The descriptions in the
Registration Statement of such agreements, contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown with respect thereto by Form S-1, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
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(n) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus (i) the Company has not incurred any
material liabilities or obligations, indirect, direct or contingent, or entered
into any material verbal or written agreement or other transaction which is not
in the ordinary course of business or which could result in a material reduction
in the future earnings of the Company; (ii) the Company has not sustained any
material loss or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other distributions
with respect to its capital stock, and the Company is not in default in the
payment of principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale of the
Firm Shares, the Option Shares and the Underwriter's Shares hereunder and upon
the exercise of options and warrants described in the Registration Statement)
of, or indebtedness material to, the Company (other than in the ordinary course
of business); (v) the Company has not issued any securities or incurred any
liability or obligation, primary or contingent, for borrowed money; and (vi)
there has not been any material adverse change in the condition (financial or
otherwise), business, properties, results of operations, or prospects of the
Company.
(o) Except as disclosed in or specifically contemplated by the
Prospectus, (i) the Company has sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations to
conduct its business as now conducted; (ii) the expiration of any trademarks,
trade names, patent rights, copyrights, licenses, approvals or governmental
authorizations would not have a material adverse effect on the condition
(financial or otherwise), business, results of operations or prospects of the
Company; (iii) the Company has no knowledge of any infringement by it or its
subsidiaries of trademark, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others; and (iv) there is no
claim being made against the Company regarding trademark, trade name, patent,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company.
(p) No default exists in the due performance and observance of any
term, covenant or condition of any material license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement, or any other
material agreement or instrument evidencing an obligation for borrowed money, or
any other material agreement or instrument to which the Company is a party or by
which the Company may be bound or to which the property or assets (tangible or
intangible) of the Company is subject or affected.
(q) To the Company's knowledge, 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, local, or foreign
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 its
8
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knowledge threatened against or involving the Company. No representation
question exists respecting the employees of the Company. 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. No labor dispute
with the employees of the Company exists or to its knowledge is imminent.
(r) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plan"). The Company does not maintain or contribute to a
defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or
any trust created thereunder) has engaged in a "prohibited transaction" within
the meaning of Section 406 of ERISA or Section 4975 of the Code, which could
subject the Company to any tax penalty on prohibited transactions and which has
not adequately been corrected.
(s) None of the Company, nor any of its employees, directors,
stockholders, or affiliates (within the meaning of the Regulations) of any of
the foregoing has taken or will take directly or indirectly, any action designed
to or which has constituted or which might be expected to cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Registered Securities.
(t) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, or other
restrictions or equities of any kind whatsoever other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(u) BDO Seidman LLP ("BDO Seidman"), whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Regulations.
(v) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which all officers and directors of the
Company and all stockholders of the Company have agreed not to, directly or
indirectly, offer, offer to sell, sell, grant any option for the sale of,
transfer, assign, pledge, hypothecate or otherwise encumber or dispose of any
shares of Common Stock or securities convertible into Common Stock, exercisable
or exchangeable for or evidencing any right to purchase or subscribe for any
shares of Common Stock (either pursuant to Rule 144 of the Regulations or
otherwise) or dispose of any interest therein for a period from the date of the
Prospectus until twelve (12) months following the date that the Registration
Statement becomes effective, without the prior written consent of the
Underwriter (the "Lock-up Agreements"). The Company will cause the Transfer
Agent (as
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defined herein) to place "stop transfer" orders on the Company's stock ledgers
in order to effect the Lock-up Agreements.
(w) There are no claims, payments, arrangements or understandings,
whether oral or written, for services in the nature of a finder's or origination
fee with respect to the sale of the Registered Securities hereunder or any other
arrangements, agreements, understandings, payments or issuance with respect to
the Company or any of its officers, directors, stockholders, employees,
affiliates or, to the Company's knowledge, stockholders or their affiliates that
may affect the Underwriter' compensation as determined by the Commission and the
National Association of Securities Dealers, Inc. (the "NASD").
(x) The Registered Securities and the Selling Stockholder Securities
have been approved for quotation on the Nasdaq National Market System
("Nasdaq"), subject to official notice of issuance.
(y) Neither the Company nor any of its officers, employees, agents
or any other person acting on behalf of the Company has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the business) to any customer, supplier,
employee or agent of a customer or supplier, or official or employee of any
governmental agency (domestic or foreign) or instrumentality of any government
(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who was, is, or may be in a position to help or
hinder the business of the Company (or assist the Company in connection with any
actual or proposed transaction) which might subject the Company or any other
such person to any damage or penalty in any civil, criminal or governmental
litigation or proceeding (domestic or foreign). The Company's internal
accounting controls are sufficient to cause the Company to comply with the
Foreign Corrupt Practices Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer, director or
stockholder of the Company, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 promulgated under the Regulations) of any of the
foregoing persons or entities has or has had, either directly or indirectly, (i)
an interest in any person or entity which (A) furnishes or sells services or
products which are furnished or sold or are proposed to be furnished or sold by
the Company, or (B) purchases from or sells or furnishes to the Company any
goods or services, or (ii) a beneficiary interest in any contract or agreement
to which the Company is a party or by which it may be bound or affected. Except
as set forth in the Prospectus there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, and any officer,
director, principal shareholder (as such term is used in the Prospectus) of the
Company, or any affiliate or associate of any of the foregoing persons or
entities.
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(aa) The Company is not, and does not intend to conduct its business
in a manner in which it would become, an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(ab) Any certificate signed by any officer of the Company and
delivered to the Underwriter or to the Underwriter's Counsel (as defined in
Section 4(d) herein) shall be deemed a representation and warranty by the
Company to the Underwriter as to the matters covered thereby.
(ac) The minute books of the Company have been made available to the
Underwriter and contain a complete summary of all meetings and actions of the
directors and stockholders of the Company, since the time of its incorporation,
and reflect all transactions referred to in such minutes accurately in all
material respects.
(ad) The Company has not distributed and will not distribute prior
to the Closing Date any offering material in connection with the offering and
sale of the Shares [and the Selling Stockholder Securities] in this offering
other than the Prospectus, the Registration Statement and the other materials
permitted by the Act. Except as described in the Prospectus, no holders of any
securities of the Company or of any options, warrants or other convertible or
exchangeable securities of the Company have the right to include any securities
issued by the Company as part of the Registration Statement or to require the
Company to file a registration statement under the Act and no person or entity
holds any anti-dilution rights with respect to any securities of the Company.
(ae) Each of the Company and its subsidiaries maintains insurance by
insurers of recognized financial responsibility of the types and in the amounts
as are prudent, customary and adequate for the business in which it is engaged,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect. The Company has no reason to
believe that it will not be able to renew existing insurance coverage with
respect to the Company as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business, in
either case, at a cost that would not have a material adverse effect on the
financial condition, operations, business, assets or properties of the Company.
The Company has not failed to file any claims, has no material disputes with its
insurance company regarding any claims submitted under its insurance policies,
and has complied with all material provisions contained in its insurance
policies.
(af) The Company has applied for, and will obtain, key man life
insurance in the amount of at least $1,000,000 for Eugene J. Schuster, which
insurance will be (i) payable to the Company and (ii) in force for a period
equal to the longer of (x) three (3) years from the date of this Agreement or
(y) the term of any employment agreement between Mr. Schuster and the Company.
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2. Purchase, Sale and Delivery of the Registered Securities.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriter, and the Underwriter agrees
to purchase from the Company, at a price equal to $_____ per share, 3,400,000
Shares.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements, herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriter to purchase all or any part of the Option Shares at a price equal to
$________ per share. The option granted hereby will expire 45 days after (i) the
date the Registration Statement becomes effective, if the Company has elected
not to rely on Rule 430A under the Regulations, or (ii) the date of this
Agreement if the Company has elected to rely upon Rule 430A under the
Regulations, and may be exercised in whole or in part from time to time (but not
on more than two (2) occasions) only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the Shares
upon notice by the Underwriter to the Company setting forth the number of Option
Shares as to which the Underwriter is then exercising the option and the time
and date of payment and delivery for any such Option Shares. Any such time and
date of delivery (an "Option Closing Date") shall be determined by the
Underwriter, but shall not be later than three full business days after the
exercise of said option, nor in any event prior to the Closing Date, as
hereinafter defined, unless otherwise agreed upon by the Underwriter and the
Company. Nothing herein contained shall obligate the Underwriter to exercise the
over-allotment option described above. No Option Shares shall be delivered
unless the Shares shall be simultaneously delivered or shall theretofore have
been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the offices of the Underwriter, at 450 Park
Avenue, New York, New York 10022, or at such other place as shall be agreed upon
by the Underwriter and the Company. Such delivery and payment shall be made at
9:00 a.m. (New York time) on ____ ___, 1999, or at such other time and date as
shall be agreed upon by the Underwriter and the Company, but no more than six
(6) business days after the date hereof (such time and date of payment and
delivery being herein called the "Closing Date"). In addition, in the event that
any or all of the Option Shares are purchased by the Underwriter, payment of the
purchase price for, and delivery of certificates for, such Option Shares shall
be made at the above mentioned office of the Underwriter or at such other place
as shall be agreed upon by the Underwriter and the Company on each Option
Closing Date as specified in the notice from the Underwriter to the Company.
Delivery of the certificates for the Shares and the Option Shares, if any, shall
be made to the Underwriter against payment by the Underwriter, of the purchase
price for the Shares and the Option Shares, if any, to the order of the Company.
Certificates for the Shares and the Option Shares, if any, shall be in
definitive, fully registered form, shall bear no restrictive legends and shall
be in such denominations and registered in such names as the Underwriter may
request in writing at least
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three (3) business days prior to Closing Date or the relevant Option Closing
Date, as the case may be. The certificates for the Shares and the Option Shares,
if any, shall be made available to the Underwriter at such office or such other
place as the Underwriter may designate for inspection, checking and packaging no
later than 9:30 a.m. on the last business day prior to Closing Date or the
relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Underwriter Underwriter's Warrants at a purchase price of $0.001 per warrant,
which warrants shall entitle the holders thereof to purchase an aggregate of
238,000 shares of Common Stock. The Underwriter's Warrants shall expire five (5)
years after the effective date of the Registration Statement and shall be
exercisable for a period of four (4) years commencing one (1) year from the
effective date of the Registration Statement at a price equaling 125% of the
initial public offering price of the Shares. The Underwriter's Warrant Agreement
and form of Warrant Certificate shall be substantially in the form filed as
Exhibit 4.2 to the Registration Statement. Payment for the Underwriter's
Warrants shall be made on the Closing Date.
3. Public Offering of the Shares. As soon after the Registration Statement
becomes effective as the Underwriter deems advisable, the Underwriter shall make
a public offering of the Shares (other than to residents of or in any
jurisdiction in which qualification of the Shares is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Underwriter may from time to time increase or decrease the public offering
price after distribution of the Shares has been completed to such extent as the
Underwriter, in its sole discretion deems advisable. The Underwriter may enter
into one or more agreements as the Underwriter, in its sole discretion, deems
advisable with one or more broker-dealers who shall act as dealers in connection
with such public offering.
4. Covenants of the Company. The Company covenants and agrees with the
Underwriter as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Shares by the Underwriter of which
the Underwriter shall not previously have been advised and furnished with a
copy, or to which the Underwriter shall have objected or which is not in
compliance with the Act, the Exchange Act or the Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Underwriter and confirm the notice in writing, (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of
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the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Registered Securities for offering
or sale in any jurisdiction or of the initiation, or the threatening, of any
proceeding for that purpose, (iv) of the receipt of any comments from the
Commission, and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
authority shall enter a stop order or suspend such qualification at any time,
the Company will use its best efforts to obtain promptly the lifting of such
order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Underwriter) in accordance with the requirements of the Act.
(d) The Company will give the Underwriter notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriter in connection with the offering of the Registered Securities which
differs from the corresponding prospectus on file at the Commission at the time
the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Regulations),
and will furnish the Underwriter with copies of any such amendment or supplement
a reasonable amount of time prior to such proposed filing or use, as the case
may be, and will not file any such amendment or supplement to which the
Underwriter or Coleman, Rhine & Goodwin LLP ("Underwriter's Counsel") shall
reasonably object.
(e) The Company shall endeavor in good faith, in cooperation with
the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Registered Securities for offering and sale under the
securities laws of such jurisdictions as the Underwriter may reasonably
designate to permit the continuance of sales and dealings therein for as long as
may be necessary to complete the distribution, and shall make such applications,
file such documents and furnish such information as may be required for such
purpose; provided, however, the Company shall not be required to qualify as a
foreign corporation or become subject to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Underwriter agrees that such action is not at the
time necessary or advisable, use all reasonable efforts to file and make such
statements or reports at such times as are or may reasonably be required by the
laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by
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the Act, as now and hereafter amended, and by the Regulations, as from time to
time in force, so far as necessary to permit the continuance of sales of or
dealings in the Registered Securities in accordance with the provisions hereof
and the Prospectus, or any amendments or supplements thereto. If at any time
when a prospectus relating to the Registered Securities is required to be
delivered under the Act, any event shall have occurred as a result of which, in
the opinion of counsel for the Company or Underwriter's Counsel, the Prospectus,
as then amended or supplemented, includes an untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if it is necessary at any time to amend or
supplement the Prospectus to comply with the Act, the Company will notify the
Underwriter promptly and prepare and file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Act, each such
amendment or supplement to be satisfactory to Underwriter's Counsel, and the
Company will furnish to the Underwriter copies of such amendment or supplement
as soon as available and in such quantities as the Underwriter may request.
(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Regulations, and to the Underwriter, an earnings statement which
will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which
statement need not be audited unless required by the Act, covering a period of
at least 12 consecutive months after the effective date of the Registration
Statement.
(h) During a period of five (5) years after the date hereof if
required by law or the applicable rules of the Commission, any securities
exchange or the NASD, the Company will furnish to its stockholders, as soon as
practicable after the end of each respective period, annual reports (including
financial statements audited by independent public accountants) and unaudited
quarterly reports of operations for each of the first three quarters of the
fiscal year, and will furnish to the Underwriter:
(i) concurrently, if required (when available if not), with
furnishing such reports to its stockholders, statements of operations of the
Company for each of the first three quarters in the form furnished to the
Company's stockholders;
(ii) concurrently with furnishing to its stockholders, an
annual report;
(iii) as soon as they are available, copies of all other
reports (financial or other) mailed to the Company's stockholders;
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(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the NASD; (v) every material press release in respect of the Company
or its affairs which was released or prepared by the Company; and
(vi) any additional information of a public nature concerning
the Company or its business that the Underwriter may reasonably request. During
such five-year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary that is not so consolidated.
(i) The Company will maintain a transfer agent (the "Transfer
Agent") and, if necessary under the jurisdiction of incorporation of the
Company, a registrar (which may be the same entity as the transfer agent) for
the Common Stock and the Underwriter's Warrants.
(j) The Company will furnish to the Underwriter or on the
Underwriter's order, without charge, at such place as the Underwriter may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), each
Preliminary Prospectus, the Prospectus, and all amendments and supplements
thereto, including any prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such quantities
as the Underwriter may reasonably request.
(k) On or before the effective date of the Registration Statement,
the Company shall provide the Underwriter with true copies of duly executed,
legally binding and enforceable Lock-up Agreements. On or before the Closing
Date, the Company shall deliver instructions to the Transfer Agent authorizing
it to place appropriate stop transfer orders on the Company's ledgers.
(l) The Company shall use its best efforts to cause its officers,
directors, stockholders or affiliates (within the meaning of the Regulations)
not to take, directly or indirectly, any action designed to, or which might in
the future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Registered Securities substantially in the manner, and subject to the
conditions, set forth under "Use of Proceeds" in the Prospectus.
(n) The Company shall timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the Exchange Act,
and the Regulations, and all
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such reports, forms and documents filed will comply as to form and substance
with the applicable requirements under the Act, the Exchange Act, and the
Regulations.
(o) The Company shall cause the Registered Securities to be quoted
on Nasdaq, and for a period of five (5) years from the date hereof shall use its
best efforts to maintain the quotation of the Registered Securities to the
extent outstanding.
(p) For a period of two (2) year from the Closing Date, the Company
shall furnish to the Underwriter, at the Company's sole expense, upon the
written request of the Underwriter, daily consolidated transfer sheets relating
to the Common Stock, up to four (4) times during such year.
(q) For a period of five (5) years after the effective date of the
Registration Statement the Company shall, at the Company's sole expense, take
all necessary and appropriate actions to further qualify the Company's
securities in all jurisdictions of the United States in order to permit
secondary sales of such securities pursuant to the Blue-Sky laws of those
jurisdictions which do not require the Company to qualify as a foreign
corporation or to file a general consent to service of process.
(r) The Company (i) prior to the effective date of the Registration
Statement, has filed a Form 8-A with the Commission providing for the
registration of the Common Stock under the Exchange Act and (ii) as soon as
practicable, will use its best efforts to take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions and to
continue such inclusion for a period of not less than five (5) years.
(s) The Company agrees that for a period of twelve (12) months
following the effective date of the Registration Statement it will not, without
the prior written consent of the Underwriter, offer, issue, sell, contract to
sell, grant any option for the sale of or otherwise dispose of any Common Stock,
or securities convertible into Common Stock, except for the issuance of the
Option Shares, the Underwriter's Warrants, [the Selling Stockholder Securities]
and shares of Common Stock issued upon the exercise of currently outstanding
warrants or options issued under any stock option plan in effect on the Closing
Date, shares of Common Stock automatically granted pursuant to any stock option
plan in effect on the Closing Date, or shares of Common Stock issued pursuant to
any employee stock purchase plan in effect on the Closing Date.
(t) Until the completion of the distribution of the Registered
Securities, the Company shall not without the prior written consent of the
Underwriter or Underwriter's Counsel, issue, directly or indirectly any press
release or other communication or hold any press conference with respect to the
Company or its activities or the offering contemplated hereby, other than trade
releases issued in the Company's business consistent with past practices with
respect to the Company's operations.
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(u) For a period equal to the lesser of (i) five (5) years from the
date hereof, and (ii) the sale to the public of the Underwriter's Shares, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Form S-1 (or other appropriate form) for the registration under
the Act of the Underwriter's Shares.
(v) The Company agrees that it shall use its best efforts, which
shall include, but shall not be limited to, the solicitation of proxies, to
elect three (3) additional persons reasonably acceptable to the Underwriter to
the Company's Board of Directors. Each of these individuals shall be an
"independent director" within the meaning of the rules of The Nasdaq Stock
Market (and, in particular, Rule 4200(a)(14)). In addition, during such three
(3) year period the Company shall allow an individual selected by the
Underwriter to attend all meetings of the Company's Board of Directors. The
Company will use its best efforts to obtain Directors and Officers insurance in
an amount of not less than $5,000,000, which insurance, once obtained, it shall
use its best efforts to keep in full force and effect for a period of at least
five (5) years from the Closing.
(w) The Company agrees that within forty-five (45) days after the
Closing it shall retain a public relations firm which is acceptable to the
Underwriter. The Company shall keep such public relations firm, or any
replacement, for a period of three (3) years from the Closing. Any replacement
public relations firm shall be retained only with the consent of the
Underwriter.
(x) The Company shall prepare and deliver, at the Company's sole
expense, to the Underwriter within the one hundred and twenty (120) day period
after the later of the effective date of the Registration Statement or the
latest Option Closing Date, as the case may be, four bound volumes containing
all correspondence with regulatory officials, agreements, documents and all
other materials in connection with the offering as requested by the
Underwriter's Counsel.
(y) For a period of three (3) years following the effective date of
the Registration Statement, the Company shall not effect a change in its
independent outside accountants without the prior written consent of the
Underwriter.
(z) Until expiration of the Underwriter's Warrants, the Company will
keep reserved sufficient shares of Common Stock for issuance upon exercise of
the Underwriter's Warrants.
(aa) For the a period of three (3) years following the effective
date of the Registration Statement:
(i) the Underwriter shall have a right of first refusal (on
terms at least as favorable as can be obtained from other sources) to act as
manager, placement agent, or investment banker with respect to any proposed
written public distribution or private placement of the Company's securities or
any merger, acquisition, or disposition of the equity or assets of the Company.
The Company shall promptly advise the Underwriter in writing of such proposed
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<PAGE>
transaction. The Underwriter thereafter shall advise the Company in writing
within ten (10) days of its receipt of such notice whether it intends to
exercise said right. If any such proposal is not accepted by the Underwriter,
but later modified, the Company will re-submit such proposal to the Underwriter.
An election by the Underwriter not to exercise said right with respect to a
particular transaction shall not affect the Underwriter's rights of first
refusal with respect to other transactions during such three (3) year period;
and
(ii) If the Underwriter introduces a potential merger or
acquisition candidates to the Company during such three (3) year period, it
shall be entitled to a Lehman Formula fee (any consideration other than cash to
be valued at fair market value) of the aggregate consideration involved in any
transaction (including mergers, acquisitions, joint ventures and any other
business combination for the Company introduced by the Underwriter) consummated
by the Company with such candidate, regardless of when it occurs, such finder's
fee to be paid in cash to the Underwriter at the closing of such transaction.
The Underwriter shall provide the Company with written notice of the
introduction of any merger and acquisition candidate for which it may be
entitled to a fee hereunder. For purposes of this Agreement, a Lehman Formula
fee shall be equal to five (5%) percent of the first million dollars of such
consideration, or portion thereof, four (4%) percent of the second million
dollars of such consideration, or portion thereof, three (3%) percent of the
third million dollars of such consideration, or portion thereof, two (2%)
percent of the fourth million dollars of such consideration, or portion thereof,
and one (1) percent of all consideration in excess of four million ($4,000,000)
dollars.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date and
each Option Closing Date (to the extent not previously paid) all expenses and
fees (other than fees of Underwriter's Counsel, except as provided in (iv)
below) incident to the performance of the obligations of the Company under this
Agreement and the Underwriter's Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, filing, delivery and mailing (including the
payment of postage with respect thereto) of the Registration Statement and the
Prospectus and any amendments and supplements thereto and the duplication,
mailing (including the payment of postage with respect thereto) and delivery of
this Agreement, the Selected Dealers Agreements, the Powers of Attorney, and
related documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriter and such dealers as the
Underwriter may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the certificates representing the
Registered Securities, (iv) the qualification of the Registered Securities under
state or foreign securities or "Blue Sky" laws and determination of the status
of such securities under legal investment laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum," the "Final Blue Sky Memorandum" and "Legal Investments Survey," if
any, and reasonable disbursements and fees of counsel in connection therewith,
(v) expense of tombstone
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advertisements and other advertising costs and expenses, (vi) costs and expenses
in connection with the "road show", (vii) fees and expenses of the transfer
agent and registrar, (viii) the fees payable to the Commission and the NASD and
(ix) the fees and expenses incurred in connection with the listing of the
Registered Securities on Nasdaq and any other market or exchange.
(b) If the transactions contemplated hereby are not consummated by
reason of any refusal or inability on the part of the Company to perform any
agreement on its part to be performed hereunder or to fulfill any condition of
the Underwriter's obligations hereunder, or if the Company shall terminate the
Agreement for any reason other than a breach by the Underwriter of its
obligations hereunder, the Company will reimburse the Underwriter for all
reasonable out-of-pocket expenses (including any and all reasonable fees and
disbursements of Underwriters' Counsel) in an amount not to exceed $150,000,
including the fees and disbursements of Underwriter's Counsel, inclusive of any
amounts already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Underwriter on the Closing Date by certified or bank cashier's check or wire
transfer or, at the election of the Underwriter, by deduction from the proceeds
of the offering contemplated herein, a non-accountable expense allowance equal
to two percent (2%) of the gross proceeds received by the Company from the sale
of the Shares, $50,000 of which has been paid to date. In the event the
Underwriter elects to exercise the over-allotment option described in Section
2(b) hereof, the Company further agrees to pay to the Underwriter on the Option
Closing Date (by certified or bank cashier's check or, at the Underwriter's
election, by deduction from the proceeds of the offering) a non-accountable
expense allowance equal to two percent (2%) of the gross proceeds received by
the Company from the sale of the Option Shares.
6. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., New York City time, on the date prior to the date of this
Agreement or such later date and time as shall be consented to in writing by the
Underwriter, and, at Closing Date and each Option Closing Date, if any, no stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of
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Underwriter's Counsel. If the Company has elected to rely upon Rule 430A of the
Regulations, the price of the Shares and any price-related information
previously omitted from the effective Registration Statement pursuant to such
Rule 430A shall have been transmitted to the Commission for filing pursuant to
Rule 424(b) of the Regulations within the prescribed time period, and prior to
Closing Date the Company shall have provided evidence satisfactory to the
Underwriter of such timely filing, or a post-effective amendment providing such
information shall have been promptly filed and declared effective in accordance
with the requirements of Rule 430A of the Regulations.
(b) The Underwriter shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Underwriter's opinion, is material, or omits to state a
fact which, in the Underwriter's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Underwriter's reasonable opinion, is material, or omits to
state a fact which, in the Underwriter's reasonable opinion, is material and is
required to be stated therein or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriter shall have
received from Underwriter's Counsel such opinion or opinions with respect to the
organization of the Company, the validity of the Registered Securities, the
Registration Statement, the Prospectus and other related matters as the
Underwriter may request and Underwriter's Counsel shall have received from the
Company such papers and information as they request to enable them to pass upon
such matters.
(d) At the Closing Date, the Underwriter shall have received the
favorable opinion of Morrison Cohen Singer & Weinstein, LLP ("MCS&W"), counsel
to the Company, dated the Closing Date, addressed to the Underwriter and in form
and substance satisfactory to Underwriter's Counsel, to the effect that:
(i) the Company (A) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its jurisdiction of
incorporation, (B) is duly qualified and licensed and in good standing as a
foreign corporation in each jurisdiction in which its ownership or leasing of
any properties or the character of its operations requires such qualification or
licensing, and (C) to the best of such counsel's knowledge, has all requisite
corporate power and authority and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its business as
described in the Prospectus.
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(ii) except as described in the Prospectus, and to the best of
such counsel's knowledge after reasonable investigation, the Company does not
own an interest in any corporation, limited liability company, partnership,
joint venture, trust or other business entity;
(iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "Capitalization" and "Description of Securities," and
to the knowledge of such counsel, the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Underwriter's Warrant Agreement, and as described in the Prospectus. The
Registered Securities and all other securities issued or issuable by the Company
conform in all material respects to the statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and validly
issued and are fully paid and non-assessable; the holders thereof are not
subject to personal liability by reason of being such holders; and to such
counsel's knowledge after reasonable inquiry, none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company. The Registered Securities to be sold by the Company hereunder and
under the Underwriter's Warrant Agreement are not and will not be subject to any
preemptive or other similar rights of any stockholder, have been duly authorized
and, when issued, paid for and delivered in accordance with their terms, will be
validly issued, fully paid and non-assessable and conform in all material
respects to the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the Registered Securities has been duly and validly taken; and the certificates
representing the Registered Securities are in due and proper form. The
Underwriter's Warrants constitute valid and binding obligations of the Company
to issue and sell, upon exercise thereof and payment therefor, the number and
type of securities of the Company called for thereby (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law). Upon the issuance and
delivery pursuant to this Agreement of the Registered Securities to be sold by
the Company, the Company will convey, against payment therefor as provided
herein, to the Underwriter good and marketable title to the Registered
Securities free and clear of all liens and other encumbrances;
(iv) the Registration Statement is effective under the Act,
and, if applicable, filing of all pricing information has been timely made in
the appropriate form under Rule 430A, and no stop order suspending the use of
the Preliminary Prospectus, the Registration Statement or Prospectus or any part
of any thereof or suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or are
pending or, to the best of such counsel's knowledge, threatened or contemplated
under the Act;
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(v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements thereto (other
than the financial statements and other financial and statistical data included
therein as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Regulations. Such
counsel shall state that such counsel has participated in conferences with
officers and other representatives of the Company and the Underwriter and
representatives of the independent public accountants for the Company, at which
conferences the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus, and any amendments or supplements thereto were
discussed, and, although such counsel is not passing upon and does not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Preliminary Prospectus, the Registration Statement and
Prospectus, and any amendments or supplements thereto, on the basis of the
foregoing, no facts have come to the attention of such counsel which lead them
to believe that either the Registration Statement or any amendment thereto, at
the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus, and any amendments or
supplements thereto);
(vi) to the best of such counsel's knowledge after reasonable
investigation, (A) there are no agreements, contracts or other documents
required by the Act to be described in the Registration Statement and the
Prospectus and filed as exhibits to the Registration Statement other than those
described in the Registration Statement and the Prospectus and filed as exhibits
thereto; (B) the descriptions in the Registration Statement and the Prospectus
and any supplement or amendment thereto of contracts and other documents to
which the Company is a party or by which it is bound are accurate in all
material respects and fairly represent the information required to be shown by
Form S-1; (C) there is not pending or threatened against the Company any action,
arbitration, suit, proceeding, litigation, governmental or other proceeding
(including, without limitation, those having jurisdiction over environmental or
similar matters),domestic or foreign, pending or threatened against the company
which (x) is required to be disclosed in the Registration Statement which is not
so disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), (y) questions the
validity of the capital stock of the Company or this Agreement, or the
Underwriter's Warrant Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with any of the foregoing; and (D) there is
no action, suit or proceeding pending or threatened against the Company before
any court or arbitrator or governmental body, agency or official in which there
is a reasonable possibility of an adverse decision which may result in a
material adverse change in the financial condition, business, affairs,
stockholders' equity, operations, properties, business or results of operations
of the Company, which could adversely affect the present or prospective ability
of the Company to perform its obligations under this Agreement or the
Underwriter's Warrant Agreement or which
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in any manner draws into question the validity or enforceability of this
Agreement or the Underwriter's Warrant Agreement;
(vii) the Company has the corporate power and authority to
enter into each of this Agreement and the Underwriter's Warrant Agreement and to
consummate the transactions provided for therein; and each of this Agreement and
the Underwriter's Warrant Agreement has been duly authorized, executed and
delivered by the company. Each of this Agreement and the Underwriter's Warrant
Agreement, assuming due authorization, execution and delivery by each other
party thereto, constitutes a legal, valid and binding agreement of the Company
enforceable against the company in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution maybe limited by applicable law), and none of the company's
execution, delivery or performance of this Agreement and the Underwriter's
Warrant Agreement, its consummation of the transactions contemplated herein or
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto conflicts
with or results in any breach or violation of any of the terms or provisions of,
or constitutes a default under, or result in the creation or imposition of any
lien, charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of (A) the
articles of incorporation or by-laws of the Company, as amended, (B) any
license, contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders' agreement, note, loan or credit agreement or any other agreement
or instrument known to such counsel to which the Company is a party or by which
it is bound, or (C) any federal, state or local statute, rule or regulation
applicable to the Company or any judgment, decree or order known to such counsel
of any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties;
(viii) no consent, approval, authorization or order, and no
filing with, any court, regulatory body, government agency or other body (other
than such as may be required under federal securities or Blue Sky laws, as to
which no opinion need be rendered) is required in connection with the issuance
of the Registered Securities pursuant to the Prospectus, and the Registration
Statement, the performance of this Agreement and the Underwriter's Warrant
Agreement, and the transactions contemplated hereby and thereby;
(ix) to the best of such counsel's knowledge after reasonable
investigation, the properties and business of the Company conform in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus;
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(x) to the best knowledge of such counsel, and except as
disclosed in Registration Statement and the Prospectus, the Company is not in
breach of, or in default under, any term or provision of any license, contract,
indenture, mortgage, installment sale agreement, deed of trust, lease, voting
trust agreement, stockholders' agreement, note, loan or credit agreement or any
other agreement or instrument evidencing an obligation for borrowed money, or
any other agreement or instrument to which the Company is a party or by which
the Company is bound or to which the property or assets (tangible or intangible)
of the Company is subject; and the Company is not in violation of any term or
provision of its articles of incorporation or by-laws, as amended, and to the
best of such counsel's knowledge after reasonable investigation, not in
violation of any franchise, license, permit, judgment, decree, order, statute,
rule or regulation;
(xi) the statements in the Prospectus under "Dividend Policy,"
"Description of Securities," and "Shares Eligible for Future Sale" have been
reviewed by such counsel, and insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations or legal conclusions,
are correct in all material respects;
(xii) the Common Stock has been accepted for quotation on
Nasdaq;
(xiii) to the best of such counsel's knowledge and based upon
a review of the outstanding securities and the contracts furnished to such
counsel by the Company and except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity, has the right to
include and/or register any securities of the Company in the Registration
Statement, require the Company to file any registration statement or, if filed,
to include any security in such registration statement;
(xiv) assuming due execution by the parties thereto other than
the Company, each Lock-up Agreement to be entered into by an officer, director
or stockholder of the Company is a legal, valid and binding obligation of the
party thereto, enforceable against the party and any subsequent holder of the
securities subject thereto in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law); and
(xv) the Company is not an "investment company" or "promoter"
or "principal underwriter" for or an "affiliated person" of, an "investment
company" as such terms are defined in the 1940 Act.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws, rules and regulations of
the United States and the laws, rules and regulations of the State of Delaware,
to the extent such counsel deems proper and to the
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extent specified in such opinion, if at all, upon an opinion or opinions (in
form and substance satisfactory to Underwriter's Counsel) of other counsel
acceptable to Underwriter's Counsel, familiar with the applicable laws; (B) as
to matters of fact, to the extent they deem proper, on certificates and written
statements of responsible officers of the Company and certificates or other
written statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of the
Company, provided that copies of any such statements or certificates shall be
delivered to Underwriter's Counsel if requested. The opinion of such counsel
shall state that knowledge shall not include the knowledge of a director or
officer of the Company who is affiliated with such firm in his or her capacity
as an officer or director of the Company. The opinion of such counsel for the
Company shall further state that the opinion of any such other counsel is in
form satisfactory to such counsel. At each Option Closing Date, if any, the
Underwriter shall have received the favorable opinion of MCS&W, counsel to the
Company, dated the Option Closing Date, addressed to the Underwriter and in form
and substance satisfactory to Underwriter's Counsel confirming as of such Option
Closing Date the statements made by MCS&W in their opinion delivered on the
Closing Date.
(e) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriter's Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company or herein contained.
(f) Prior to each of the Closing Date and each Option Closing Date,
if any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, stockholders' equity or the business activities of the Company,
whether or not in the business, from the latest dates as of which such condition
is set forth in the Registration Statement and Prospectus; (ii) there shall have
been no transaction, not in the business, entered into by the Company, from the
latest date as of which the financial condition of the Company is set forth in
the Registration Statement and Prospectus which is adverse to the Company; (iii)
the Company shall not be in default under any provision of any instrument
relating to any outstanding indebtedness which default has not been waived; (iv)
the Company shall not have issued any securities (other than the Registered
Securities and the Selling Stockholder Securities) or declared or paid any
dividend or made any distribution in respect of its capital stock of any class
and there has not been any change in the capital stock, or any material increase
in the debt (long or short term) or liabilities or obligations of the Company
(contingent or otherwise); (v) no material amount of the assets of the Company
shall have been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus; (vi) no action, suit or proceeding, at law or in
equity, shall have been pending or threatened (or circumstances giving rise to
same) against the Company, or affecting any of its respective properties or
businesses before or by any court or federal, state or foreign commission, board
or other administrative agency wherein an unfavorable decision, ruling or
finding may materially
26
<PAGE>
adversely affect the business, operations, prospects or financial condition or
income of the Company, except as set forth in the Registration Statement and
Prospectus; and (vii) no stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated, threatened or contemplated by
the Commission.
(g) At each of the Closing Date and each Option Closing Date, if
any, the Underwriter shall have received a certificate of the Company signed on
behalf of the Company by the principal executive officer of the Company, dated
the Closing Date or Option Closing Date, as the case may be, to the effect that
such executive has carefully examined the Registration Statement, the Prospectus
and this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such Closing
Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no proceedings
for that purpose have been instituted or are pending or, to the best of each of
such person's knowledge after due inquiry, are contemplated or threatened under
the Act;
(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto, contain all statements and
information required by the Act to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement thereto
includes any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading and neither the Preliminary Prospectus or any supplement, as of
their respective dates, thereto included 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
were made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus: (a) the
Company has not incurred up to and including the Closing Date or the Option
Closing Date, as the case may be, other than in the its business, any material
liabilities or obligations, direct or contingent; (b) the Company has not paid
or declared any dividends or other distributions on its capital stock; (c) the
Company has not entered into any transactions not in the ordinary course of
business; (d) there has not been any change in the capital stock or material
increase in long-term debt or any increase in the short-term borrowings (other
than any increase in the short-term borrowings in the ordinary course of
business) of the Company; (e) the Company has not sustained any loss or damage
to its property or assets, whether or not insured; (f) there is no litigation
which is pending or threatened (or circumstances giving rise to same) against
the Company or any affiliated party of any of the
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<PAGE>
foregoing which is required to be set forth in an amended or supplemented
Prospectus which has not been set forth; and (g) there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been set forth. References to the Registration Statement and the Prospectus in
this subsection (g) are to such documents as amended and supplemented at the
date of such certificate.
(h) By the Closing Date, the Underwriter will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriter.
(i) At the time this Agreement is executed, the Underwriter shall
have received a letter, dated such date, addressed to the Underwriter in form
and substance satisfactory in all respects (including the non-material nature of
the changes or decreases, if any, referred to in clause (iii) below) to the
Underwriter and Underwriter's Counsel, from BDO Seidman:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Regulations thereunder and that the
Underwriter may rely upon the opinion of BDO Seidman with respect to the
financial statements and supporting schedules included in the Registration
Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the latest
available minutes of the stockholders and board of directors and the various
committees of the board of directors of the Company, consultations with officers
and other employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come to their
attention which would lead them to believe that (x) the unaudited financial
statements and supporting schedules of the Company included in the Registration
Statement, if any, do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Regulations or are not
fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements of the Company included in the Registration Statement, or (y) at a
specified date not more than five (5) days prior to the effective date of the
Registration Statement, there has been any change in the capital stock or
material increase in long-term debt of the Company, or any material decrease in
the stockholders' equity or net current assets or net assets of the Company as
compared with amounts shown in the January 31, 1999, balance sheet included in
the Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease, setting forth
the amount of such change or decrease;
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<PAGE>
(iv) stating that 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; and
(v) statements as to such other material matters incident to
the transaction contemplated hereby as the Underwriter may reasonably request.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriter shall have received from BDO Seidman a letter, dated as of the
Closing Date or the Option Closing Date, as the case may be, to the effect that
they reaffirm that statements made in the letter furnished pursuant to
Subsection (i) of this Section 6, except that the specified date referred to
shall be a date not more than five (5) days prior to Closing Date or the Option
Closing Date, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (iv) of Subsection (i) of this
Section 6 with respect to certain amounts, percentages and financial information
as specified by the Underwriter and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (iv).
(k) On each of Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Underwriter the appropriate number of
Registered Securities.
(l) No order suspending the sale of the Registered Securities in any
jurisdiction designated by the Underwriter pursuant to subsection (e) of Section
4 hereof shall have been issued on either the Closing Date or the Option Closing
Date, if any, and no proceedings for that purpose shall have been instituted or
shall be contemplated.
(m) On or before the Closing Date, the Company shall have executed
and delivered to the Underwriter, (i) the Underwriter's Warrant Agreement,
substantially in the form filed as Exhibit 4.2, to the Registration Statement,
in final form and substance satisfactory to the Underwriter, and (ii) the
Underwriter's Warrants in such denominations and to such designees as shall have
been provided to the Company.
(n) On or before Closing Date, the Common Stock shall have been duly
approved for quotation on Nasdaq.
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<PAGE>
(o) On or before Closing Date, there shall have been delivered to
the Underwriter all of the Lock-up Agreements in final form and substance
satisfactory to Underwriter's Counsel.
If any condition to the Underwriter' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Underwriter may terminate this Agreement or, if
the Underwriter so elects, it may waive any such conditions which have not been
fulfilled or extend the time for their fulfillment.
7. Indemnification. (a) The Company agrees to indemnify and hold harmless
the Underwriter (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and Underwriter's Counsel), and
each person, if any, who controls the Underwriter ("controlling person") within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from
and against any and all loss, liability, claim, damage, and expense whatsoever
(including, but not limited to, reasonable attorneys' fees and any and all
reasonable expense whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever and any
and all amounts paid in settlement of any claim or litigation provided that the
indemnified persons may not agree to any such settlement without the prior
written consent of the Company), as and when incurred, arising out of, based
upon or in connection with (i) any untrue statement or alleged untrue statement
of a material fact contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented); or
(B) in any application or other document or communication (in this Section 7
collectively called "application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company in any
jurisdiction in order to qualify the Registered Securities under the securities
laws thereof or filed with the Commission, any state securities commission or
agency, Nasdaq or any securities exchange; or any omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading (in the case of the Prospectus, in the light
of the circumstances under which they were made), unless such statement or
omission was made in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriter by or on behalf of such
Underwriter expressly for use in any Preliminary Prospectus, the Registration
Statement or Prospectus, or any amendment thereof or supplement thereto, or in
any application, as the case may be; or (ii) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Agreement. The
indemnity agreement in this subsection (a) shall be in addition to any liability
which the Company may have at common law or otherwise.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
Registration Statement, and each other person, if any, who controls the Company,
within the meaning of the Act, to the same extent as the foregoing indemnity
from the Company to the Underwriter but only with respect to statements or
omissions, if any, made in any Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement thereto or in any
application made in reliance upon, and in strict conformity with, written
information furnished to the Company with
30
<PAGE>
respect to the Underwriter by the Underwriter expressly for use in such
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Underwriter in connection with this
Offering. The Company acknowledges that the statements with respect to the
public offering of the Registered Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriter expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriter for
inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure to so notify an indemnifying party shall not relieve it from any
liability which it may have otherwise or which it may have under this Section 7,
except to the extent that it has been prejudiced in any material respect by such
failure). In case any such action is brought against any indemnified party, and
it notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
the reasonable fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld.
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(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, 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 this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Registered Securities or (B) if the allocation provided by clause (A) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of each of the contributing parties, on the one hand, and the
party to be indemnified on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In any case
where the Company is a contributing party and the Underwriter is the indemnified
party, the relative benefits received by the Company on the one hand, and the
Underwriter, on the other, shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Registered Securities (before
deducting expenses other than underwriting discounts and commissions) bear to
the total underwriting discounts received by the Underwriter hereunder, in each
case as set forth in the table on the Cover Page of the Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriter, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subdivision (d), the Underwriter shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Registered Securities purchased by the Underwriter hereunder. No person guilty
of fraudulent misrepresentation (within the meaning of Section 12(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company within the meaning of the Act, each officer of the
Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution may
be made against another party or parties under this subparagraph (d), notify
such party or parties from whom contribution may be sought, but the omission so
to notify such party or parties shall not relieve the party or parties from whom
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contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), or to the extent that such party or
parties were not adversely affected by such omission. The contribution agreement
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements of the Company
at the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the respective
indemnity and contribution agreements contained in Section 7 hereof shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Underwriter, the Company, any controlling person of either
the Underwriter or the Company, and shall survive termination of this Agreement
or the issuance and delivery of the Registered Securities to the Underwriter, as
the case may be.
9. Effective Date. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the date hereof. For purposes of this Section 9, the
Registered Securities to be purchased hereunder shall be deemed to have been so
released upon the earlier of dispatch by the Underwriter of telegrams to
securities dealers releasing such shares for offering or the release by the
Underwriter for publication of the first newspaper advertisement which is
subsequently published relating to the Registered Securities.
10. Termination. (a) Subject to subsection (b) of this Section 10, the
Underwriter shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has disrupted, or in the
Underwriter's reasonable opinion will in the immediate future disrupt the
financial markets; or (ii) any material adverse change in the financial markets
shall have occurred; or (iii) if trading on the New York Stock Exchange, the
American Stock Exchange, or in the over-the-counter market shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the Commission or any other
government authority having jurisdiction; or (iv) if the United States shall
have become involved in a war or major hostilities, or if there shall have been
an escalation in an existing war or major hostilities or a national emergency
shall have been declared in the United States; or (v) if a banking moratorium
has been declared by a state or federal authority; or (vi) if the Company shall
have sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in the
Underwriter's opinion, make it inadvisable to proceed with the delivery of the
Registered Securities; or (viii) if there shall have been such a material
adverse change in the prospects or conditions of the Company, or such material
adverse change in the general market, political or economic conditions, in the
United States or elsewhere as in the Underwriter's judgment would make it
inadvisable to proceed with the offering, sale and/or delivery of the Registered
Securities.
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(b) If this Agreement is terminated by the Underwriter in accordance
with any of the provisions of Section 6, Section 10(a) or Section 11, the
Company shall promptly reimburse and indemnify the Underwriter pursuant to
Section 5(b) hereof. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10 and 11 hereof), and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Default by the Company. If the Company shall fail at the Closing Date
or any Option Closing Date, as applicable, to sell and deliver the number of
Registered Securities which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect to
any Option Shares to be purchased on an Option Closing Date, the Underwriter
may, by notice the Company, terminate the Underwriter' obligation to purchase
Option Shares from the Company on such date) without any liability on the part
of any non-defaulting party other than pursuant to Section 5, Section 7 and
Section 10 hereof. No action taken pursuant to this Section shall relieve the
Company from liability, if any, in respect of such default.
12. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to Auerbach,
Pollak & Richardson, Inc., 450 Park Avenue, New York, New York 10022, Attention:
Michael P. Considine, with a copy, which shall not constitute notice, to
Coleman, Rhine & Goodwin LLP, 750 Lexington Avenue, New York, New York 10022,
Attention: Kenneth S. Goodwin, Esq. Notices to the Company shall be directed to
the Company at 156 William Street, Suite 1204, New York, New York 10038,
Attention: Eugene I. Schuster, with a copy, which shall not constitute notice,
to Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York, New
York 10022, Attention: Robert H. Cohen, Esq.
13. Parties. This Agreement shall inure solely to the benefit of and shall
be binding upon the Underwriter, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Registered Securities from the Underwriter shall be deemed to be a
successor by reason merely of such purchase.
14. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
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15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
16. Entire Agreement; Amendments. This Agreement and the Underwriter's
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Underwriter and the Company.
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If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
ART RENAISSANCE, INC.
By:_______________________
Name:
Title:
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
AUERBACH, POLLAK & RICHARDSON, INC.
By:___________________________
Name:
Title:
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Exhibit 4.4
ART RENAISSANCE, INC.
AND
AUERBACH, POLLAK & RICHARDSON, INC.
UNDERWRITER'S
WARRANT AGREEMENT
Dated as of ______ ____, 1999
<PAGE>
UNDERWRITER'S WARRANT AGREEMENT dated as of ____ ____, 1999, between ART
RENAISSANCE, INC., a Delaware corporation (the "Company"), and AUERBACH, POLLAK
& RICHARDSON, INC. and its assignees or designees (each hereinafter referred to
variously as a "Holder" or "Auerbach").
W I T N E S S E T H :
WHEREAS, Auerbach has agreed pursuant to the underwriting agreement (the
"Underwriting Agreement") between the Company and Auerbach to act as underwriter
(the "Underwriter") in connection with the Company's proposed public offering of
3,400,000 shares of common stock of the Company, $.01 par value, (the "Common
Stock"), at a public offering price of $_____ per share (the "Public Offering").
WHEREAS, pursuant to the Underwriting Agreement, the Company proposes to
issue warrants to the Underwriter to purchase up to an aggregate of 238,000
shares of Common Stock (the "Underwriter's Warrants").
WHEREAS, the Underwriter's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date (as such term is defined in the
Underwriting Agreement) by the Company to the Underwriter in consideration for,
and as part of the Underwriter's compensation in connection with, the
Underwriter acting as the underwriter pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Representatives to the Company of an aggregate of One Hundred Seventy-five
Dollars ($175.00), 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. Auerbach is hereby granted the right to purchase, at any time
from _____ ___, 2000 until 5:30 p.m., New York time, on _____ ___, 2004 (5 years
from the effective date (the "Effective Date") of the registration statement and
any supplement thereto, on Form S-1, No.333- (the "Registration Statement")), at
which time the Underwriter's Warrants expire, up to an aggregate 238,000 shares
of Common stock (subject to adjustment as provided in Section 8 hereof), at an
initial exercise price (subject to adjustment as provided in Section 11 hereof)
of $_____ (125% of the public offering price) (the "Exercise Price").
2. Underwriter's Warrant Certificates. The Underwriter's Warrant
certificates (the "Warrant Certificates") delivered and to be delivered pursuant
to this Agreement shall be in the form set forth in Exhibit A, attached hereto
and made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
3. Registration of Warrant. The Underwriter's Warrants shall be numbered
and shall be registered on the books of the Company when issued.
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4. Exercise of Underwriter's Warrant.
4.1 Method of Exercise. The Underwriter's Warrants initially are
exercisable at the Exercise Price (subject to adjustment as provided in Section
11 hereof) per Underwriter's Warrant set forth in Section 8 hereof payable by
certified or official bank check in New York Clearing House funds. Upon
surrender of a Underwriter's Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise Price
for the shares of Common Stock purchased at the Company's principal offices in
New York (currently located at 156 William Street, New York, New York 10038) the
registered Holder of a Underwriter's Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the shares of
Common Stock so purchased. The purchase rights represented by each Underwriter's
Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional shares of Common Stock underlying the
Underwriter's Warrants). In the case of the purchase of less than all of the
shares of Common Stock purchasable under any Underwriter's Warrant Certificate,
the Company shall cancel said Underwriter's Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Underwriter's Warrant
Certificate of like tenor for the balance of the shares of Common stock
purchasable thereunder.
4.2 Exercise by Surrender of Underwriter's Warrant. In addition to
the method of payment set forth in Section 4.1 and in lieu of any cash payment
required thereunder, the Holder(s) of the Underwriter's Warrants shall have the
right at any time and from time to time to exercise the Underwriter's Warrants
in full or in part by surrendering the Warrant Certificate in the manner
specified in Section 4.1 in exchange for the number of shares of Common Stock
equal to the product of (x) the number of shares of Common Stock as to which the
Underwriter's Warrants are being exercised, multiplied by (y) a fraction, the
numerator of which is the Market Price (as defined in Section 9.3 (e) hereof) of
the shares of Common Stock minus the Exercise Price of the shares of Common
Stock and the denominator of which is the Market Price per share of Common
Stock. Solely for the purposes of this Section 4.2, Market Price shall be
calculated either (i) on the date on which the form of election attached hereto
is deemed to have been sent to the Company pursuant to Section 15 hereof
("Notice Date") or (ii) as the average of the Market Price for each of the five
trading days immediately preceding the Notice Date, whichever of (i) or (ii)
results in a greater Market Price.
5. Issuance of Certificates. Upon the exercise of the Underwriter's
Warrant, the issuance of certificates for shares of Common Stock, properties or
rights underlying such Underwriter's Warrant shall be made forthwith (and in any
event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax, other than income taxes, which
may be payable in respect of the issuance thereof, and such certificates shall
(subject to the provisions of Sections 7 and 9 hereof) 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
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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 Underwriter's Warrant Certificates and the certificates representing
the shares of Common Stock or other securities, property or rights issued upon
exercise of the Underwriter's Warrant shall be executed on behalf of the Company
by the manual or facsimile signature of the then present President or any Vice
President of the Company under its corporate seal reproduced thereon, attested
to by the manual or facsimile signature of the then present Secretary or any
Assistant Secretary of the Company. Underwriter's Warrant Certificates shall be
dated the date of execution by the Company upon initial issuance, division,
exchange, substitution or transfer.
6. Transfer of Underwriter's Warrant. The Underwriter's Warrant shall be
transferable only on the books of the Company maintained at its principal
office, where its principal office may then be located, upon delivery thereof
duly endorsed by the Holder or by its duly authorized attorney or representative
accompanied by proper evidence of succession, assignment or authority to
transfer. Upon any registration transfer, the Company shall execute and deliver
the new Underwriter's Warrant to the person entitled thereto.
7. Restriction On Transfer of Underwriter's Warrant. The Holder of a
Underwriter's Warrant Certificate, by its acceptance thereof, covenants and
agrees that the Underwriter's Warrant is being acquired as an investment and not
with a view to the distribution thereof, and that the Underwriter's Warrant may
not be sold, transferred, assigned, hypothecated or otherwise disposed of, in
whole or in part, for the term of the Underwriter's Warrant, except (i) during
the first year of the term, to officers of the Underwriter and thereafter (ii)
to officers or employees of the Underwriter who are also stockholders of the
Underwriter, or by will, pursuant to the laws of descent and distribution, or by
the operation of law.
8. Exercise Price and Number of Securities. Except as otherwise provided
in Section 10 hereof, each Underwriter's Warrant is exercisable to purchase one
share of Common Stock at an initial exercise price equal to the Exercise Price.
The Exercise Price and the number of shares of Common Stock for which the
Underwriter's Warrant may be exercised shall be the price and the number of
shares of Common Stock which shall result from time to time from any and all
adjustments in accordance with the provisions of Section 11 hereof.
9. Registration Rights.
9.1 Registration Under the Securities Act of 1933. Each
Underwriter's Warrant Certificate and each certificate representing shares of
Common Stock and any of the other securities issuable upon exercise of the
Underwriter's Warrant (collectively, the "Warrant Shares") shall bear the
following legend unless (i) such Underwriter's Warrant or Warrant Shares are
distributed to the public or sold to the underwriters for distribution to the
public pursuant to Section 9 hereof or otherwise pursuant to a registration
statement filed under the Securities Act of 1933, as amended (the "Act"), or(ii)
the Company has received an opinion of counsel, in form
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and substance reasonably satisfactory to counsel for the Company, that such
legend is unnecessary for any such certificate:
THE UNDERWRITER'S WARRANT 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 UNDERWRITER'S WARRANT REPRESENTED BY THE
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE UNDERWRITER'S WARRANT AGREEMENT
REFERRED TO HEREIN.
9.2 Piggyback Registration. If, at any time commencing one (1) year
after the Effective Date and expiring five (5) years thereafter, the Company
proposes to register any of its securities under the Act (other than in
connection with a merger or pursuant to Form S-4 or Form S-8 or successor form
thereto) it will give written notice by registered mail, at least thirty (30)
days prior to the filing of each such registration statement, to the Holders of
the Warrant Shares of its intention to do so. If any of the Holders of the
Warrant Shares notify the Company within twenty (20) days after mailing of any
such notice of its or their desire to include any such securities in such
proposed registration statement, the Company shall afford such Holders of the
Warrant Shares the opportunity to have any such Warrant Shares registered under
such registration statement. In the event that the managing underwriter for said
offering advises the Company in writing that in its opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering without causing a diminution in the offering
price or otherwise adversely affecting the offering, the Company will include in
such registration (a) first, the securities the Company proposes to sell, (b)
second, the securities held by the entities that made the demand for
registration, (c) third, the Warrant Shares requested to be included in such
registration which in the opinion of such underwriter can be sold, pro rata
among the Holders of Warrant Shares on the basis of the number of Underwriter's
Warrant Shares requested to be registered by such Holders, and (d) fourth, other
securities requested to be included in such registration.
Notwithstanding the provisions of this Section 9.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 9.2 (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.
9.3 Demand Registration. (a) At any time commencing one (1) year
after the Effective Date and expiring five (5) years thereafter, the Holders of
the Underwriter's Warrants and/or Warrant Shares representing a "Majority" (as
hereinafter defined) of the Underwriter's
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Warrants and/or Warrant Shares shall have the right (which right is in addition
to the registration rights under Section 9.2 hereof), exercisable by written
notice to the Company, to have the Company prepare and file with the Securities
and Exchange Commission (the "Commission"), on one occasion, a registration
statement and such other documents, including a prospectus, as maybe necessary
in the opinion of both counsel for the Company and counsel for the Holders, in
order to comply with the provisions of the Act, so as to permit a public
offering and sale by such Holders and any other Holders of the Underwriter's
Warrant and/or Warrant Shares who notify the Company within fifteen (15) days
after the Company mails notice of such request pursuant to Section 9.3(b) hereof
(collectively, the "Requesting Holders") of their respective Warrant Shares for
the earlier of (i) six (6) consecutive months or (ii) until the sale of all of
the Warrant Shares requested to be registered by the Requesting Holders.
(b) The Company covenants and agrees to give written notice of
any registration request under this Section 9.3 by any Holder or Holders
representing a Majority of the Underwriter's Warrants and/or Warrant Shares to
all other registered Holders of the Underwriter's Warrants and the Warrant
Shares within ten (10) days from the date of the receipt of any such
registration request.
(c) The Company shall not be required to file a registration
statement for the Warrant Shares if, within twenty (20) days after its receipt
of a notice pursuant to Section 9.3(a), it provides written notice (a
"Repurchase Notice") to all registered Holders of its intention to repurchase
any and all Underwriter's Warrants and/or Warrant Shares. The repurchase price
shall be equal to (i) with respect to the Underwriter's Warrants, the difference
between the Market Price (as defined in Section 9.3(e)) per share of Common
Stock on the date of the notice sent pursuant to Section 9.3(a) and the exercise
price of the Underwriter's Warrants and (ii) with respect to the Warrant Shares,
the Market Price (as defined in Section 9.3(e)) per share of Common Stock on the
date of the notice sent pursuant to Section 9.3(a). All Holders who desire to
participate in such repurchase shall notify the Company in writing within ten
(10) days of their receipt of a Repurchase Notice. Such repurchase shall be in
immediately available funds and shall close within two (2) days after the
expiration of the ten (10) day period specified in the preceding sentence.
(d) Notwithstanding anything to the contrary contained herein,
if the Company shall not have filed a registration statement for the Warrant
Shares within the time period specified in Section 9.4(a) hereof pursuant to the
written notice specified in Section 9.3(a) of the Holders of a Majority of the
Underwriter's Warrants and/or Warrant Shares, the Company, at the option of the
Holders of a Majority, will be required to repurchase (i) any and all Warrant
Shares at the higher of the Market Price (as defined in Section 9.3(e)) per
share of Common Stock on (x) the date of the notice sent pursuant to Section
9.3(a) or (y) the expiration of the period specified in Section 9.4(a) and (ii)
any and all Underwriter's Warrants at such Market Price per share of Common
Stock less the Exercise Price of such Underwriter's Warrants. The Holders of a
Majority shall notify the Company in writing of their election to require such
repurchase. Such repurchase shall be in immediately available funds and shall
close within two
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(2) days after the later of (i) the expiration of the period specified in
Section 9.4(a) or (ii) the delivery of the written notice of election specified
in this Section 9.3(d).
(e) Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be the average of the last
reported sale prices for the last five (5) trading days, as officially reported
by the principal securities exchange on which the Common Stock is listed or
admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, the average closing sale price as
furnished by the Nasdaq National Market System ("Nasdaq"), or if the Common
Stock is not quoted on Nasdaq, as determined in good faith by resolution of the
Board of Directors of the Company, based on the best information available to
it.
9.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Sections 9.2 or 9.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within ninety (90) days of receipt of any demand
therefor, and to have any registration statements declared effective at the
earliest possible time, shall furnish each Holder desiring to sell Warrant
Shares such number of prospectuses as shall reasonably be requested and shall
maintain the effectiveness of such registration statement for a period of at
least twelve (12) months. Notwithstanding the foregoing sentence, the Company
shall be entitled one time only to postpone the filing of any registration
statement otherwise required to be prepared and filed by it pursuant to this
Section 9.4(a) if the Company is (i) publicly committed to a self-tender or
exchange offer and the filing of a registration statement would cause a
violation of Regulation M under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or (ii) involved in negotiating or consummating an
acquisition or merger which would make such registration impracticable, in
either of which cases the filing of the registration statement may be delayed
for a period of up to 60 days. The Company shall promptly deliver to the Holders
a written notice of postponement, which notice shall specifically set forth the
reason for such postponement. Following the delivery of such notice, the Company
shall be required to file the postponed registration statement upon the earlier
of (i) the consummation or termination, as applicable, of the event requiring
such postponement (ii) 60 days after delivery of the aforementioned notice.
(b) The Company shall pay all costs (excluding fees and
expenses of Holder(s)' counsel and any underwriting or selling commissions, and
excluding roadshow expenses if the only shares to be registered in such
Registration Statement are Warrant Shares), fees and expenses in connection with
all registration statements filed pursuant to Sections 9.2 and 9.3(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees and
expenses (including those of the Company)in connection with the registration
statement filed pursuant to Section 9.3(c).
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(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Shares included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), 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.
(d) The Company shall indemnify the Holder(s)of the Warrant
Shares 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 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 each of the
Underwriters contained in Section 7 of the Underwriting Agreement.
(e) The Holder(s) of the Warrant Shares 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 information
furnished in writing by or on behalf of such Holders, 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 Section 7 of the
Underwriting Agreement pursuant to which the Underwriter has agreed to indemnify
the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Underwriter's Warrant prior to the
initial filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Shares to be included in any registration
statement filed pursuant to Section 9.3 hereof, or permit any other registration
statement to be or remain effective during the effectiveness of a registration
statement filed pursuant to Section 9.3 hereof (other than registration
statements filed prior to an exercise of registration rights by a Holder of
Underwriter's Warrants and/or Warrant Shares pursuant to Section 9.2 hereof),
without the prior written consent of Auerbach or as otherwise required by the
terms of any existing registration rights granted prior to the date of this
Agreement by the Company to the holders of any of the Company's securities.
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(h) In the event of an underwritten offering, the Company
shall furnish to each Holder participating in the offering and to each
underwriter 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 as soon as practicable after the
effective date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall enter into an underwriting agreement
with the managing underwriters (in the case of registration rights exercised
pursuant to Section 9.3 hereof, selected for such underwriting by Holders
holding a Majority of the Warrant Shares requested to be included in such
underwriting, which may be the Representative). 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 shall be parties to
any underwriting agreement relating to an underwritten sale of their Warrant
Shares and 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) For purposes of this Agreement, the term "Majority" in
reference to the Underwriter's Warrants or Warrant Shares shall mean in excess
of fifty percent (50%) of the then outstanding Underwriter's Warrants or Warrant
Shares that (i) are not held by the Company, an affiliate, officer, creditor,
employee or agent thereof or any of their respective affiliates, members of
their family, persons acting as nominees or in conjunction therewith or (ii)
have not been resold to the public pursuant to a registration statement filed
with the Commission under the Act.
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10. Obligations of Holders. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 9 hereof that
each of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Warrant Shares held by them, the intended method of sale or
other disposition of such securities, the identity of and compensation to be
paid to any underwriters proposed to be employed in connection with such sale or
other disposition, and such other information as may reasonably be required to
effect the registration of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus relating
to the Warrant Shares covered by a registration statement is required to be
delivered under the Act, of the happening of any event with respect to such
selling Holder as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.
11. Adjustments to Exercise Price and Number of Securities. The Exercise
Price in effect at any time and the number and kind of securities purchased upon
the exercise of the Underwriter's Warrant shall be subject to adjustment from
time to time only upon the happening of the following events:
11.1 In case the Company shall (i) declare a dividend on its Common
Stock in Common Stock or make a distribution of Common Stock, (ii) subdivide its
outstanding Common Stock, (iii) combine its outstanding Common Stock into a
smaller number of shares of Common Stock or (iv) issue by reclassification of
its Common Stock other securities of the Company (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), the number of Warrant Shares purchasable
upon exercise of each Underwriter's Warrant immediately prior thereto shall be
adjusted so that the Holder of each Underwriter's Warrant shall be entitled to
receive the kind and number of shares of Common Stock or other securities of the
Company which he would have owned or have been entitled to receive after the
happening of any of the events described above, had such Underwriter's Warrant
been exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph 11.1
shall become effective immediately after the effective date of such event
retroactive to immediately after the record date, if any, for such event.
11.2 In case the Company shall issue rights, options or warrants to
all holders of its Common Stock, without any charge to such holders, entitling
them (for a period expiring within 45 days after the record date mentioned below
in this paragraph 11.2) to subscribe for or to purchase Common Stock at a price
per share that is lower at the record date mentioned below than the then current
market price per share of Common Stock (as defined in paragraph 11.4 below), the
number of Warrant Shares thereafter purchasable upon exercise of each
Underwriter's Warrant shall be determined by multiplying the number of Warrant
Shares theretofore purchasable upon exercise of each Underwriter's Warrant by a
fraction, of which the
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<PAGE>
numerator shall be the number of shares of Common Stock outstanding on such
record date plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the denominator shall be the number of
shares of Common Stock outstanding on such record date plus the number of shares
which the aggregate offering price of the total number of shares of Common Stock
so offered would purchase at the then current market price per shares of Common
Stock. Such adjustment shall be made whenever such rights, options or warrants
are issued, and shall become effective retroactively to immediately after the
record date for the determination of stockholders entitled to receive such
rights, options or warrants.
11.3 In case the Company shall distribute to all holders of its
shares of Common Stock securities other than Common Stock or evidences of its
indebtedness or assets (excluding cash dividends payable out of consolidated
earnings or retained earnings and dividends or distributions referred to in
paragraph 11.1 above) or rights, options or warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase shares
of Common Stock (excluding those referred to in paragraph 11.2 above), then in
each case the number of Warrant Shares thereafter issuable upon the exercise of
each Underwriter's Warrant shall be determined by multiplying the number of
Warrant Shares theretofore issuable upon the exercise of each Underwriter's
Warrant, by a fraction, of which the numerator shall be the current market price
per shares of Common Stock (as defined in paragraph 11.4 below) on the record
date mentioned below in this paragraph 11.3, and of which the denominator shall
be the current market price per shares of Common Stock on such record date, less
the then fair value (as determined by the Board of Directors of the Company,
whose determination shall be conclusive) of the portion of the shares of stock
other than Common Stock or assets or evidences of indebtedness so distributed or
of such subscription rights, options or warrants, or of such convertible or
exchangeable securities applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made, and shall become effective
on the date of distribution retroactive to immediately after the record date for
the determination of stockholders entitled to receive such distribution.
11.4 For the purpose of any computation under paragraphs 11.2 and
11.3 of this Section 11, the current market price per share of Common Stock at
any date shall be the average of the daily closing prices for fifteen (15)
consecutive trading days commencing twenty (20) trading days before the date of
such computation. The closing price for each day shall be the last reported sale
price regular way or, in case no such reported sale takes place on such day, the
average of the closing bid and asked prices regular way for such day, in either
case on the principal national securities exchange on which the shares are
listed or admitted to trading, or if they are not listed or admitted to trading
on any national securities exchange, but are traded in the over-the-counter
market, the closing sale price of the Common Stock or, in case no sale is
publicly reported, the average of the representative closing bid and asked
quotations for the Common Stock on Nasdaq or any comparable system, or if the
shares of Common Stock are not listed on Nasdaq or a comparable system, the
closing sale price of the Common Stock or, in case no sale is publicly reported,
the average of the closing bid and asked prices as furnished by two members of
the NASD selected from time to time by the Company for that purpose.
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<PAGE>
11.5 No adjustment in the number of Warrant Shares purchasable
hereunder or the Exercise price thereof shall be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the number
of Warrant Shares purchasable upon the exercise of each Underwriter's Warrant;
provided, however, that any adjustments which by reason of this paragraph 11.5
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment, but not later than three years after the happening of
the specified event or events. All calculations shall be made to the nearest one
thousandth of a share. Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled, but shall not be required, to
make such changes in the number of Warrant Shares purchasable upon the exercise
of each Underwriter's Warrant, in addition to those required by this Section 11,
as it in its discretion shall determine to be advisable in order that any
dividend or distribution in shares of Common Stock, subdivision,
reclassification or combination of shares of Common Stock, issuance of rights,
warrants or options to purchase Common Stock, or distribution of shares of stock
other than Common Stock, evidences of indebtedness or assets (other than
distributions of cash out of consolidated earnings or retained earnings) or
convertible or exchangeable securities hereafter made by the Company to the
holders of its shares of Common Stock shall not result in any tax to the holders
of its Common Stock or securities convertible into Common Stock.
11.6 Whenever the number of Warrant Shares purchasable upon the
exercise of each Underwriter's Warrant is adjusted, as herein provided, the
Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to such adjustment by a fraction, of which the numerator shall
be the number of Warrant Shares purchasable upon the exercise of each
Underwriter's Warrant immediately prior to such adjustment, and of which the
denominator shall be the number of Warrant Shares so purchasable immediately
thereafter.
11.7 For the purpose of this Section 11, the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the Company
at the date of this Agreement or (ii) any other class of stock resulting from
successive changes or reclassifications of such shares consisting solely of
changes in par value, or from no par value to par value, or from par value to no
par value. In the event that at any time, as a result of an adjustment made
pursuant to paragraph 11.1 above, the Holders shall become entitled to purchase
any shares of capital stock of the Company other than Common Stock, thereafter
the number of such other shares so purchasable upon exercise of each
Underwriter's Warrant and the Exercise Price of such shares shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Warrant Shares contained in
paragraphs 11.1 through 11.6, inclusive, and paragraphs 11.8 through 11.13,
inclusive, of this Section 11, and the provisions of Sections 4, 5, 9 and 13,
with respect to the Warrant Shares, shall apply on like terms to any such other
shares.
11.8 Upon the expiration of any rights, options, warrants or
conversion rights or exchange privileges granted pursuant to paragraphs 11.2 and
11.3 above, if any thereof shall not have been exercised, the Exercise Price and
the number of shares of Common Stock purchasable upon the exercise of each
Underwriter's Warrant shall, upon such expiration, be
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<PAGE>
readjusted and shall thereafter be such as it would have been had it originally
been adjusted (or had the original adjustment not been required, as the case may
be) as if (i) the only shares of Common Stock so issued were the shares of
Common Stock, if any, actually issued or sold upon the exercise of such rights,
options, warrants or conversion rights or exchange privileges and (ii) such
shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the issuance, sale
or grant of all of such rights, options, warrants or conversion rights or
exchange privileges whether or not exercised; provided, however, that no such
readjustment shall have the effect of increasing the Exercise Price by an amount
in excess of the amount of the adjustment initially made in respect to the
issuance, sale or grant of such rights, options, warrants or conversion rights
or exchange privileges.
11.9 The Company may, at its option, at any time during the term of
the Underwriter's Warrants, reduce the then current Exercise Price to any amount
deemed appropriate by the Board of Directors of the Company.
11.10 Whenever the number of Warrant Shares issuable upon the
exercise of each Underwriter's Warrant or the Exercise Price of such Warrant
Shares is adjusted, as herein provided, the Company shall promptly mail by first
class mail postage prepaid, to each Holder notice of such adjustment or
adjustments. The Company shall retain a firm of independent public accountants
(who may be the regular accountants employed by the Company) to make any
computation required by this Section 11 and shall cause such accountants to
prepare a certificate setting forth the number of Warrant Shares issuable upon
the exercise of each Underwriter's Warrant and the Exercise Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such
adjustment was made. Such certificate shall be conclusive on the correctness of
such adjustment and each Holder shall have the right to inspect such certificate
during reasonable business hours.
11.11 Except as provided in this Section 8, no adjustment in respect
of any dividends shall be made during the term of the Underwriter's Warrants or
upon the exercise of the Underwriter's Warrants.
11.12 In case of any consolidation of the Company with, or merger
of, the Company with or into another corporation or in case of any sale or
conveyance to another corporation of the property of the Company as an entirety
or substantially as an entirety, the Company or such successor or purchasing
corporation (or an affiliate of such successor or purchasing corporation), as
the case may be, agrees that each Holder shall have the right thereafter upon
payment of the Exercise Price in effect immediately prior to such action to
purchase upon exercise of each Underwriter's Warrant the kind and amount of
shares and other securities and property (including cash) which he would have
owned or have been entitled to receive after the happening of such
consolidation, merger, sale or conveyance had such Underwriter's Warrant been
exercised immediately prior to such action. The provisions of this paragraph
11.12 shall similarly apply to successive consolidations, mergers, sales or
conveyances.
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<PAGE>
11.13 Notwithstanding any adjustment in the Exercise Price or the
number or kind of shares purchasable upon the exercise of the Underwriter's
Warrants pursuant to this Agreement, certificates for Underwriter's Warrants
issued prior or subsequent to such adjustment may continue to express the same
price and number and kind of Warrant Shares as are initially issuable pursuant
to this Agreement.
11.14 Each Underwriter's 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 Underwriter's Warrant
Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of Warrant Shares 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 Underwriter's 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 Underwriter's Warrant, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
12. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of shares of Common stock upon the
exercise of the Underwriter's Warrant, nor shall it be required to issue scrip
or pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
13. Reservation and Listing of Securities. 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 Underwriter's Warrant, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. Every transfer agent ("Transfer
Agent") for the Common Stock and other securities of the Company issuable upon
the exercise of the Underwriter's Warrant will be irrevocably authorized and
directed at all times to reserve such number of authorized shares of Common
Stock and other securities as shall be requisite for such purpose. The Company
will keep a copy of this Agreement on file with every Transfer Agent for the
Common Stock and other securities of the Company issuable upon the exercise of
the Underwriter's Warrant. The Company will supply every such Transfer Agent
with duly executed stock and other certificates, as appropriate, for such
purpose. The Company covenants and agrees that, upon exercise of the
Underwriter's Warrant 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 Underwriter's Warrant shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Underwriter's Warrant to be
listed (subject to official notice of issuance) on all
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<PAGE>
securities exchanges on which the Common Stock issued to the public in
connection herewith may then be listed and/or quoted on Nasdaq.
14. Notices to Underwriter's Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders 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 Underwriter's 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
(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 fifteen (15) days prior to the date fixed as a
record date or 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 notice 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.
15. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have be unduly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) if to the registered Holder of the Underwriter's Warrant,
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 in Section 4
hereof or to such other address as the Company may designate by notice to the
Holders.
15
<PAGE>
16. Supplements; Amendments; Entire Agreement. This Agreement (including
the Underwriting Agreement to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof and may not be modified or amended except
by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought. The Company and the Underwriter may from
time to time supplement or amend this Agreement without the approval of any
holders of Underwriter's Warrant Certificates (other than the Underwriter) in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Underwriter may deem necessary or desirable and which
the Company and the Underwriter deem shall not adversely affect the interests of
the Holders of Underwriter's Warrant Certificates.
17. Successors. All of 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.
18. Survival of Representations and Warranties. All statements in any
schedule, exhibit or certificate or other instrument delivered by or on behalf
of the parties hereto, or in connection with the transactions contemplated by
this Agreement, shall be deemed to be representations and warranties hereunder.
Notwithstanding any investigations made by or on behalf of the parties to this
Agreement, all representations, warranties and agreements made by the parties to
this Agreement or pursuant hereto shall survive.
19. Governing Law. This Agreement and each Underwriter's Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York 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.
20. Severability. If any provision of this Agreement shall beheld to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. 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.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Underwriter and any other registered Holder(s) of the Underwriter's Warrant
Certificates or Warrant Shares 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 Underwriter and any other Holder(s) of the
Underwriter's Warrant Certificates or Warrant Shares.
16
<PAGE>
23. 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.
17
<PAGE>
IN WITNESS OF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
ATTEST: ART RENAISSANCE, INC.
___________________________________ By:_____________________________________
Name:
Title:
AUERBACH, POLLAK & RICHARDSON, INC.
By:_____________________________________
Name:
Title:
18
<PAGE>
EXHIBIT A
[FORM OF UNDERWRITER'S WARRANT CERTIFICATE]
THE UNDERWRITER'S WARRANT 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 UNDERWRITER'S WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
EXERCISABLE ON OR BEFORE 5:30 P.M., NEW YORK TIME, ______ ___, 2004.
Underwriter's Warrant No.
238,000 Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that _______, or registered assigns, is the
registered holder of Warrants to purchase initially, at any time from ______
___, 2000 until 5:30 p.m., New York time on _____ ___, 2004 ("Expiration Date"),
up to ____ shares of fully-paid and non-assessable common stock, $.01 par value
("Common Stock") of Art Renaissance, Inc., a Delaware corporation (the
"Company") at the initial exercise price, subject to adjustment in certain
events, of $_____ per share (the "Exercise Price") upon surrender of this
Underwriter's Warrant Certificate and payment of the Exercise Price at an office
or agency of the Company, but subject to the conditions set forth herein and in
the Underwriter's Warrant Agreement dated as of ____ __, 1999 between the
Company and Auerbach, Pollak & Richardson, Inc. (the "Warrant Agreement").
Payment of the Exercise Price shall be made either (i) by certified or official
bank check in New York Clearing House funds payable to the order of the Company
or (ii) by surrender of this Warrant Certificate in accordance with the
provisions of Section 4.2 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Underwriter's Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void. The Underwriter's
Warrants evidenced by this Warrant Certificate are part of a duly authorized
issue of Underwriter's Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
1
<PAGE>
instrument and is hereby referred to for a description of the rights, limitation
of 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 Underwriter's Warrant.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable upon the exercise of the Underwriter's Warrants 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 and/or type of securities issuable upon the
exercise of the Underwriter's 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 Warrant
Agreement.
Upon due presentment for registration of 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 Underwriter's Warrant shall be issued to the transferee(s) in exchange for
this Warrant Certificate, subject to the limitations provided herein and in the
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 Underwriter's Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such numbered unexercised Underwriter's
Warrant.
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(s) hereof, 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
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
This Warrant Certificate does not entitle any holder thereof to any of the
rights of a shareholder of the Company.
2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of ____ __, 1999
ATTEST: ART RENAISSANCE, INC.
___________________________________ By:_____________________________________
Name:
Title:
3
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby elects irrevocably to exercise the within Warrant
and to purchase _____ shares of Common Stock of ART RENAISSANCE, INC. and hereby
makes payment of $_________ (at the rate of $____ per share) in payment of the
Exercise Price pursuant thereto. Please issue the Common Stock as to which this
Warrant is exercised in accordance with the instructions given below.
or
The undersigned hereby elects irrevocably to exercise the within
Warrant and to purchase ___________ shares of Common Stock of ART RENAISSANCE,
INC. by surrender of the unexercised portion of the within Warrant Certificate
(with a "Value" of $______________ based on a "Market Price" of $___________).
Please issue the Common Stock in accordance with the instructions given below.
Dated: _________________
Signature: ____________________________
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant Certificate.)
Address: _______________________________________
_______________________________________
_______________________________________
(Insert Social Security or Other Identifying Number of Holder)
Signature Guaranteed: ______________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name _____________________________________________
(Print in Block Letters)
Address __________________________________________
4
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder desires to
transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________ here sells, assigns and transfers unto
[NAME 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, with full power of substitution.
Dated: ____________________
Signature: __________________________________
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant Certificate.)
Address: _______________________________________
_______________________________________
_______________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature
Guaranteed: _______________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
5
<PAGE>
Exhibit 10.2
EXECUTION COPY
================================================================================
ASSET PURCHASE AND CONSIGNMENT AGREEMENT
dated as of
May 31, 1997
by and among
MCM LIMITED PARTNERSHIP,
ART RENAISSANCE, INC.
and
ART RENAISSANCE CHICAGO, INC.
================================================================================
<PAGE>
ASSET PURCHASE AND CONSIGNMENT AGREEMENT
TABLE OF CONTENTS
Page
----
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 Agreement to Sell and Purchase ............................... 1
1.2 Acquired Assets .............................................. 2
1.3 Excluded Assets .............................................. 3
1.4 Assumed Liabilities .......................................... 4
1.5 Retained Liabilities ......................................... 5
1.6 Purchase Price; Allocation of Purchase Price ................. 6
1.7 Agreement Regarding TBO's .................................... 7
1.8 [Intentionally Omitted] ...................................... 7
1.9 Additional Provisions ........................................ 7
ARTICLE II
CONSIGNMENT OF CERTAIN INVENTORY
2.1 Grant of Rights .............................................. 10
2.2 Consignment Fee .............................................. 10
2.3 Labelling of Consigned Inventory ............................. 14
2.4 Costs ........................................................ 14
2.5 Insurance; Storage of Consigned Inventory .................... 14
2.6 Title; UCC Filings ........................................... 15
2.7 Removal of Consigned Inventory; Inspection ................... 15
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MCM
3.1 Organization and Good Standing ............................... 15
3.2 Authority .................................................... 16
3.3 No Conflicts ................................................. 16
3.4 Consents and Approvals ....................................... 16
3.5 No Interest in Other Entities ................................ 16
3.6 Compliance with Law ..... .................................... 16
3.7 Compliance with Material Agreements and Leases ............... 17
3.8 Ordinary Course ...... ....................................... 17
3.9 Litigation ................................................... 17
3.10 Fairness of Financial Statements............................. 17
3.11 Tax Returns ........... ..................................... 18
3.12 Proprietary Rights ........................................... 18
3.13 Employees .................................................... 18
3.14 Environmental Matters ........................................ 18
3.15 Brokers and Finders .......................................... 18
i
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Page
----
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ARI AND SUB
4.1 Organization and Good Standing ............................... 19
4.2 Authority .................................................... 19
4.3 No Conflicts ................................................. 19
4.4 Consents and Approvals ....................................... 20
4.5 Subsidiaries ................................................. 20
4.6 Compliance with Law .......................................... 20
4.7 Litigation ................................................... 20
4.8 Solvency ..................................................... 20
4.9 Brokers and Finders .......................................... 21
ARTICLE V
ADDITIONAL COVENANTS
5.1 Certificate of Incorporation and By-Laws of Sub;
Agreement to Appoint MCM Director ............................ 21
5.2 Compliance with Bulk Sales Laws .............................. 21
5.3 Agreement Regarding Employees ................................ 21
5.4 Agreement Regarding Computer Files ........................... 22
5.5 Publicity; Disclosure ........................................ 22
5.6 Notice of Litigation ......................................... 22
5.7 Additional Agreements Regarding Certain Actions by Sub ....... 23
5.8 Agreement to Negotiate Subordination Agreement ............... 24
ARTICLE VI
CLOSING DELIVERIES OF ARI AND SUB
6.1 Sub Security Agreement ....................................... 25
6.2 ARI Pledge and Security Agreement ............................ 25
6.3 Subleases .................................................... 25
6.4 ARI Guaranty ................................................. 26
6.5 Certificate of Incorporation; By-Laws ........................ 26
6.6 [Intentionally Omitted] ...................................... 26
6.7 Authorizing Resolutions of ARI and Sub ....................... 26
6.9 Evidence of Insurance ........................................ 26
6.10 UCC Consignment Statements ................................... 26
6.11 Bill of Assumption ........................................... 26
6.12 Purchase Price; Other Payments ............................... 26
ARTICLE VII
CLOSING DELIVERIES OF MCM
7.1 Sub Security Agreement ....................................... 27
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Page
----
7.2 ARI Pledge and Security Agreement ............................ 27
7.3 Subleases .................................................... 27
7.4 Bill of Sale ................................................. 27
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification by MCM ....................................... 27
8.2 Indemnification by ARI and Sub ............................... 27
8.3 Indemnification Payments ..................................... 28
8.4 Procedure for Third Party Claims ............................. 28
8.5 Limitation of Indemnification ................................ 29
8.6 Survival ..................................................... 30
ARTICLE IX
MISCELLANEOUS
9.1 Agreement to Govern .......................................... 30
9.2 Severability ................................................. 30
9.3 Notices and Other Communications ............................. 30
9.4 Law to Govern ................................................ 31
9.5 Successors and Assigns ....................................... 31
9.6 Further Assurances ........................................... 32
9.7 Gender, Number and Headings .................................. 32
9.8 Modification or Amendment .................................... 32
9.9 Waiver of Provisions ......................................... 32
9.10 Expenses ..................................................... 32
9.11 Counterparts ................................................. 32
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INDEX OF DEFINED TERMS
Page
defined
-------
Acquired Assets ...............................................................2
Actual Annual Payment ........................................................13
Aggregate Consignment Fees ...................................................11
Aggregate Weekly Payments ....................................................11
Agreement .....................................................................1
ARI ...........................................................................1
ARI Guaranty .................................................................26
ARI Indemnified Parties ......................................................27
Assumed Liabilities ...........................................................4
Business ......................................................................1
CAW Agreement .................................................................3
COBRA ........................................................................22
COBRA Beneficiaries ..........................................................22
Confidentiality Agreement .....................................................4
Consigned Inventory ..........................................................10
Consignment Fees .............................................................10
Consignment Period ...........................................................10
Contracts .....................................................................2
Escrow Agreement ..............................................................6
Excluded Assets ...............................................................3
Financial Statements .........................................................17
Flat-Rate Payment ............................................................10
Georgetown Location ...........................................................4
Indemnified Party ............................................................28
Indemnifying Party ...........................................................28
Interim Financial Statements .................................................17
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Page
defined
-------
Inventory .....................................................................3
Layaways ......................................................................2
Liens .........................................................................1
Losses .......................................................................27
MCM ...........................................................................1
MCM Indemnified Parties ......................................................28
Minimum Annual Payment .......................................................13
Organic Transaction ..........................................................13
Permitted Liens ...............................................................1
Permitted Locations ..........................................................14
Pledge and Security Agreement ................................................25
Proprietary Rights ...........................................................18
Purchase Price ................................................................6
Reconciliation Statement .....................................................11
Retained Liabilities ..........................................................5
Security Agreement ...........................................................25
Sub ...........................................................................1
Sublease Agreements ..........................................................25
Subordination Agreement ......................................................24
Taxes .........................................................................5
TBO Payment ...................................................................7
TBO's .........................................................................2
Third Party Consigned Inventory ...............................................3
UCC Consignment Statements ...................................................15
Weekly Payment ...............................................................12
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EXECUTION COPY
ASSET PURCHASE AND CONSIGNMENT AGREEMENT
THIS ASSET PURCHASE AND CONSIGNMENT AGREEMENT (this "Agreement") is made
and entered into as of May 31, 1997, by and among MCM LIMITED PARTNERSHIP, an
Illinois limited partnership d/b/a Merrill Chase Galleries and Gallery Lara
("MCM"), ART RENAISSANCE, INC., a Delaware corporation ("ARI"), and ART
RENAISSANCE CHICAGO, INC., a Delaware corporation and wholly-owned subsidiary of
ARI ("Sub").
W I T N E S S E T H:
WHEREAS, MCM is engaged in the sale and other distribution of works of art
and various materials related thereto (the "Business");
WHEREAS, ARI is engaged in a business similar to the Business;
WHEREAS, ARI has heretofore organized Sub as a single-purpose wholly-owned
subsidiary for the purpose of consummating the transactions contemplated hereby
and for the purpose of operating certain Chicago-area art galleries currently
operated by MCM, and is willing to execute this Agreement indicating its
agreement to be jointly and severally liable for Sub's obligations hereunder;
WHEREAS, Sub desires to purchase from MCM, and MCM desires to sell to Sub,
certain of the assets used in the Business on an "as is-where is" basis for the
consideration and upon the terms and conditions hereinafter set forth; and
WHEREAS, MCM agrees to consign to Sub certain inventory of MCM, and Sub
agrees to act as consignee with respect to such inventory, on the terms and
conditions hereinafter set forth.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein and other valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 Agreement to Sell and Purchase. Upon the terms and subject to the
conditions set forth herein, MCM hereby sells, transfers, assigns, conveys and
delivers to Sub, and Sub hereby purchases from MCM, the Acquired Assets (as
defined in Section 1.2 hereof), excluding only the Excluded Assets (as defined
in Section 1.3 hereof), free and clear of all mortgages, liens, security
interests or encumbrances (collectively, "Liens"), other than Liens with respect
to the Assumed Liabilities (as defined in Section 1.4 hereof) or Liens set forth
on Schedule 1.1 hereto (collectively, the "Permitted Liens")
<PAGE>
1.2 Acquired Assets. As used herein, the term "Acquired Assets" shall mean
all right, title and interest of MCM in and to any and all current and long-term
assets associated with the Business on the date hereof, whether real, personal
or mixed, tangible or intangible, excluding only the Excluded Assets. Without
limiting the generality of the foregoing, the Acquired Assets shall include the
following:
(a) all current and long-term assets listed on Schedule 1.2(a)
attached hereto, together with all of MCM's office supplies, general
supplies, packing materials and framing materials (i.e., miscellaneous
framing samples and supplies, but excluding completed frames);
(b) all accounts receivable of MCM listed on Schedule 1.2(b) hereto;
(c) all right, title and interest of MCM in, to and under each of
the open customer layaway orders (collectively, the "Layaways") identified
on Schedule 1.2(c) hereto, it being agreed that, notwithstanding the
foregoing, any item of inventory relating to Layaways in the possession of
MCM on the date hereof shall remain the property of MCM and shall be
included in the Consigned Inventory (as defined in Section 2.1);
(d) all right, title and interest of MCM in, to and under each of
the open customer orders classified as "To Be Ordered's" (collectively,
"TB0's"), identified on Schedule 1.2(d) hereto;
(e) all right, title and interest of MCM in, to and under each of
the contracts, agreements, understandings, policies and arrangements
listed on Schedule 1.2(e) hereto (collectively the "Contracts"), a copy of
each of which has previously been provided or otherwise made available to
ARI and/or Sub;
(f) all right, title and interest of MCM in, to and under any
trademarks, trade names or assumed names currently used by MCM in the
Business, including, without limitation, the names "Merrill Chase
Galleries," "Gallery Lara" and "The Artique" and any marks associated
therewith and derivatives thereof;
(g) the MCMLP 401(k) Plan, together with the trust related thereto;
and
(h) all books of account, records (other than partnership or
corporate records), research and resource materials, plans, files,
invoices, order files, customer lists, supplier lists, catalogs,
information sheets, pricing sheets, advertising and display materials and
brochures, financial and inventory software, and all other files, records
and data of MCM used in or related to the Business,
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except to the extent such materials relate to the Excluded Assets and/or
Retained Liabilities and, in each case, subject to the access provisions
of Section 1.9(d)(ii).
1.3 Excluded Assets. Notwithstanding the foregoing, the Acquired Assets
shall not include, and neither ARI nor Sub shall purchase, the following assets
(collectively, the "Excluded Assets"), which Excluded Assets shall be retained
by MCM and shall not be sold, assigned or transferred to either of ARI or Sub:
(a) all cash and cash reserves of MCM, including all temporary cash
investments, bank deposits, rights to funds generated from credit card
receipts relating to sales made prior to the date hereof (without regard
to when such funds are actually received by MCM), marketable securities,
certificates of deposit, commercial paper, treasury bills, notes and other
similar investments;
(b) all inventory owned by MCM, including, without limitation, the
Consigned Inventory (as defined in Section 2.1) (collectively, the
"Inventory"), and all proceeds of the foregoing;
(c) all customer deposits made on or prior to the date hereof in
respect of any item of Inventory, any Layaway or any of the TBO's;
(d) all lease or rental prepayments, or security or other deposits
of MCM;
(e) all inventory or other property held by MCM on a consignment
basis or otherwise in the possession of MCM but owned by third parties
(collectively, "Third Party Consigned Inventory"), it being understood
that Sub shall take physical possession of, but not legal title to, any of
such consigned property the consignor of which consents to the transfer to
Sub thereof;
(f) all right, title and interest of MCM in, to and under that
certain Consignment, Royalty and Asset Purchase Agreement, dated November
10,1995 (the "CAW Agreement"), between MCM and Corporate Artworks Ltd.,
including, without limitation, any assets, inventory or other property of
MCM consigned thereunder or rights to receive proceeds pursuant thereto;
(g) all right, title and interest of MCM in, to and under any claims
and/or rights against third parties that (i) relate to MCM or the Business
prior to the date hereof, to any Excluded Asset or to any Retained
Liability, whether or not currently existing or asserted, and (ii) do not
directly relate to the Assumed Liabilities;
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(h) all partnership and/or corporate records, books of account, tax
returns and other records and documents of MCM and its partners not
specifically related to the operation of the Business;
(i) all right, title and interest of MCM in and to its Washington,
D.C. (Georgetown) location (the "Georgetown Location") and any assets or
property of MCM located at or directly related to conduct of business by
MCM at such location (it being understood that MCM will not use the name
Merrill Chase or any derivatives thereof with respect to the Georgetown
Location, other than as may be required in connection with documentation
relating to the leasing or subleasing thereof);
(j) all insurance premiums prepaid by MCM prior to the date hereof;
provided, however, that such premiums may be retained by ARI or Sub to the
extent any of such policies is transferred to ARI and/or Sub and MCM is
reimbursed in full for the remaining amount of any such prepayments;
(k) all prepaid taxes and any rights of MCM to any federal, state,
local or foreign tax refunds or carrybacks or any payment under any tax
sharing, tax allocation or similar agreements;
(l) all right, title and interest of MCM in and to each of the
assets identified on Schedule 1.3(1) hereto;
(m) all right, title and interest of MCM in, to and under this
Agreement, that certain Confidentiality Agreement, dated May 9, 1996 (the
"Confidentiality Agreement"), between ARI and MCM, and under any other
agreement between or among MCM, ARI and/or Sub entered into on or after
the date of this Agreement; and
(n) all right, title and interest of MCM in and to any and all
assets and properties relating to the Business to the extent such assets
and properties are not transferable pursuant to applicable law or
contract.
1.4 Assumed Liabilities. Except as set forth in Section 1.5 and
notwithstanding anything to the contrary contained in this Agreement, Sub hereby
assumes and agrees to pay, perform and discharge all operating liabilities of
MCM incurred in connection with, or as a result of, the ordinary course of
business and associated with the Business on or after the date hereof,
including, without limitation, the following (collectively, the "Assumed
Liabilities"):
(a) except as otherwise provided herein, any liabilities or
obligations of MCM arising under or related to (i) any of the Contracts
constituting Acquired Assets, (ii) Layaways, (iii) TBO's, (iv) Third Party
Consigned Inventory (including any obligation to make payments or return
artwork to a consignor), or
4
<PAGE>
(v) any open vendor orders, including, without limitation, those listed on
Schedule 1.4(a) hereto, in each case to the extent that such obligations
or liabilities remain unperformed or unfulfilled on, or by their terms
continue in effect after, the date hereof;
(b) all trade payables and accrued expenses of MCM on or as of the
date hereof; provided, however, that the aggregate amount of trade
payables and accrued expenses assumed by Sub shall not exceed $546,460;
(c) except as otherwise provided in Section 1.5(d), any liabilities
or obligations of MCM related to compensation currently in force between
MCM and any of its employees, sales persons, agents or representatives,
including, without limitation, liabilities and obligations in respect of
salary, regular and quarterly bonuses, commissions, accrued vacation,
benefits and insurance;
(d) all liabilities and obligations that arise pursuant to Section
5.3, including, without limitation, any liabilities and obligations in
respect of the MCMLP 401(k) Plan; and
(e) except as otherwise specifically set forth herein, all
liabilities or obligations relating to any sales, use, purchase, transfer,
real estate, payroll, unemployment compensation or similar taxes, fees,
levies, duties, imposts and other charges of any kind (together with any
and all interest, penalties, additions to tax and additional amounts
imposed with respect thereto) (collectively, "Taxes") imposed by any
governmental or taxing authority arising from or related to (i) the
consummation of any of the transactions contemplated hereby, (including
the consignment of the Consigned Inventory) or (ii) any period on or after
the date hereof.
Sub shall pay, discharge and perform all of the Assumed Liabilities
promptly and when due, except to the extent contested by Sub in good faith
(provided that such liabilities shall continue to be Assumed Liabilities). MCM
will use its reasonable efforts to assist Sub in the assumption of the foregoing
liabilities, including, without limitation, the execution and delivery of any
agreements, instruments or other documents reasonably necessary or desirable to
accomplish the foregoing.
1.5 Retained Liabilities. Neither ARI nor Sub is assuming, and neither
shall be liable for, any of the following liabilities or obligations of MCM
(collectively, the "Retained Liabilities") and none of the following liabilities
or obligations shall be Assumed Liabilities for purposes of this Agreement:
(a) any liabilities or obligations of MCM under the CAW Agreement;
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(b) any liabilities or obligations of MCM relating to the Georgetown
Location;
(c) any liabilities or obligations of MCM relating to any Taxes
arising from or related to any period prior to the date hereof, including,
any sales taxes due or to become due with respect to sales of Inventory by
MCM prior to the date hereof;
(d) any liabilities or obligations of MCM in respect of salary or
commissions payable to MCM's employees prior to the date hereof, including
the payment of any amounts payable to hourly employees for services
performed prior to the date hereof (it being agreed that, except for the
foregoing, Sub shall assume and be solely responsible for the payment of
all liabilities and obligations relating to regular and quarterly bonuses,
commissions, accrued vacation and other employee compensation and
benefits, regardless of whether such amounts relate to periods on or prior
to the date hereof);
(e) any liabilities or obligations of MCM related to the Excluded
Assets or which are not Assumed Liabilities; and
(f) any liabilities or obligations of MCM under the Confidentiality
Agreement, this Agreement or under any other agreement between or among
MCM, ARI and/or Sub entered into on or after the date of this Agreement.
MCM hereby acknowledges that it is retaining the Retained Liabilities and
MCM shall pay, discharge and perform all such liabilities and obligations
promptly when due, except to the extent contested by MCM in good faith (provided
that such liabilities and obligations shall continue to be Retained
Liabilities).
1.6 Purchase Price; Allocation of Purchase Price. The aggregate purchase
price to be paid to MCM by or on behalf of Sub for the Acquired Assets shall be
the assumption by Sub of the Assumed Liabilities plus cash in the amount of
$1,000,000 (the "Purchase Price"), which shall be payable concurrently herewith
in immediately available federal funds (it being agreed that such amount may be
reduced by any amounts delivered to MCM pursuant to that certain Amended and
Restated Escrow Agreement, dated as of May 15, 1997 (the "Escrow Agreement"),
among ARI, MCM and First Trust National Association, as escrow agent) to the
extent such amounts are paid to MCM by the Escrow Agent on the date hereof. The
Purchase Price shall be allocated among the Acquired Assets as shall be agreed
upon by the parties as soon as practicable hereafter, which allocation shall be
set forth on Schedule 1.6 to be attached hereto. MCM, ARI and Sub each hereby
covenants and agrees that none of them will take a position on any income Tax
return or with any governmental authority that is in any way inconsistent with
the terms of this Section 1.6 or the allocation set forth on Schedule 1.6 to be
attached hereto. The parties hereto agree that such allocation shall be revised
in a manner consistent with Temporary Treasury Regulation ss.1.1060-1T(f) or any
successor thereto to reflect
6
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any adjustments to the Purchase Price made pursuant to this Article I and any
indemnification payments made under Article VIII.
1.7 Agreement Regarding TBO's. With respect to TBO's, the parties hereby
agree as follows:
(a) concurrently herewith, Sub shall assume responsibility for the
administration and completion of each of the TBO's listed on Schedule
1.2(d) hereto, including, without limitation, remitting any remaining
amounts due to vendors and/or artists, collecting amounts due from
customers, paying any commissions due sales personnel, paying any Taxes,
expenses or other charges related thereto, and providing, in a
professional manner, any and all framing, shipping and related services as
may be necessary to complete such TB0;
(b) Sub shall use its best efforts to collect any and all amounts
due in respect of TB0's in a professional, timely and diligent manner;
(c) as consideration for the transfer of the TBO's to Sub, MCM shall
be entitled to receive a commission equal to 11.30% of any amounts paid to
Sub by customers in respect of the TB0's (each, a "TB0 Payment");
(d) so long as any amounts remain due from customers in respect of
TB0's, Sub shall submit to MCM a report at least once per month (which
report shall be delivered concurrently with the monthly reconciliation
statement in respect of Consigned Inventory pursuant to Section 2.2(c)(i))
setting forth the status of each TB0, any amounts collected from customers
and Sub's calculation of the TB0 Payment due MCM in respect thereof; and
(e) concurrently with Sub's delivery of the report referred to in
Section 1.7(d), Sub shall remit to MCM the amount of the TB0 Payment, if
any, in immediately available federal funds.
1.8 [Intentionally Omitted]
1.9 Additional Provisions.
(a) Instruments of Conveyance, Transfer and Assumption, Etc. (i)
from time to time and at any time at the request of Sub, MCM shall execute
and deliver to Sub such deeds, bills of sale, endorsements, assignments
and other good and sufficient documents and instruments of conveyance and
transfer, in form and substance reasonably satisfactory to Sub, as Sub
shall deem reasonably necessary or appropriate to effectively confirm to
and vest in Sub all right, title and interest in and to all of the
Acquired Assets, free and clear of all Liens together with all third party
consents and approvals relating thereto, and
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(ii) concurrently herewith, Sub shall deliver to MCM such instruments of
assumption, in form and substance reasonably satisfactory to MCM, as MCM
shall deem reasonably necessary and appropriate to evidence the assumption
by Sub of the Assumed Liabilities pursuant to Section 1.4.
(b) Further Assurances, Etc. MCM shall, at any time and from time to
time after the date hereof, upon the reasonable request of Sub, do,
execute, acknowledge and deliver, or cause to be done, executed,
acknowledged or delivered, all such further acts, deeds, assignments,
transfers, conveyances, powers of attorney or assurances as may be
reasonably required by Sub for the effective transferring, assigning,
conveying, granting, assuring and confirming to Sub, or for aiding and
assisting in the collection of or reducing to possession by Sub, any of
the Acquired Assets, or to confirm to and vest in Sub all of MCM's right,
title and interest in and to the Business and to all of the Acquired
Assets. Sub shall, at any time and from time to time after the date
hereof, upon the reasonable request of MCM, do, execute, acknowledge and
deliver, or cause to be done, executed, acknowledged or delivered, all
such further acts, assumptions or assurances as may be reasonably required
for the effective assumption by Sub of the Assumed Liabilities.
(c) Assignment of Contracts, Rights, Etc. Anything contained in this
Agreement to the contrary notwithstanding, this Agreement shall not
constitute an assignment or attempted assignment of any Contract, lease,
commitment, agreement, purchase or sale order, technology, intellectual
property, concession, grant, franchise or any other asset or property
included in the Business or Acquired Assets, or any claim or right or any
benefit arising thereunder or resulting therefrom, to the extent that an
assignment or attempted assignment thereof, without the consent or waiver
of a third party, cannot lawfully be made or if made would constitute a
breach thereof or in any way materially adversely affect the rights of Sub
thereunder, unless and until such consent or waiver of such third party
has been duly obtained or become effective by operation of law. MCM shall
use its reasonable efforts to obtain such consent or waiver of such third
party to the assignment thereof to Sub in all cases in which such consent
or waiver is necessary or required for assignment or transfer as
contemplated herein. If such consent is not obtained or if,
notwithstanding such consent, an assignment or attempted assignment
thereof would be ineffective or would materially adversely affect the
rights of MCM thereunder so that Sub would not, in fact, receive all such
rights, MCM will use its reasonable efforts and cooperate with Sub in any
lawful arrangements necessary or desirable to provide for Sub the benefit
thereunder. If and to the extent that such arrangements cannot be made,
Sub shall not have any liability or obligation with respect to such
affected Acquired Asset, any other provision of this Agreement or any
assumption agreement executed by Sub to the contrary notwithstanding. If
and to the extent that such arrangement can be made so as to afford Sub
the benefit thereof, Sub
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shall be liable for the corresponding obligations (except to the extent
herein otherwise provided).
(d) Access to Information by Sub and MCM.
(i) Those books and records the possession of which is not
being transferred to Sub pursuant to this Agreement and which relate
to the Business shall be preserved and maintained by MCM for at
least five (5) years after the date hereof. Upon prior notice from
Sub to such effect, MCM shall provide Sub and its authorized
representatives, during normal business hours, such access to such
books and records retained by MCM and MCM's agents or
representatives, and which relate to the Business as may be
reasonably requested by Sub from time to time. Sub shall be
entitled, at its own expense, to make extracts and copies thereof
and MCM shall cooperate with Sub in connection with accomplishing
the same. Prior to disposing of any such books and records after the
end of such five (5) year period, MCM shall offer to Sub the right
to obtain the originals of such books and records at Sub's cost and
expense of shipping.
(ii) Those books, records, computer files and related
materials, the possession of which is being transferred to Sub
pursuant to this Agreement and which relate to the Business, any of
the Excluded Assets and/or any Retained Liability (including,
without limitation, the Inventory) shall be preserved and maintained
by Sub for at least five (5) years after the date hereof. Upon prior
notice from MCM to such effect, Sub shall provide MCM and its
authorized representatives, during normal business hours, such
access to such books, records, computer files and related materials,
and any hardware or software necessary to access and review the
foregoing, in the possession of Sub and/or Sub's agents or
representatives, and which relate to the Business, any of the
Excluded Assets and/or any Retained Liability (including, without
limitation, the Inventory) as may be reasonably requested by MCM
from time to time. MCM shall be entitled, at its own expense, to
make extracts and copies, including, without limitation, copies of
any relevant computer files, thereof and Sub shall cooperate with
MCM in connection with accomplishing the same. Prior to disposing of
any such books, records, computer files and related materials, after
the end of such five (5) year period, Sub shall offer to MCM the
right to obtain the originals of such books, records, computer files
and related materials, at MCM's cost and expense of shipping.
(iii) Notwithstanding the foregoing, within forty-five (45)
days after the date hereof, MCM and Sub shall identify those books,
records
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and related materials located at the Schaumburg, Illinois corporate
office which do not relate to the ongoing operation of the Business,
which books, records and related materials shall be removed from
such location by MCM and retained in accordance with the provisions
of Section 1.9(d)(i) hereof.
ARTICLE II
CONSIGNMENT OF CERTAIN INVENTORY
2.1 Grant of Rights. Effective upon the date hereof and, except as
provided in Section 2.2(g), for a period of five (5) years hereafter (the
"Consignment Period"), MCM hereby grants to Sub the sole and exclusive right,
throughout the world, to offer and sell all or any item of inventory listed on
Schedule 2.1 hereto (collectively, the "Consigned Inventory"). The Consigned
Inventory shall remain in the possession of Sub, as consignee, on a consignment
basis in accordance with the provisions of this Article II.
2.2 Consignment Fee.
(a) Amount of Fee. In consideration for the rights granted by MCM to
Sub in Section 2.1, MCM shall be entitled to receive the following fees in
connection with sales of Consigned Inventory:
(i) with respect to any item of serialized Consigned Inventory
purchased by MCM prior to January 1, 1996, 64.88% of the "Total
Original Cost" of such item (as listed on Schedule 2.1 hereto);
(ii) with respect to any item of serialized Consigned
Inventory purchased by MCM on or after January 1, 1996, 100% of the
"Total Original Cost" of such item (as listed on Schedule 2.1
hereto) (all amounts payable pursuant to clauses (i) and (ii)
referred to, collectively, as the "Consignment Fees"); and
(iii) MCM shall also be entitled to receive, with respect to
those items of Consigned Inventory that consist of non-serialized
Inventory or The Artique merchandise, loose frames, frames on
consigned artwork and non-allocated "freight-in" costs for all
Consigned Inventory, the amount of $1,905 per week, which shall be
paid at the same time as, and in conjunction with, each of the first
130 Weekly Payments (as defined below), but shall not be subject to
adjustment (the "Flat-Rate Payment").
(b) Weekly Payments and Reports. All amounts payable pursuant to
this Section 2.2 shall be made by wire transfer of immediately available
federal funds to an account designated by MCM in weekly installments equal
to the
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Weekly Payment (as defined in Section 2.2(d)) plus the Flat-Rate Payment,
together with a report of all items of Consigned Inventory sold during the
week to which such Weekly Payment relates. For the purposes of this
Agreement, the term "week" shall mean a calendar week beginning at 12:01
a.m. Monday. Sub shall remit each Weekly Payment and Flat-Rate Payment due
MCM hereunder on the Thursday following the week to which such Weekly
Payment relates (or, if such Thursday is not a business day the next
succeeding business day); provided, however, that the first Weekly Payment
hereunder shall be due on Thursday, June 12, 1997 in respect of the
eight-day period from Sunday, June 1, 1997 through Sunday, June 8, 1997,
inclusive. Any Weekly Payment or Flat-Rate Payment that is not paid when
due shall bear interest from the date when due until such amount is paid
in full, at an interest rate per annum, compounded weekly, which is equal
to the lesser of (a) ten percent (10%) per annum and (b) the highest rate
allowable under applicable law.
(c) Reconciliation. The Consignment Fees paid to MCM pursuant to
this Section 2.2 shall be subject to reconciliation on a monthly basis as
follows:
(i) no later than the fifteenth (15th) day following the last
day of each month during the Consignment Period, Sub shall remit to
MCM a written statement setting forth: (A) a list of all serialized
Consigned Inventory sold during such month, which list shall include
the artist's name, title, serial or other inventory tracking number,
and the Total Original Cost of each item sold; (B) the payments
received by or on behalf of Sub with respect to each such item of
Consigned Inventory sold during such month; (C) the aggregate amount
of Consignment Fees applicable to such Consigned Inventory sold
during such month, as determined pursuant to Sections 2.2(a)(i) and
(ii) (the "Aggregate Consignment Fees"); and (D) the aggregate
amount of Weekly Payments made by Sub to MCM pursuant to Section
2.2(b) applicable to such month (the "Aggregate Weekly Payments"),
which amounts shall be adjusted as necessary to account for Weekly
Payments applicable to more than one month (e.g., if a Weekly
Payment is due on Thursday June 5, 1997 for the week of May 26, 1997
through June 1, 1997, one-seventh of the Weekly Payment would be
allocated to the month of June);
(ii) in the event that the Aggregate Consignment Fees for any
month are less than the amount of the Aggregate Weekly Payments for
such month, then Sub shall be entitled to acquire from MCM, at no
additional cost, items of serialized Consigned Inventory for Sub's
own account, subject to the following conditions: (A) Sub shall
notify MCM in writing of the items of serialized Consigned Inventory
it desires to acquire; (B) the aggregate amount of Consignment Fees
(as determined
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pursuant to Sections 2.2(a)(i) or (ii)) which would otherwise be
payable by Sub to MCM in respect of such items of serialized
Consigned Inventory to be acquired by Sub pursuant to this Section
2.2(c)(ii) shall not exceed the amount by which the Aggregate Weekly
Payments exceed the amount of the Aggregate Consignment Fees for
such month; and (C) at least one-third of the aggregate amount of
Consignment Fees (as determined pursuant to Sections 2.2(a)(i) and
(ii)) which would otherwise be payable by Sub to MCM in respect of
such items of serialized Consigned Inventory to be acquired by Sub
pursuant to this Section 2.2(c)(ii) shall be attributable to
Consigned Inventory purchased by MCM prior to January 1, 1995;
provided, however, that in the event that none of the remaining
serialized Consigned Inventory was purchased by MCM prior to January
1, 1995, then this clause (C) shall cease to be applicable;
provided, further, that Sub shall have the right to defer any
acquisitions of serialized Consigned Inventory pursuant to this
Section 2.2(c)(ii) until such time or times as Sub shall determine,
it being understood that in the event Sub defers such acquisitions
the parties shall maintain (and update on a monthly basis) a record
of the amount of Consigned Inventory that Sub may acquire hereunder;
and
(iii) in the event that the amount of the Aggregate
Consignment Fees for any month exceeds the amount of the Aggregate
Weekly Payments for such month, then Sub will pay to MCM the amount
by which the Aggregate Consignment Fees exceeds the amount of
Aggregate Weekly Payments for such month, which payment shall be
made by Sub in immediately available federal funds and shall be paid
to MCM on or before the date on which the next Weekly Payment is
due, it being understood that any amounts paid by Sub to MCM
pursuant to this Section 2.2(c)(iii) shall not be included as part
of any Weekly Payment nor in the determination of the Aggregate
Weekly Payments for any month; provided, however, that any amount
payable hereunder that is not paid when due shall bear interest from
the date when due until such amount is paid in full, at an interest
rate per annum, compounded weekly, equal to the lesser of (a) ten
percent (10%) per annum and (b) the highest rate allowable under
applicable law.
(d) Weekly Payments. The amount of the weekly payment payable by Sub
to MCM pursuant to Section 2.2(b) shall be $11,886 (as such amount may be
adjusted from time to time pursuant to this Section 2.2(d), the "Weekly
Payment"). Following the first year of the Consignment Period, in the
event that the Minimum Annual Payment (as defined in Section 2.2(e))
applicable to any year is reduced pursuant to Section 2.2(e), then the
amount of the Weekly Payment for such year shall be reduced to an amount
equal to 1.923% (i.e., 1/52nd) of the Minimum Annual Payment applicable to
such year.
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(e) Minimum Annual Payments. In the event that the aggregate amount
of Weekly Payments paid by Sub to MCM in respect of serialized Consigned
Inventor; pursuant to Section 2.2(b) plus reconciliation payments paid by
Sub to MCM pursuant to Section 2.2(c)(iii), if any, during any of the
first four years of the Consignment Period (the "Actual Annual Payment")
exceeds $618,058 (as such amount may be adjusted from time to time
pursuant to this Section 2.2(e), the "Minimum Annual Payment"), then the
Minimum Annual Payment for the following year shall be reduced by an
amount equal to 75% of the amount by which the Actual Annual Payment
exceeded the Minimum Annual Payment with respect to such year, it being
agreed that each year of the Consignment Period shall be measured from
anniversary date of this Agreement.
(f) Termination of Consignment; Return of Consigned Inventory. At
such time as Sub shall have paid MCM all Consignment Fees due in respect
of Consigned Inventory, the provisions of this Article II shall terminate
and shall cease to be of any further force or effect. In addition, the
provisions of this Article II may be terminated by MCM in the event of a
breach of or default by either of ARI or Sub in respect of any of their
respective covenants, representations or warranties contained in this
Agreement or in any of the other agreements, instruments, certificates of
documents contemplated hereby. Following a termination of the provisions
of this Article II, ARI and Sub agree that they shall promptly return all
Consigned Inventory to MCM and shall cooperate with MCM to effect the
termination of the consignment relationship created hereunder.
(g) Acceleration of Consignment Fee following an Organic
Transaction. In the event of an Organic Transaction (as defined below),
all Consignment Fees in respect of any serialized Consigned Inventory
which is unsold as of the date of the Organic Transaction (as determined
pursuant to Sections 2.2(a)(i) and (ii)), together with any remaining
Flat-Rate Payments payable pursuant to Section 2.2(a)(iii), shall become
immediately due and payable by Sub to MCM and shall be paid by Sub in full
in immediately available federal funds to an account designated by MCM.
Following such payment, title to all remaining Consigned Inventory shall
be transferred from MCM to Sub and the provisions of this Article II shall
terminate. For the purposes of this Section 2.2(g), an "Organic
Transaction" means (i) the sale, lease, exchange, transfer or other
disposition of all or substantially all of ARI's or Sub's assets to a
person or group of persons; (ii) any merger, consolidation, refinancing,
recapitalization, or other transaction or series of transactions that
results in the holders of the issued and outstanding voting securities of
either of ARI or Sub (including any affiliate of such holders) immediately
prior to such transaction(s) owning or controlling less than a majority of
the voting securities of the continuing or surviving entity immediately
following such transaction(s); and/or (iii) any event, occurrence, or
transaction or series of transactions following or as a result of
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which Eugene I. Schuster is no longer (A) a director of each of ARI and
Sub, (B) the Chairman of the Board, Chief Executive Officer or President
of each of ARI and Sub, and (C) the record and beneficial owner of the
largest aggregate number of issued and outstanding shares of the capital
stock of ARI.
(h) Sample Calculation; Intent of this Section 2.2. A sample
calculation of the payment and payment adjustment provisions is set forth,
for illustrative purposes only, as Exhibit 2.2(h) to this Agreement. This
Section 2.2 is intended to ensure that, subject to the acceleration
provisions of Section 2.2(g), by the end of the Consignment Period, all
Consigned Inventory will have been sold (or acquired by Sub pursuant to
Section 2.2(c)(ii)) and all provisions hereof shall be interpreted
consistently with such intent.
2.3 Labelling of Consigned Inventory. Sub will affix a label on each item
of Consigned Inventory, which label shall be clearly visible and shall read as
follows:
NOTICE: THIS ARTICLE IS HELD ON A CONSIGNMENT BASIS ONLY AND IS THE
PROPERTY OF MCM LIMITED PARTNERSHIP. ANY REMOVAL OF THIS ARTICLE
FROM THESE PREMISES IS SUBJECT TO AN ASSET PURCHASE AND CONSIGNMENT
AGREEMENT AND MAY REQUIRE THE PRIOR WRITTEN CONSENT OF MCM LIMITED
PARTNERSHIP.
2.4 Costs. MCM shall not be responsible for any costs which Sub may incur
in connection with its efforts to sell, maintain, store, insure or otherwise
handle the Consigned Inventory.
2.5 Insurance; Storage of Consigned Inventory. During the Consignment
Period the Consigned Inventory will be stored only at the locations set forth on
Schedule 2.5 hereto (collectively, the "Permitted Locations"). At all times from
the date hereof through the later of the expiration of the Consignment Period
and the full performance by Sub of its obligations under this Article II, Sub
shall obtain and maintain, at its sole cost and expense, such casualty and other
insurance as MCM shall require from one or more insurance carriers satisfactory
to MCM, in an amount not less than the aggregate "Total Original Cost" of the
serialized Consigned Inventory as set forth on Schedule 2.1 hereto plus the
total amount of Flat-Rate Payments to be made pursuant to Section 2.2(a)(iii).
Each of such policies shall (a) name MCM as an additional named insured and loss
payee; (b) provide that it may not be terminated or amended without thirty (30)
days' prior written notice to MCM; and (c) provide that it is primary to any
other valid and collectible insurance policies applicable to MCM and/or the
Consigned Inventory and is not subject to contribution. Concurrently herewith,
and from time to time at MCM's request hereafter, Sub shall deliver to MCM
evidence that such insurance policies are in full force and effect, and a
certificate of insurance naming MCM as an additional named insured and loss
payee.
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2.6 Title; UCC Filings.
(a) Title to the Consigned Inventory is reserved in MCM until sale
of and payment in full to MCM with respect to the Consigned Inventory in
accordance with the terms hereof or until such Consigned Inventory is
acquired and paid for by Sub pursuant to Section 2.2(c)(ii) hereof.
(b) Concurrently with the execution of this Agreement, Sub and/or
ARI shall execute and deliver to MCM for filing such UCC-1 financing
statements as MCM shall reasonably request showing MCM as consignor and
Sub as consignee with respect to the Consigned Inventory (collectively,
the "UCC Consignment Statements").
2.7 Removal of Consigned Inventory; Inspection. Except in connection with
delivery of Consigned Inventory to a customer following receipt by Sub of all
amounts due from such customer in respect thereof (or until such Consigned
Inventory is acquired and paid for by Sub pursuant to Section 2.2(c)(ii)
hereof), Sub shall not remove, and shall not permit any third party to remove,
any item of the Consigned Inventory from any Permitted Location without MCM's
prior written consent. At reasonable times and upon reasonable notice from MCM,
Sub shall allow MCM or its representatives access to and the right to inspect
the Consigned Inventory, together with any and all records or reports in
connection therewith, including, without limitation, computer files and related
software. Notwithstanding the foregoing, Sub shall be entitled to remove items
of Consigned Inventory, without prior notice to or consent from MCM, to and from
any of the Permitted Locations, provided, and on the condition, that Sub shall
provide MCM with a report listing the location of each item of Consigned
Inventory concurrently with the monthly reconciliation statement delivered to
MCM pursuant to Section 2.2(c)(i). Upon at least thirty (30) days' prior written
notice to MCM, Sub shall have the right to remove the Consigned Inventory or a
part thereof to a location other than a Permitted Location; provided, however,
that, Sub shall have provided MCM with such documentation and other information
as MCM may request, in its sole discretion, to amend or file any UCC consignment
filings of Sub, ARI, MCM or any other party in respect of the Consigned
Inventory and to provide appropriate notice to the secured creditors of Sub
and/or ARI, as the case may be.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MCM
MCM represents and warrants to each of ARI and Sub as follows:
3.1 Organization and Good Standing. MCM is a partnership duly organized,
validly existing and in good standing under the laws of the State of Illinois
and has full power and authority to enter into and perform this Agreement and to
carry on the Business as it is currently being conducted. MCM is duly qualified
to do business and is in good standing as a foreign partnership in each
jurisdiction in which the nature of its business or properties requires
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such qualification, except where the failure to be so qualified or in good
standing would not have a material adverse effect on the Business.
3.2 Authority. The execution, delivery and performance by MCM of this
Agreement, and each of the other agreements, documents and instruments
contemplated hereby, have been duly authorized by all necessary action of MCM
and by all necessary action of each of its partners. This Agreement, and each
other agreement, document and instrument contemplated hereby, have been duly
authorized, executed and delivered by MCM and constitute the legal, valid and
binding obligations of MCM enforceable against MCM in accordance with their
respective terms, except as such enforceability may be limited by (a) applicable
bankruptcy, reorganization, fraudulent conveyance, fraudulent transfer,
moratorium, insolvency or other similar laws affecting the rights and remedies
of creditors generally, (b) general principles of equity (regardless of whether
considered in a proceeding in equity or at law) and the discretion of the court
before which any proceeding therefor may be brought, and (c) an implied covenant
of good faith and fair dealing.
3.3 No Conflicts. The execution, delivery and performance by MCM of this
Agreement and the other agreements, documents and instruments contemplated
hereby do not and will not (a) conflict with, or result in the breach or
termination of, or constitute a default under, the certificate of limited
partnership or agreement of limited partnership of MCM or any lease, agreement,
license, commitment or other instrument or any order, judgment or decree to
which MCM is a party or is otherwise bound (assuming that each of the consents
referred to in Section 3.4 are obtained); (b) constitute a violation by MCM of
any law or regulation applicable to MCM; or (c) result in the creation or
imposition of any Lien upon any of the Acquired Assets, except, in each case,
where such conflict, breach, termination, default, violation or Lien would not
reasonably be expected to have a material adverse effect upon the Business or
the Acquired Assets.
3.4 Consents and Approvals. Except as set forth on Schedule 3.4 hereto, no
consent, approval or other action by, or notice to, or registration or filing
with, any governmental or administrative agency or authority, or any other
person, is required or necessary in connection with the execution, delivery and
performance by MCM of this Agreement and each other agreement, document and
instrument contemplated hereby, or the consummation by MCM of the transactions
contemplated hereby and thereby (including the assignment of Contracts).
3.5 No Interest In Other Entitles. MCM has no subsidiaries. The Acquired
Assets do not include shares of capital stock of any corporation or any
ownership or other investment interest, either of record, beneficially or
equitably, in any other entity and MCM does not hold, directly or indirectly,
any of the foregoing.
3.6 Compliance with Law. MCM is not in violation, and no event has
occurred which, with the passage of time, would constitute a violation, of any
statute, law, rule, regulation, ordinance, decree, order, franchise, permit or
license of any governmental body or
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court applicable to MCM or the Business, and which violation would reasonably be
expected to have a material adverse effect on the Business or the Acquired
Assets.
3.7 Compliance with Material Agreements and Leases. Except as set forth on
Schedule 3.7 attached hereto, to MCM's knowledge, it is not in default under any
material agreement or lease and, to MCM's knowledge, no event has occurred or is
reasonably likely to occur which (after notice or lapse of time or both) would
constitute a breach or default under, or otherwise permit modification,
cancellation, acceleration or termination of, any material agreement or lease or
would result in the creation of any Lien upon of the Business or the Acquired
Assets, except, in each case, where such default, breach or Lien would not
reasonably be expected to have a material adverse effect upon the Business or
the Acquired Assets.
3.8 Ordinary Course. Except as set forth in Schedule 3.8 attached hereto,
since October 31, 1996, MCM has operated the Business in the ordinary course
consistent with past practices and has not made or instituted any material
change in its methods of purchase, sale, consignment, lease, management,
marketing, accounting, financing, or operations.
3.9 Litigation. There is no suit, claim, investigation, action or
proceeding against MCM which is now pending or, to the knowledge of MCM,
threatened before any court, administrative or regulatory body or governmental
agency, nor to the knowledge of MCM is there any reasonable basis therefor,
which will or could prevent or interfere with the consummation of the
transactions contemplated hereby, and which would reasonably be expected to have
a material adverse effect on the Business or the Acquired Assets.
3.10 Fairness of Financial Statements. True and complete copies of (a) the
audited balance sheets of MCM for the fiscal years ended January 31, 1996 and
January 31, 1995, and the related audited statements of operations, changes in
partners' capital and cash flows of MCM, together with all related notes
thereto, accompanied by the reports thereon of BDO Seidman LLP (collectively
referred to herein as the "Financial Statements"), and (b) the unaudited
consolidated balance sheet of MCM for the month of October 31, 1996 and the
related income and expense statements and consolidated profit and loss
comparisons (collectively referred to herein as the "Interim Financial
Statements") have been delivered by MCM to ARI. Except as disclosed on Schedule
3.10 attached hereto and, with respect to the Financial Statements, based solely
on the report of BDO Seidman LLP, the Financial Statements and the Interim
Financial Statements (i) were prepared in accordance with the books of account
and other financial records of MCM; (ii) present fairly in all material respects
the consolidated financial condition and results of operations of the periods
covered thereby; (iii) have been prepared in accordance with United States
generally accepted accounting principals and practices as in effect during the
relevant period and consistently applied throughout the periods involved; and
(iv) include all adjustments that are necessary for a fair presentation of the
consolidated financial condition of MCM and the results of the operations of MCM
as of the dates thereof or for the periods covered thereby, subject, in the case
of the Interim Financial Statements, to normal year-end adjustments.
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3.11 Tax Returns. Except as set forth on Schedule 3.11 attached hereto (i)
all returns and reports in respect of Taxes required to be filed with respect to
MCM prior to the date hereof have been timely filed; (ii) all Taxes required to
be shown on such returns and reports or otherwise due have been timely paid;
(iii) all such returns and reports are true, correct and complete in all
material respects; (iv) no adjustment relating to such returns has been proposed
by any Tax authority; (v) there are no pending or, to the knowledge of MCM,
threatened actions or proceedings for the assessment or collection of Taxes
against MCM; (vi) all Taxes required to be withheld, collected or deposited by
or with respect to MCM have been timely withheld, collected or deposited, as the
case may be, and, to the extent required, have been paid to the relevant taxing
authority; and (vii) MCM has established in accordance with its normal
accounting practices and procedures accruals and reserves that, in the
aggregate, are adequate for the payment of all Taxes not yet due and payable and
attributable to any period preceding the date hereof.
3.12 Proprietary Rights. MCM owns or possesses valid and binding licenses
or other rights to use, all trademarks, trade and business names, service marks,
service names that are used in or related to the Business and listed on Schedule
3.12 attached hereto (collectively, the "Proprietary Rights").
3.13 Employees. Set forth on Schedule 3.13 attached hereto is a list of
the name and job title of each of the current employees of MCM, which schedule
also sets forth each employee's: (a) hire date; (b) salary and/or draw against
commissions; (c) commission and/or bonus structure; (e) insurance and 401(k)
plan participation; and (f) estimated accrued vacation at April 30, 1997.
Notwithstanding the foregoing, the parties acknowledge that any information
contained in Schedule 3.13 is qualified in its entirety by reference to the
employment and/or wage agreements between MCM and each of its employees, copies
of which have been made available to ARI.
3.14 Environmental Matters. To MCM's knowledge, it has substantially
complied with all applicable laws relating to the environment, safety, health or
the regulation of or imposition of standards of conduct concerning discharges,
emissions, releases or threatened releases of noises, odors or any pollutants,
contaminants or hazardous or toxic wastes, hazardous materials, whether as
matter or energy, into ambient air, water or land, or otherwise relating to the
manufacture, processing, generation, distribution, use, treatment, storage,
disposal, cleanup, transport or handling of pollutants, contaminants or
hazardous or toxic wastes, hazardous substances or hazardous materials, except,
in each case, where any lack of compliance has not had or would not reasonably
be expected to have a material adverse effect upon the Business or the Acquired
Assets.
3.15 Brokers and Finders. MCM has not engaged, consented to or authorized
any broker, investment banker or other third party to act on its behalf,
directly or indirectly, as a broker or finder in connection with the
transactions contemplated by this Agreement.
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MCM IS SELLING THE ACQUIRED ASSETS TO SUB AND IS CONSIGNING THE CONSIGNED
INVENTORY TO SUB HEREUNDER ON AN "AS IS WHERE IS" BASIS. THE REPRESENTATIONS AND
WARRANTIES OF MCM SET FORTH IN THIS ARTICLE III ARE IN LIEU OF ALL OTHER
REPRESENTATIONS AND WARRANTIES OF MCM, WHETHER ORAL OR WRITTEN, EXPRESS OR
IMPLIED, WARRANTIES OR CONDITIONS OF MERCHANTABLE QUALITY AND FITNESS FOR A
PARTICULAR PURPOSE OR THOSE ARISING BY STATUTE OR OTHERWISE IN LAW OR FROM THE
COURSE OF DEALING OR USAGE OF TRADE. EXCEPT AS SET FORTH ABOVE, MCM HEREBY
EXPRESSLY DISCLAIMS ALL OTHER REPRESENTATIONS AND WARRANTIES.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ARI AND SUB
Each of ARI and Sub hereby, jointly and severally, represents and warrants
to MCM as follows:
4.1 Organization and Good Standing. Each of ARI and Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the full corporate power and authority to enter into
and to perform this Agreement. ARI is the sole owner of all of the issued and
outstanding equity interests of Sub. Each of ARI and Sub is duly qualified to do
business and is in good standing as a foreign corporation in each jurisdiction
in which the nature of its business or properties requires such qualification,
except where the failure to be so qualified or in good standing would not have a
material adverse effect on its business or properties. A true and complete copy
of the Restated Certificate of Incorporation and By-Laws of Sub are set forth as
Exhibit 4.1(a) and Exhibit 4.1(b) hereto, respectively.
4.2 Authority. The execution, delivery and performance by ARI and Sub of
this Agreement, and each of the other agreements, documents and instruments
contemplated hereby, have been duly authorized by all necessary corporate action
of ARI and Sub. This Agreement, and each other agreement, document and
instrument contemplated hereby, have been duly authorized, executed and
delivered by ARI and Sub and constitute the legal, valid and binding obligations
of ARI and Sub, enforceable against each of ARI and Sub in accordance with their
respective terms, except as such enforceability may be limited by (a) applicable
bankruptcy, reorganization, fraudulent conveyance, fraudulent transfer,
moratorium, insolvency or other similar laws affecting the rights and remedies
of creditors generally, (b) general principles of equity (regardless of whether
considered in a proceeding in equity or at law) and the discretion of the court
before which any proceeding therefor may be brought, and (c) an implied covenant
of good faith and fair dealing.
4.3 No Conflicts. The execution, delivery and performance by each of ARI
and Sub of this Agreement, the other agreements, documents and instruments
contemplated hereby do not and will not (a) conflict with, or result in the
breach or termination of, or constitute a default
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under, the certificates of incorporation or by-laws of either of ARI or Sub or
any lease, agreement, license, commitment or other instrument, or any order,
judgment or decree, to which ARI or Sub is a party or by which it is otherwise
bound; (b) constitute a violation by ARI or Sub of any law or regulation
applicable to ARI and/or Sub; or (c) result in the creation or imposition of any
Lien upon any of the Acquired Assets, except, in each case, where such conflict,
breach, termination, default violation or Lien could not reasonably be expected
to have a material adverse effect upon the Business or the Acquired Assets.
4.4 Consents and Approvals. No consent, approval or other action by, or
notice to, or registration or filing with, any governmental or administrative
agency or authority, or any other person, is required or necessary in connection
with the execution, delivery and performance by ARI and/or Sub of this Agreement
and each other agreement, document and instrument contemplated hereby, or the
consummation by ARI and/or Sub of the transactions contemplated hereby and
thereby.
4.5 Subsidiaries. Schedule 4.5 hereto sets forth a list of each entity in
which ARI and/or Sub, directly or indirectly, owns any equity interest and their
respective ownership thereof.
4.6 Compliance with Law. Neither ARI nor Sub is in violation, and no event
has occurred which, with the passage of time, would constitute a violation, of
any statute, law, rule, regulation, ordinance, decree, order, franchise, permit
or license of any governmental body or court applicable to ARI and Sub's
business or properties, and which could reasonably be expected to have a
material adverse effect on the Business or the Acquired Assets.
4.7 Litigation. There is no suit, claim, investigation, action or
proceeding against ARI or Sub which is now pending or, to the knowledge of
either of ARI or Sub, threatened before any court, administrative or regulatory
body or governmental agency, nor to the knowledge of either ARI or Sub is there
any reasonable basis therefor, which will or could prevent or interfere with the
consummation of any transaction contemplated hereby, and which could reasonably
be expected to have a material adverse effect on the Business or the Acquired
Assets.
4.8 Solvency. ARI and each of its subsidiaries, including, without
limitation, Sub, (a) has assets, both at present fair salable value and at fair
valuation, greater than the amount of its liabilities; (b) has capital
sufficient to carry on its respective business and transactions and all business
and transactions in which it is about to engage; (c) has not engaged in and is
not about to engage in a business or transaction for which its remaining assets
are unreasonably small in relation to the business or the transaction; (d) is
able to pay its respective debts as they mature and does not intend to incur, or
believe that it is incurring, debts beyond its ability to pay as they mature;
and (e) has no actual intent to hinder, delay or defraud either present or
future creditors.
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4.9 Brokers and Finders. Neither ARI nor Sub has engaged, consented to or
authorized any broker, investment banker or other third party to act on its or
their behalf, directly or indirectly, as a broker or finder in connection with
the transactions contemplated by this Agreement.
ARTICLE V
ADDITIONAL COVENANTS
5.1 Certificate of Incorporation and By-Laws of Sub; Agreement to Appoint
MCM Director. ARI and Sub agree that, so long as any obligations remain due to
MCM (or any assignee or successor in interest thereto) under this Agreement or
any agreement or instrument contemplated hereby or any claim for indemnification
remains outstanding MCM shall have, in its sole and absolute discretion (a) the
right, upon delivery of written notice to Sub, to designate one person to the
Board of Directors of Sub, in which case each of ARI and Sub shall immediately
take any and all actions, including, without limitation the execution and
delivery of appropriate stockholder consents necessary to cause such person
designated by MCM to be named as a director of Sub or (ii) the right to (A)
receive prior notice of any action proposed to be taken by the Board of
Directors of Sub, (B) receive such notices as are given to directors of Sub of
any meeting of the Board of Directors of Sub, (C) designate one person to attend
or participate in any meeting of the Board of Directors of Sub as an observer,
(D) receive, promptly upon completion, all written management reports and
written management accounts relating to Sub, to the extent such reports and
accounts are provided to the Board of Directors of Sub and (B) have reasonable
access to the statutory books and minute books of Sub upon reasonable prior
written notice to an executive officer of Sub or ARI, but only to the extent
such statutory books and minute books would be available to all members of the
Board of Directors of Sub.
5.2 Compliance with Bulk Sales Laws. The parties hereby waive compliance
with the bulk sales law and any other similar laws in any applicable
jurisdiction in respect of the transactions contemplated by this Agreement,
including, but not limited to, any applicable state Tax law that may require
notification of state taxing authorities and related actions in respect of bulk
sales of assets outside of the ordinary course of business.
5.3 Agreement Regarding Employees.
(a) Concurrently herewith, Sub shall offer employment to each person
currently employed by MCM for substantially the same amount of
compensation and on substantially the same terms and conditions of
employment as currently applicable to such employees. For a period of at
least six (6) months following the date hereof, Sub shall provide or make
available to any person who accepts an offer of employment with Sub such
employee benefits (including, without limitation, insurance, severance and
other benefits) of such types and amounts as made available to such person
by MCM immediately prior to the date hereof and without respect to any
preexisting conditions, waiting periods or other
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qualification requirements. Length of service for all former employees of
MCM who are hired by Sub shall be 100% convened to, and shall for all
purposes be deemed to be, length of service for the purpose of determining
benefits to be provided to such employees by Sub. Effective as of the date
hereof, Sub shall assume sponsorship of the MCMLP 401(k) Plan.
(b) Except as otherwise provided in Section 1.4(c) hereof, MCM shall
be responsible for all compensation due to MCM's employees or former
employees with respect to their employment with MCM prior to the date
hereof, whether or not hired by Sub.
(c) Sub shall be responsible for perpetuating group health plan
continuation coverage pursuant to Section 4980B of the Code and Section
601 through 609 of EPISA ("COBRA") for all employees, former employees and
their dependents who are eligible for COBRA (the "COBRA Beneficiaries")
under MCM's group health plan as of the date hereof. Sub shall indemnify
and hold MCM harmless for any liability MCM incurs at any time after the
Closing under the provisions of COBRA with respect to any COBRA
Beneficiary who had or has a "qualifying event" (within the meaning of
COBRA) before, on or after the date hereof.
5.4 Agreement Regarding Computer Files. ARI and Sub acknowledge that MCM's
access and inspection rights in respect of Consigned Inventory pursuant to
Section 2.7 may require MCM to access and review certain computer files,
together with certain software related thereto. Each of ARI and Sub agrees that
it shall not change, or cause to be changed, the configuration of any computer
files, software or hardware relating to the Consigned Inventory without the
prior written consent of MCM; provided, however, that ARI and/or Sub may modify
or reconfigure any existing software system, or convert to a new software system
and cease to maintain the existing system, with the prior written consent of
MCM, which consent shall not be unreasonably withheld.
5.5 Publicity; Disclosure. Except as required by applicable law, none of
ARI, Sub or MCM shall disclose or permit their respective shareholders,
partners, officers, directors, representatives, agents or employees to disclose
the existence, terms or conditions of this Agreement or any of the transactions
contemplated herein to any third party without the prior written consent of the
other. The parties hereto will mutually agree in advance on the form, timing and
contents of announcements and disclosures regarding the transactions
contemplated herein.
5.6 Notice of Litigation. Each of ARI, Sub and MCM shall notify the other
parties immediately in the event that it receives notice, or otherwise becomes
aware, of any suit, claim, investigation, action or proceeding, whether pending
or threatened, against it which prevents, interferes with or adversely effects,
or could reasonably be expected to prevent, interfere with or adversely effect
the transactions contemplated hereby.
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5.7 Additional Agreements Regarding Certain Actions by Sub. Each of ARI
and Sub hereby agree and covenant that, except with the prior written consent of
MCM (or, in the event MCM nominates a director to the Board of Directors of Sub
pursuant to Section 5. 1(b)(i), the consent of such MCM-nominated director), Sub
shall not:
(a) create, assume, incur or suffer any mortgage, pledge, security
interest, adverse claim or other encumbrance in respect of any of its
properties or assets;
(b) sell, assign, lease (as lessor), or otherwise transfer or
dispose of all or a substantial portion of its properties or assets,
except for the sale of works of art and related merchandise and materials
acquired from MCM hereunder in the ordinary course of Sub's business;
(c) except for those employees of MCM who are offered employment by
Sub concurrently herewith, employ any person, firm, corporation or other
entity, whether as an employee, consultant or otherwise, for annual
renumeration or compensation (including benefits) in excess of $100,000
per year;
(d) increase, reduce or reclassify the authorized or issued shares
of capital stock of Sub, or issue, sell, grant, commit or otherwise
obligate Sub to issue, sell or grant to any person, firm, corporation or
other entity (i) any shares of its capital stock, (ii) any securities
convertible into or exchangeable for or carrying any rights to acquire
from Sub any shares of its capital stock of any class, or (iii) any
options, warrants or any other rights to acquire from Sub any shares of
capital stock;
(e) fail to take all steps necessary to maintain, preserve and
protect Sub's proprietary right, title and interest in and to the
properties and assets of Sub, including, without limitation, any patents,
trade secrets, trademarks, trade names, assumed names, brand names,
copyrights and other intellectual property rights, whether now owned or
hereafter acquired;
(f) enter into any merger, consolidation or amalgamation, or
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution), or make any material change in the nature or line of, or its
method of conducting, its business;
(g) incur or assume any indebtedness of any kind other than
indebtedness to trade creditors incurred in the ordinary course of
business of Sub consistent with past practice, or agree to act, as a
surety or guarantor for any other person, firm, corporation or other
entity, or with respect to any other indebtedness;
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(h) do any of the following: (i) take any action for the
commencement of a voluntary case under any applicable bankruptcy,
insolvency or similar law, now or hereafter in effect, (ii) consent to the
entry of any order for relief in an involuntary case under any such law,
(iii) consent to the appointment or taking possession by a receiver,
liquidator, assignee, custodian, trustee or sequestrator (or similar
official) of Sub or any substantial part of its properties, (iv) make a
general assignment for the benefit of creditors, or (v) make any other
arrangement or composition with creditors generally to modify the terms of
payment of, or otherwise restructure Sub's obligations;
(i) make any investments in any person, firm or corporation, whether
affiliated or unaffiliated, or, except in the ordinary course of business
of Sub consistent with past practice, purchase or acquire any business,
property or assets of any person, firm, corporation or other entity;
(j) enter into any transaction, including without limitation any
purchase, sale, lease or exchange of any property or the rendering of any
service, with an affiliate of Sub unless such transaction is in the
ordinary course of business, and is upon fair and reasonable terms no less
favorable to Sub than Sub would be able to obtain in a comparable arm's
length transaction with a person not an affiliate;
(k) declare or pay any dividend on, or make any payment on account
of, or set apart assets for a sinking or other analogous fund for, the
purchase, redemption, defeasance, retirement or other acquisition of any
capital stock of Sub, or make any other distribution in respect thereof,
either directly or indirectly, whether in cash, property, or obligations
of Sub;
(l) amend, terminate, cancel or compromise any claims of Sub or
waive any other rights of substantial value to Sub; or
(in) amend, restate, change, revoke, cancel or otherwise modify any
provision of the Restated Certificate of Incorporation or the By-Laws of
Sub, attached hereto as Exhibit 4.1(a) and Exhibit 4.1(b), respectively,
or take or cause to be taken any action in respect thereof.
5.8 Agreement to Negotiate Subordination Agreement. MCM, Sub and ARI
hereby covenant and agree to negotiate in good faith and use their reasonable
best efforts to cause the execution and delivery of a Subordination Agreement
among MCM, ARI and the Bank of Bloomfield Hills, in form and substance
satisfactory to MCM (the "Subordination Agreement"), within thirty (30) days
after the date hereof. In the event that the Subordination Agreement has not
been executed and delivered within such 30-day period, then the Flat-Rate
Payment referred to in Section 2.2(a)(iii) hereof shall be accelerated and
become immediately due and payable in full to MCM.
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ARTICLE VI
CLOSING DELIVERIES OF ARI AND SUB
Concurrently herewith, ARI and Sub shall deliver, or cause to be
delivered, to MCM, each of the following documents:
6.1 Sub Security Agreement. A Security Agreement, in form and substance
satisfactory to MCM (the "Security Agreement"), duly executed by Sub and
acknowledged by ARI, pursuant to which Sub shall grant to MCM a first priority
security interest in all of Sub's assets, rights and properties on the terms and
conditions described therein, together with such duly executed UCC-1 financing
statements in connection therewith as MCM shall reasonably request.
6.2 ARI Pledge and Security Agreement. A Pledge and Security Agreement, in
form and substance satisfactory to MCM (the "Pledge and Security Agreement"),
duly executed by ARI, pursuant to which ARI shall pledge all of the capital
stock of Sub to MCM and grant to MCM a subordinated security interest in all of
ARI's assets, rights and properties on the terms and conditions described
therein, together with (i) one or more certificates evidencing the capital stock
of Sub, (ii) one or more assignments separate from certificate duly executed by
ARI in blank sufficient to transfer such stock to MCM, and (iii) duly executed
UCC-1 financing statements in connection therewith as MCM shall reasonably
request.
6.3 Subleases. Sublease Agreements between Sub, as sublessee, and MCM, as
sublessor (the "Sublease Agreements"), duly executed by Sub, which shall be in
form and substance reasonably satisfactory to Sub and MCM, and pursuant to which
ARI shall agree to sublease from MCM each of MCM's Water Tower, Gallery Lara,
Woodfield Mall and Oak Brook retail gallery locations and Schaumburg facility.
In connection with each Sublease Agreement, Sub shall deliver to MCM
concurrently herewith: (a) a cash security deposit in an amount equal to the
security deposit of MCM currently held by the lessor of such property, if any,
which security deposit shall be treated, on a pass-through basis, in the same
manner as MCM's security deposit under the primary lease, and (b) evidence of
liability insurance policies from one or more insurance carriers reasonably
satisfactory to MCM with respect to each property subject to a Sublease
Agreement, each of which policies shall (i) name MCM as an additional named
insured and loss payee; (ii) provide that it may not be terminated or amended
without thirty (30) days' prior written notice to MCM; and (iii) provide that it
is primary to any other valid and collectible insurance policies applicable to
MCM and/or such premises and is not subject to contribution.
6.4 ARI Guaranty. A Guaranty, in form and substance satisfactory to MCM
(the "ARI Guaranty"), duly executed by ARI, guaranteeing to MCM the payment and
performance of Sub's obligations under this Agreement and each of the agreements
contemplated hereby, including, without limitation, the Security Agreement and
each of the Sublease Agreements.
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6.5 Certificate of Incorporation; By-Laws. Evidence satisfactory to MCM
that the Restated Certificate of Incorporation and By-Laws of Sub are in the
form of Exhibit 4.1(a) and Exhibit 4.1(b) hereto, respectively, and that the
same have not been amended, modified, rescinded, revoked, cancelled or otherwise
changed since the date each was filed or adopted, as the case may be.
6.6 [Intentionally Omitted].
6.7 Authorizing Resolutions of ARI and Sub. A copy of such resolutions
adopted by the board of directors of each of ARI and Sub, duly certified by the
Secretary or Assistant Secretary thereof, authorizing ARI and Sub, as the case
may be, to execute, deliver and perform each of their respective obligations
under this Agreement and each other agreement, instrument, certificate and
document contemplated hereby.
6.8 Incumbency Certificate. One or more certificates, duly executed by the
Secretary or Assistant Secretary of each of ARI and Sub, certifying to the
incumbency of any officer or other person signing this Agreement or any other
document related to the transactions contemplated hereby on behalf of each of
ARI and Sub.
6.9 Evidence of Insurance. One or more certificates of insurance naming
MCM as an additional insured and loss payee with respect to the Consigned
Inventory pursuant to Section 2.5 hereof.
6.10 UCC Consignment Statements. The UCC Consignment Statements in respect
of the Consigned Inventory pursuant to Section 2.6 hereof, duly executed by Sub
and/or ARI.
6.11 Bill of Assumption. A Bill of Assumption, duly executed by Sub,
evidencing Sub's assumption of the Assumed Liabilities hereunder.
6.12 Purchase Price; Other Payments. Cash in the amount of the Purchase
Price (subject to reduction to account for any amounts paid to MCM pursuant to
the Escrow Agreement as provided in Section 1.6), together with any other
amounts payable to MCM pursuant to Section 6.3 (replacement security deposits).
ARTICLE VII
CLOSING DELIVERIES OF MCM
Concurrently herewith, MCM shall deliver, or caused to be delivered, to
ARI and Sub the following documents:
7.1 Sub Security Agreement. The Security Agreement duly executed by MCM.
7.2 ARI Pledge and Security Agreement. The Pledge and Security Agreement
duly executed by MCM.
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7.3 Subleases. Each of the Sublease Agreements, duly executed by MCM.
7.4 Bill of Sale. A Bill of Sale, duly executed by MCM, evidencing the
transfer of the Acquired Assets to Sub hereunder.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification by MCM. Subject to the terms of this Article VIII, MCM
covenants and agrees to indemnify and hold harmless ARI and Sub and their
respective affiliates, shareholders, officers, directors, agents and employees
(collectively, the "ARI Indemnified Parties") from and against any liability,
loss, damage or expense (including, but not limited to, reasonable attorneys'
and accountants' fees and expenses), whether or not resulting from third party
claims (collectively, "Losses"), suffered by any of the ARI Indemnified Parties,
which arise out of or result from:
(a) any inaccuracy or misrepresentation in or breach of any of the
representations, warranties, covenants or agreements made by MCM in this
Agreement or in any agreement, instrument, certificate or other document
delivered by MCM pursuant to the provisions of this Agreement;
(b) any of the Retained Liabilities;
(c) any other matter related to the conduct of the Business by MCM
or the use or ownership of the Acquired Assets and the Excluded Assets
prior to the date hereof (or the Excluded Assets following the date
hereof) other than the Assumed Liabilities; or
(d) any Taxes arising from or related to any period prior to the
date hereof.
8.2 Indemnification by ARI and Sub. Subject to the terms of this Article
VIII, each of ARI and Sub, jointly and severally, covenants and agrees to
indemnify and hold harmless MCM and its affiliates, partners, officers,
directors, agents and employees (collectively, the "MCM Indemnified Parties")
from and against any Losses suffered by any of the MCM Indemnified Parties which
arise out of or result from:
(a) any inaccuracy or misrepresentation in or breach of any of the
representations, warranties, covenants or agreements made by ARI and/or
Sub in this Agreement or in any agreement, instrument, certificate or
other document delivered by ARI and/or Sub pursuant to the provisions of
this Agreement;
(b) the Assumed Liabilities;
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(c) the conduct by ARI and/or Sub of its business and the use of the
Acquired Assets after the date hereof, but excluding Losses that arise
from any events or conditions existing prior to the date hereof; or
(d) any Taxes arising from or related to (i) the consummation of any
of the transactions (including the consignment of the Consigned Inventory)
contemplated hereby, or (ii) any period on or after the date hereof.
8.3 Indemnification Payments. All indemnity payments, whether by ARI, Sub
or MCM, to be made under this Agreement shall be made in immediately available
funds.
8.4 Procedure for Third Party Claims.
(a) Each Person entitled to indemnification under this Agreement
(the "Indemnified Party") shall give notice to the party or parties
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party (at its
expense) to assume the defense of any claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be reasonably
satisfactory to the Indemnified Party. The Indemnified Party may
participate in such defense at the Indemnified Party's expense, except
that the fees and expenses of the Indemnified Party's counsel shall be
paid by the Indemnifying Party as they are incurred if:
(i) the employment has been specifically authorized by the
Indemnifying Party in writing;
(ii) the Indemnifying Party has (A) declined to assume the
defense and employ counsel or (B) has not, within ten (10) days
after being notified of a potential claim for indemnification
hereunder, provided notice of its election to assume the defense of
the relevant claim or litigation; or
(iii) the named parties to any action (including any impleaded
parties) include both an ARI Purchaser Indemnified Party and a MCM
Indemnified Party, and the Indemnified Party has been advised by
counsel that representation of such parties by the same counsel
would be inappropriate under applicable standards of professional
conduct due to actual or potential differing interests between them
(in which case, if the Indemnified Party notifies the Indemnifying
Party in writing that the Indemnified Party elects to employ
separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall have neither the right nor the obligation
to assume the defense of such action on behalf of the
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Indemnified Party). For purposes of this Section 8.4(a)(iii) solely,
counsel for the Indemnified Party shall be counsel selected by the
Indemnified Party and reasonably acceptable to the Indemnifying
Party.
The omission by any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its indemnification
obligations under this Agreement. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which (I) does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability with respect to such claim or litigation or (II) would
impose an injunction or other equitable relief upon the Indemnified Party.
Notwithstanding the foregoing, the Indemnified Party shall have the right
at all times to take over and assume control of the defense, settlement,
negotiations or lawsuit relating to any claim or demand; provided,
however, that if the Indemnified Party does so take over and assume
control, the amount of the indemnity by the Indemnifying Party shall be
limited to the amount which the Indemnifying Party is able to demonstrate
that it and the claimant could have settled the matter for immediately
prior to the time of assumption. In the event that the Indemnifying Party
does not accept the defense of any matter as provided above, the
Indemnified Party shall have the full right to defend against such claim
or demand, and shall be entitled to settle or agree to pay in full such
claim or demand, in its sole discretion.
(b) The Indemnified Party shall cooperate with the Indemnifying
Party in defending any such claim and provide any books, records,
information or testimony requested, which is in the hands of or under the
control of the Indemnified Party.
8.5 Limitation of Indemnification. Notwithstanding anything contained in
this Article VIII to the contrary, the parties hereto agree that (a) the maximum
liability of MCM, on the one hand, and ARI and Sub, on the other hand, pursuant
to this Article VIII shall in no event exceed an amount equal to the cash
portion of the Purchase Price, and (b) that MCM shall not be required to
indemnify any ARI Indemnified Party, and neither of ARI or Sub shall be required
to indemnify any MCM Indemnified Party, in either case, until the aggregate
amount of Losses claim by the party seeking indemnification exceeds $30,000, and
then only to the extent by which such Losses exceed $30,000.
8.6 Survival. Regardless of any investigation at any time made by or on
behalf of any party hereto, (a) all representations and warranties made herein
shall survive the date hereof for a period of two (2) years and (b) all
covenants, agreements and indemnities made hereunder or pursuant to or in
connection with the transactions contemplated hereby shall survive the date
hereof indefinitely.
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ARTICLE IX
MISCELLANEOUS
9.1 Agreement to Govern. This Agreement, including all of the Exhibits and
Schedules hereto, which are incorporated herein by this reference, sets forth
the entire understanding of the parties hereto and supersedes all prior oral or
written agreements between them with respect to the subject matter contained
herein, including, without, limitation, that certain letter agreement, dated
December 3, 1996, between ARI and MCM, as the same has been extended or amended
from time to time.
9.2 Severability. The parties hereto expressly agree that it is not the
intention of any party hereto to violate any public policy, statutory or common
laws, rules, regulations or decisions of any court, government or agency
thereof. If any provision of this Agreement is judicially or administratively
interpreted or construed as being in violation thereof, such provision shall be
inoperative to the minimum extent necessary and the remainder of this Agreement
shall remain binding upon the parties hereto.
9.3 Notices and Other Communications. Every notice or other communication
required or desired to be given hereunder shall be in writing and shall be
delivered either by personal delivery, telegram, a nationally recognized courier
service, postage-prepaid, return receipt requested, certified or registered
mail, or facsimile transmission with acknowledgment of receipt, addressed to the
party to whom intended at the following address:
(a) If to MCM: MCM Limited Partnership
c/o HKL Investors, Inc.
200 West Madison Street, Suite 3800
Chicago, Illinois 60606
Attention: Mark S. Hoplamazian
Facsimile: (312) 750-8545
with a copy to: Neal, Gerber & Eisenberg
Two North LaSalle Street
Suite 2200
Chicago, Illinois 60602
Attention: Michael A. Pucker
Facsimile: (312) 269-1747
(b) If to ARI or Sub: Art Renaissance, Inc.
17 John Street
New York, New York 10038
Attention: Eugene I. Schuster
Facsimile: (212) 571-0966
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with a copy to: Seyburn, Kahn, Gin, Bess,
Deitch & Serlin, P.C.
2000 Town Center
Suite 1500
Southfield, Michigan 48075-1195
Attention: David C. May
Facsimile: (810) 353-3727
or at such other address as the intended recipient previously shall have
designated by written notice. Notice by courier or certified or registered mail
shall be effective on the date it is officially recorded as delivered to the
intended recipient by return receipt or the date of attempted delivery where
delivery is refused by the intended recipient. All notices and communications
delivered in person shall be deemed to have been delivered to and received by
the addressee, and shall be effective, on the date of personal delivery. Any
notice transmitted by telegram or facsimile transmission shall be deemed to have
been delivered to and received by the addressee, and shall be effective, on the
date said notice is delivered to the telegram company for transmission or
received by the recipient, respectively.
9.4 Law to Govern. The validity, construction and enforceability of this
Agreement shall be governed in all respects by the laws of the State of
Illinois, without regard to its conflict of laws principles. The parties hereby
irrevocable and unconditionally submit to the exclusive jurisdiction of the
courts of Cook County in the State of Illinois and of the United States of
America located in the City of Chicago, Illinois for any actions, suits or
proceedings arising out of or relating to this agreement and the transactions
contemplated hereby and agree not to commence any action, suit or proceeding
relating thereto except in such courts.
9.5 Successors and Assigns. The rights and privileges under this Agreement
may not be assigned and the duties and obligations under this Agreement may not
be delegated by any party hereto without the prior written consent of the other
parties hereto. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective personal and legal
representatives, successors and assigns. Notwithstanding any provision herein to
the contrary, this Agreement and all of MCM's right, title and interest
hereunder, including its right to receive payments from Sub hereunder, shall be
fully assignable by MCM to any corporation, partnership, limited liability
company, trust, person or entity.
9.6 Further Assurances. At any time on or after the date hereof, the
parties hereto shall each perform such acts, execute and deliver such
instruments, assignments, endorsements and other documents and do all such other
things consistent with the terms of this Agreement as may be reasonably
necessary to accomplish the transactions contemplated by, or otherwise carry out
the purposes of, this Agreement.
9.7 Gender. Number and Headings. The masculine, feminine or neuter
pronouns used herein shall be interpreted without regard to gender, and the use
of the singular or plural shall be deemed to include the other whenever the
context so requires. The headings in this
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Agreement are inserted for convenience of reference only and shall not be a part
of or control or affect the meaning of this Agreement.
9.8 Modification or Amendment. This Agreement may be modified or amended
only by a written instrument executed by all of the parties hereto.
9.9 Waiver of Provisions. The terms, covenants, representations,
warranties and conditions of this Agreement may be waived only by a written
instrument executed by the party waiving compliance. The failure of any party at
any time to require performance of any provision hereof shall in no manner
affect the right at a later date to enforce the same. No waiver by any party of
any condition or breach of any provision, term, covenant, representation or
warranty contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such condition or of the breach of any other provision,
term, covenant, representation or warranty of this Agreement.
9.10 Expenses. Each party shall bear its own expenses incident to this
Agreement and the transactions contemplated hereby, including without
limitation, all fees of counsel, accountants and other consultants.
9.11 Counterparts. This Agreement may be executed in separate
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto executed this Agreement as of the
date first written above.
MCM:
MCM LIMITED PARTNERSHIP, an Illinois
limited partnership
By: HKL Investors, Inc., its General
Partner
By: /s/ Mark S. Hoplamazian
------------------------------
Mark S. Hoplamazian
President
ARI:
ART RENAISSANCE, INC., a Delaware
corporation
By: /s/ Eugene I. Schuster
----------------------------------
Eugene I. Schuster
Chief Executive Officer
SUB:
ART RENAISSANCE CHICAGO, INC., a
Delaware corporation
By: /s/ Eugene I. Schuster
----------------------------------
Name:
Title: C.E.O.
[SIGNATURE PAGE TO ASSET PURCHASE AND CONSIGNMENT AGREEMENT]
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Exhibit 10.3
EXECUTION COPY
AMENDMENT NO. 1
TO
ASSET PURCHASE AND CONSIGNMENT AGREEMENT
AMENDMENT NO. 1 TO ASSET PURCHASE AND CONSIGNMENT AGREEMENT (this
"Amendment"), is made and entered into as of January 29, 1998, by and among MCM
LIMITED PARTNERSHIP, an Illinois limited partnership ("MCM"), ART RENAISSANCE,
INC., a Delaware corporation ("ARI"), ART RENAISSANCE CHICAGO, INC., a Delaware
corporation and wholly-owned subsidiary of ARI ("Sub"), and Eugene I. Schuster,
a resident of the State of Michigan ("Schuster").
W I T N E S S E T H:
WHEREAS, MCM, ARI and Sub are parties to that certain Asset Purchase and
Consignment Agreement, dated as of May 31, 1997 (the "Original Agreement");
WHEREAS, MCM, ARI and Sub desire to amend certain provisions of the
Original Agreement as more particularly set forth herein; and
WHEREAS, in consideration of, and a material inducement for, MCM's
execution of this Amendment, Schuster has agreed to execute and deliver a
Personal Guaranty in favor of MCM guaranteeing the full payment and performance
of all debts and obligations of each of ARI and Sub under the Original
Agreement, as amended hereby, and all agreements, instruments and documents
contemplated thereby or hereby.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein and other valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Defined Terms. All capitalized terms which are used but not otherwise
defined herein shall have the meanings specified in the Original Agreement.
2. Agreement Regarding TBO's. Section 1.7 of the Original Agreement is
hereby deleted in its entirety and the following shall be inserted in lieu
thereof (provided, however, that all references to schedules shall refer to the
corresponding schedules attached to the Original Agreement):
1.7 Agreement Regarding TBO's. With respect to TBO's, the parties
hereby agree as follows:
(a) Sub shall assume and retain responsibility for the
administration and completion of each of the TBO's listed on
Schedule 1.2(d) hereto, including, without limitation, remitting any
remaining amounts due to vendors and/or artists, collecting
<PAGE>
amounts due from customers, paying any commissions due sales
personnel, paying any Taxes, expenses or other charges related
thereto, and providing, in a professional manner, any and all
framing, shipping and related services as may be necessary to
complete such TBO; and
(b) as soon as reasonably practicable hereafter, Sub shall pay
to MCM $25,000 in immediately available federal funds in full
satisfaction of any payment obligations of Sub to MCM in respect of
TBO's, including, without limitation, any obligations under Section
1.7(c) of the Original Agreement.
3. Agreement Regarding Consigned Inventory. With respect to the Consigned
Inventory and the Consignment Fee and other payments payable by Sub to MCM
pursuant to Section 2.2 of the Original Agreement, the parties hereby agree as
follows:
(a) Sub shall pay, or cause to be paid, to MCM in respect of the
Consigned Inventory the amount of $350,000 less any amounts actually
received by MCM from Sub during the period from November 1, 1997 through
December 31, 1997, which amount shall be payable in immediately available
federal funds as soon as reasonably practicable following the execution of
this Amendment.
(b) Section 2.1 of the Original Agreement is hereby deleted in its
entirety and the following shall be inserted in lieu thereof (provided,
however, that all references to schedules shall refer to the corresponding
schedules attached to the Original Agreement):
2.1. Grant of Rights. Effective upon the date hereof and,
except as provided in Sections 2.2(c) and (d), through August 31,
1999 (the "Consignment Period"), MCM hereby grants to Sub the sole
and exclusive right, throughout the world, to offer and sell all or
any item of inventory listed on Schedule 2.1 hereto (collectively,
the "Consigned Inventory"). The Consigned Inventory shall remain in
the possession of Sub, as consignee, on a consignment basis in
accordance with the provisions of this Article II.
(c) Section 2.2 of the Original Agreement is hereby deleted in its
entirety and the following shall be inserted in lieu thereof (provided,
however, that all references to schedules shall refer to the corresponding
schedules attached to the Original Agreement):
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2.2 Consignment Fee: Take Down of Consigned Inventory
(a) Amount of Fee. In consideration for the rights granted by
MCM to Sub in Section 2.1, MCM shall be entitled to receive an
aggregate consignment fee of $2,150,000 (the "Consignment Fee"),
which amount shall be payable in equal weekly installments (each, a
"Weekly Payment") at the rate of $100,000 per month; provided,
however, that the aggregate Weekly Payments for three (3) of the
first six (6) months of calendar year 1998 shall be in the amount of
$150,000 per month (such three (3) months to be selected in Sub's
discretion). Each Weekly Payment shall be due and payable in
immediately available federal funds during the Consignment Period
until such time as the aggregate amount of Weekly Payments paid by
Sub to MCM is equal to the Consignment Fee. Any Weekly Payment that
is not paid when due shall bear interest from the date when due
until such amount is paid in full, at an interest rate per annum,
compounded monthly, which is equal to the lesser of (i) ten percent
(10%) per annum and (ii) the highest rate allowable under applicable
law.
(b) Take-Down of Consigned Inventory. Subject to the
provisions of this Section 2.2(b), Sub shall have the right (but not
the obligation) at any time after January 1, 1998, but not more than
once per calendar quarter, to submit to MCM a written list (the
"Take Down List") identifying all items of Consigned Inventory that
Sub has either (i) sold since the date of the last Take Down List
(or, with respect to the first Take Down List, since the date of the
Original Agreement), or (ii) desires to acquire for its own account.
Each Take Down List shall identify items of Consigned Inventory sold
by Sub and/or which Sub desires to acquire for its own account as
specifically as possible, including, as applicable, the artist's
name, title, serial or other inventory tracking number, and the
"Total Original Cost" (as listed on Schedule 2.1 hereto) of each
item (it being agreed that the "Total Original Cost" for any item of
Consigned Inventory purchased by MCM prior to January 1, 1996 shall
be discounted by 35.12% (the "Aging Discount")). In addition, each
Take Down List shall comply with the following provisions: (i) the
aggregate Total Original Cost (after giving effect to the Aging
Discount) for all items of Consigned Inventory included on such Take
Down List shall not exceed the aggregate amount of Weekly Payments
paid by Sub to MCM since the date of the prior Take Down List (or,
with respect to the first Take Down List, the aggregate amount of
payments actually received by MCM from Sub during the period from
November 1, 1997 through the date hereof); (ii) at least two-thirds
of the aggregate Total Original Cost
3
<PAGE>
(after giving effect to the Aging Discount) for all items of
Consigned Inventory included on such Take Down List shall be
attributable to items of Consigned Inventory sold by Sub and/or ARI
to unaffiliated third party purchasers; and (iii) at least one-third
of the aggregate Total Original Cost (after giving effect to the
Aging Discount) for all items of Consigned Inventory included on
such Take Down List shall be attributable to Consigned Inventory
purchased by MCM prior to January 1, 1995; provided, however, that
in the event that none of the remaining Consigned Inventory was
purchased by MCM prior to January 1, 1995, then this clause (iii)
shall cease to be applicable. To the extent that each Take Down List
complies with the provisions of this Section 2.2(b), then the items
of Consigned Inventory listed thereon shall cease to be Consigned
Inventory hereunder and, as applicable, shall be deemed transferred
to Sub.
(c) Remedies Upon Default: Termination of Consignment. In the
event of a breach of or default by either of ARI or Sub in respect
of any of their respective covenants, representations or warranties
contained in this Agreement or in any of the other agreements,
instruments, certificates of documents contemplated hereby or a
breach of or default by Schuster under that certain Personal
Guaranty, dated as of January 29, 1998, MCM may, in its sole
discretion, either (i) terminate the provisions of the Article II
regarding Consigned Inventory, in which event ARI and Sub agree that
they shall promptly return (at their sole cost and expense) all
Consigned Inventory to MCM and shall cooperate with MCM to effect
the orderly termination of the consignment relationship created
hereunder, or (ii) accelerate and declare the remaining unpaid
balance of the Consignment Fee immediately due and payable, in which
event Sub shall pay to MCM in full the remaining unpaid balance of
the Consignment Fee in immediately available federal funds and, upon
receipt thereof by MCM, title to all remaining Consigned Inventory
shall be transferred from MCM to Sub and the provisions of this
Article II shall terminate.
(d) Acceleration of Consignment Fee following an Organic
Transaction. In the event of an Organic Transaction (as defined
below), any remaining unpaid balance of the Consignment Fee shall
become immediately due and payable by Sub to MCM and shall be paid
in full by Sub to MCM in immediately available federal funds.
Following such payment, title to all remaining Consigned Inventory
shall be transferred from MCM to Sub and the provisions of this
Article II shall terminate. For the purposes of this Section 2.2(d).
an "Organic Transaction" means (i) the sale, lease, exchange,
transfer
4
<PAGE>
or other disposition of all or substantially all of ARI's or Sub's
assets to a person or group of persons; (ii) any merger,
consolidation, refinancing, recapitalization, or other transaction
or series of transactions that results in the holders of the issued
and outstanding voting securities of either of ARI or Sub (including
any affiliate of such holders) immediately prior to such
transaction(s) owning or controlling less than a majority of the
voting securities of the continuing or surviving entity immediately
following such transaction(s); and/or (iii) any event, occurrence,
or transaction or series of transactions following or as a result of
which Schuster is no longer (A) a director of each of ARI and Sub,
(B) the Chairman of the Board, Chief Executive Officer or President
of each of ARI and Sub, and (C) the record and beneficial owner of
the largest aggregate number of issued and outstanding shares of the
capital stock of ARI.
(d) Section 2.5 of the Original Agreement is hereby deleted in its
entirety and the following shall be inserted in lieu thereof (provided,
however, that all references to schedules shall be deemed to refer to
schedules attached to the Original Agreement):
2.5 Insurance: Storage of Consigned Inventory. During the
Consignment Period the Consigned Inventory will be stored only at
the locations set forth on Schedule 2.5 hereto (collectively, the
"Permitted Locations"). At all times from the date hereof through
the later of the expiration of the Consignment Period and the full
performance by Sub of its obligations under this Article II, Sub
shall obtain and maintain, at its sole cost and expense, such
casualty and other insurance as MCM shall require from one or more
insurance carriers satisfactory to MCM, in an amount not less than
the unpaid balance of the Consignment Fee plus $50,000. Each of such
policies shall (a) name MCM as an additional named insured and loss
payee; (b) provide that it may not be terminated or amended without
thirty (30) days' prior written notice to MCM; and (c) provide that
it is primary to any other valid and collectible insurance policies
applicable to MCM and/or the Consigned Inventory and is not subject
to contribution. From time to time at MCM's request hereafter, Sub
shall deliver to MCM evidence that such insurance policies are in
full force and effect, and a certificate of insurance naming MCM as
an additional named insured and loss payee.
(e) Section 2.6(a) of the Original Agreement is hereby deleted in
its entirety and the following shall be inserted in lieu thereof:
(a) Title to the Consigned Inventory is reserved in MCM until
sale of and payment in full to MCM with respect to the Consigned
5
<PAGE>
Inventory in accordance with the terms hereof or until such
Consigned Inventory is deemed acquired and paid for by Sub pursuant
to Section 2.2(b) hereof.
4. Reaffirmation of Section 4.8. Each of Sub and ARI hereby reaffirms the
representations and warranties contained in Section 4.8 of the Original
Agreement with respect to the solvency of ARI and its Subsidiaries on and as of
the date hereof.
5. Indemnification by ARI and Sub. Section 8.2(a) is hereby deleted in its
entirety and the following shall be inserted in lieu thereof:
(a) any inaccuracy or misrepresentation in or breach of any of
the representations, warranties, covenants or agreements made by ARI
and/or Sub in this Agreement or in any agreement, instrument,
certificate or other document delivered by ARI and/or Sub pursuant
to the provisions of this Agreement, or any inaccuracy or
misrepresentation in or breach of any of the representations,
warranties, covenants or agreements made by Schuster in that certain
Personal Guaranty, dated as of January 29, 1998;
6. Personal Guaranty of Schuster. In consideration of, and as a material
inducement to, MCM's willingness to enter into this Amendment, Schuster agrees
to execute and deliver concurrently herewith a Personal Guaranty, in form and
substance satisfactory to MCM, in favor of MCM pursuant to which Schuster shall
guaranty the full payment and performance of all debts and obligations of ARI
and/or Sub under Section 2.2(a) of the Original Agreement, as amended hereby.
7. Reaffirmation of Ancillary Documents. Each of ARI and Sub hereby
reaffirms and confirms its obligations under each of the ancillary documents
delivered in connection with the Original Agreement, including, without
limitation, that certain Security Agreement, dated as of May 31, 1997, between
MCM and Sub, that certain Pledge and Security Agreement, dated as of May 31,
1997, between MCM and ARI, and that certain Guaranty, dated as of May 31, 1997,
of ARI in favor of MCM.
8. Other Provisions Unchanged. Except as specifically amended hereby, all
other terms and conditions of the Original Agreement shall remain in full force
and effect.
9. Severability. The parties hereto expressly agree that it is not the
intention of any party hereto to violate any public policy, statutory or common
laws, rules, regulations or decisions of any court, government or agency
thereof. If any provision of this Amendment is judicially or administratively
interpreted or construed as being in violation thereof, such provision shall be
inoperative to the minimum extent necessary and the remainder of this Agreement
shall remain binding upon the parties hereto.
6
<PAGE>
10. Further Assurances. At any time on or after the date hereof, the
parties hereto shall each perform such acts, execute and deliver such
instruments, assignments, endorsements and other documents and do all such other
things consistent with the terms of this Amendment as may be reasonably
necessary to accomplish the transactions contemplated by, or otherwise carry out
the purposes of, this Amendment.
11. Law to Govern. The validity, construction and enforceability of this
Amendment shall be governed in all respects by the laws of the State of
Illinois, without regard to its conflict of laws principles. The parties hereby
irrevocable and unconditionally submit to the exclusive jurisdiction of the
courts of Cook County in the State of Illinois and of the United States of
America located in the City of Chicago, Illinois for any actions, suits or
proceedings arising out of or relating to this Amendment and the transactions
contemplated hereby and agree not to commence any action, suit or proceeding
relating thereto except in such courts.
12. Gender, Number and Headings. The masculine, feminine or neuter
pronouns used herein shall be interpreted without regard to gender, and the use
of the singular or plural shall be deemed to include the other whenever the
context so requires. The headings in this Amendment are inserted for convenience
of reference only and shall not be a part of or control or affect the meaning of
this Amendment.
13. Counterparts. This Amendment may be executed in separate counterparts,
each of which shall be an original and all of which taken together shall
constitute one and the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto executed this Amendment as of the
date first written above.
MCM:
MCM LIMITED PARTNERSHIP, an Illinois
limited partnership
By: HKL Investors, Inc., its General
Partner
By: /s/ Mark S. Hoplamazian
-------------------------------
Mark S. Hoplamazian
President
ARI:
ART RENAISSANCE, INC., a Delaware
corporation
By: /s/ Eugene I. Schuster
-----------------------------------
Eugene I. Schuster
Chief Executive Officer
SUB:
ART RENAISSANCE CHICAGO, INC., a
Delaware corporation
By: /s/ Eugene I. Schuster
-----------------------------------
Eugene I. Schuster
Chief Executive Officer
The undersigned hereby joins in the execution and delivery of this
Amendment solely for the purposes of binding himself to the provisions of
Section 6 hereof.
/s/ Eugene I. Schuster
-----------------------------------------
Eugene I. Schuster, individually
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO
ASSET PURCHASE AND CONSIGNMENT AGREEMENT]
8
<PAGE>
EXECUTION COPY
PERSONAL GUARANTY
FOR VALUE RECEIVED, and in consideration of the willingness of MCM LIMITED
PARTNERSHIP, an Illinois limited partnership (together with its successors and
assigns, "MCM"), to enter into Amendment No. 1, dated as of January 29, 1998, to
that certain Asset Purchase and Consignment Agreement, dated as of May 31, 1997
(as amended, the "Purchase Agreement"), among MCM, ART RENAISSANCE CHICAGO,
INC., a Delaware corporation (together with its successors and assigns, "Sub"),
and ART RENAISSANCE, INC., a Delaware corporation (together with its successors
and assigns, "ARI"), the undersigned hereby absolutely, irrevocably and
unconditionally personally guarantees the full and prompt payment when due,
whether by acceleration or otherwise, and at all times thereafter, and the full
and prompt performance, of all of Sub's and/or ARI's obligations to MCM under
Section 2.2(a) of the Purchase Agreement, howsoever created, arising or
evidenced, whether direct or indirect, primary or secondary, absolute or
contingent, joint or several, now or hereafter existing or due or to become due
(including interest on any such amount whether accruing before or after any
bankruptcy or insolvency proceeding involving Sub and/or ARI and, if interest on
any portion of such obligations ceases to accrue by operation of law by reason
of the commencement of such proceeding, including such interest as would have
accrued on any such portion of such obligations if such proceeding had not
commenced) (all of the foregoing obligations hereinafter referred to,
collectively, as the "Liabilities"). Capitalized terms used but not defined
herein shall have the meanings specified in the Purchase Agreement, as amended.
The undersigned expressly guaranties, without limitation, the payment when
due of all payments on, under or in respect of the Liabilities. The undersigned
further agrees to pay all expenses (including reasonable attorneys' fees and
legal expenses) paid or incurred by MCM in endeavoring to collect the
Liabilities, or any part thereof, and in enforcing this Guaranty. For the
purposes of this Guaranty, Liabilities shall include all of each of Sub's and
ARI's obligations under Section 2.2(a) of the Purchase Agreement to MCM,
notwithstanding any right or power of Sub and/or ARI or anyone else to assert
any claim or defense as to the invalidity or unenforceability of any such
obligation, and no such claim or defense shall affect or impair the obligations
of the undersigned hereunder, provided, however, notwithstanding anything
contained herein to the contrary, the maximum amount of the obligation of the
undersigned to MCM shall not exceed $2,150,000, plus (i) interest on all amounts
not paid when due pursuant to Section 2.2(a) of the Purchase Agreement, at an
interest rate per annum, compounded monthly, which is equal to the lesser of (A)
ten percent (10%) per annum, and (B) the highest rate allowable under applicable
law, and (ii) all expenses (including reasonable attorneys' fees and legal
expenses) paid or incurred by MCM in endeavoring to collect the Liabilities, or
any part thereof, and in enforcing this Guaranty, less amounts actually received
by MCM and applied by MCM to the payment of the Liabilities.
The undersigned agrees that, in the event of the dissolution or insolvency
of any of Sub, ARI or the undersigned, or the inability or failure of any of
Sub, ARI or the undersigned to pay its or his debts as they become due, or an
assignment by any of Sub, ARI or the undersigned for the
<PAGE>
benefit of creditors, or the commencement of any case or proceeding in respect
any of Sub, ARI or the undersigned under any bankruptcy, reorganization,
insolvency or similar laws and if such event shall occur at a time when any of
the Liabilities may not then be due and payable, the undersigned will pay to MCM
forthwith the full amount which would be payable hereunder by the undersigned if
all Liabilities were then due and payable.
The undersigned hereby represents and warrants to MCM that the undersigned
has a minimum net worth of not less than $10 million, and covenants that, so
long as any Liabilities remaining outstanding, the undersigned will maintain a
minimum net worth of not less than $10 million. This Guaranty shall in all
respects be a continuing, absolute and unconditional guaranty, and shall remain
in full force and effect (notwithstanding, without limitation, the death of the
undersigned or that, at any time or from time to time, all Liabilities may have
been paid in full), until the date on which the Liabilities (including any
extensions or renewals of any thereof) and all interest thereon and all expenses
(including attorneys' fees and legal expenses) paid or incurred by MCM in
seeking to collect the Liabilities, or any part thereof, and in enforcing this
Guaranty shall have been finally and irrevocably paid in full.
The undersigned further agrees that, if at any time all or any part of any
payment theretofore applied by MCM to any of the Liabilities is or must be
rescinded or returned by MCM for any reason whatsoever (including, without
limitation, the insolvency, bankruptcy or reorganization of either of Sub or
ARI), such Liabilities shall, for the purposes of this Guaranty, to the extent
that such payment is or must be rescinded or returned, be deemed to have
continued in existence, notwithstanding such application by MCM, and this
Guaranty shall continue to be effective or be reinstated, as the case may be, as
to such Liabilities, all as though such application by MCM had not been made.
MCM may, from time to time at its sole discretion and without notice to
the undersigned, take any or all of the following actions: (a) retain or obtain
a lien upon or a security interest in any property to secure any of the
Liabilities or any obligation hereunder; (b) retain or obtain the primary or
secondary obligation of any obligor or obligors, in addition to the undersigned,
with respect to any of the Liabilities; (c) extend or renew for one or more
periods (regardless whether longer than the original period), alter or exchange
any of the Liabilities, or release or compromise any obligation of the
undersigned hereunder or any obligation of any nature of any other obligor
(including, without limitation, Sub and ARI) with respect to any of the
Liabilities; (d) release or fail to perfect its lien upon or security interest
in, or impair, surrender, release or permit any substitution or exchange for,
all or any part of any property securing any of the Liabilities or any
obligation hereunder, or extend or renew for one or more periods (regardless
whether longer than the original period) or release, compromise, alter or
exchange any obligations of any nature of any obligor with respect to any such
property; and (e) resort to the undersigned for payment of any of the
Liabilities, regardless whether MCM shall have resorted to any property securing
any of the Liabilities or any obligation hereunder or shall have proceeded
against any other obligor primarily or secondarily obligated with respect to any
of the Liabilities.
The undersigned waives all defenses, offsets and counterclaims with
respect to this Guaranty and payment of the Liabilities. No act of commission or
omission of any kind, or at any
<PAGE>
time, upon the part of MCM in respect to any matter whatsoever, shall in any way
affect or impair this Guaranty. Any amounts received by MCM from whatsoever
source on account of the Liabilities may be applied by MCM toward the payment of
such of the Liabilities, and in such order of application, as MCM may from time
to time elect.
The undersigned hereby irrevocably waives any rights which he may acquire
by way of subrogation under this Guaranty, by any payment made hereunder or
otherwise, and any right of reimbursement and any right of salvage against the
Company therefor and hereby further irrevocably waives, so long as any
Liabilities remain outstanding, any and all claims the undersigned may have
against Sub and/or ARI for any indebtedness of Sub and/or ARI to the undersigned
now existing or hereafter incurred.
The undersigned hereby expressly waives: (a) notice of MCM's acceptance of
this Guaranty; (b) notice of the existence or creation or nonpayment of all or
any of the Liabilities; (c) presentment, demand, notice of dishonor, protest,
and all other notices whatsoever; and (d) all diligence in collection or
protection of or realization upon the Liabilities or any thereof, any obligation
hereunder, or any security for or guaranty of any of the foregoing.
MCM may, from time to time at its sole discretion and without notice to
the undersigned, assign or transfer any or all of the Liabilities or any
interest therein; and, notwithstanding any such assignment or transfer or any
subsequent assignment or transfer thereof, such Liabilities shall be and remain
Liabilities for the purposes of this Guaranty, and each and every immediate and
successive assignee or transferee of any of the Liabilities or of any interest
therein shall, to the extent of such assignee's or transferee's interest in the
Liabilities, be entitled to the benefits of this Guaranty to the same extent as
if such assignee or transferee were MCM provided, however, that, unless MCM
shall otherwise consent in writing, MCM shall have an unimpaired right, prior
and superior to that of any such assignee or transferee, to enforce this
guaranty for MCM's benefit as to those of the Liabilities which MCM has not
assigned or transferred.
No delay on MCM's part in the exercise of any right or remedy shall
operate as a waiver thereof, and no single or partial exercise by MCM of any
right or remedy shall preclude other or further exercise thereof or the exercise
of any other right or remedy; nor shall any modification or waiver of any of the
provisions of this guaranty be binding upon MCM except as expressly set forth in
a writing duly signed and delivered on MCM's behalf. No action of MCM permitted
hereunder shall in any way affect or impair MCM's rights or the undersigned's
obligations under this Guaranty. The undersigned's obligations under this
Guaranty shall be absolute and unconditional irrespective of any circumstance
whatsoever which might constitute a legal or equitable discharge or defense of
the undersigned. The undersigned hereby acknowledges that there are no
conditions to the effectiveness of this Guaranty.
The undersigned hereby represents and warrants to MCM that the undersigned
now has and will continue to have independent information concerning each of
Sub's and ARI's affairs, financial condition and business. MCM shall not have
any duty or responsibility to provide the undersigned with any credit or other
information concerning either of Sub's or ARI's affairs, financial condition or
business which may come into MCM's possession.
<PAGE>
The undersigned hereby further represents and warrants to MCM that: (a)
the execution, delivery and performance of this Guaranty require no
governmental, regulatory or other approval, (b) this Guaranty has been duly
executed and delivered on the undersigned's behalf and is the legal, valid and
binding obligation of the undersigned, enforceable in accordance with its terms
except as such enforceability may be limited by (i) bankruptcy, insolvency or
other laws limiting creditors rights generally, or (ii) general principles of
equity, (c) the execution, delivery and performance of this Guaranty do not and
will not contravene or conflict with any provision of (i) law applicable to the
undersigned, or (ii) any judgment, decree or order of any court or governmental
or administrative agency binding upon the undersigned, and do not and will not
contravene or conflict with, or cause any Lien to arise under, any provision of
any agreement or instrument binding upon the undersigned or any of his
properties.
This Guaranty shall be binding upon the undersigned and upon the
undersigned's heirs, executors, administrators, representatives, successors and
assigns; and all references herein to Sub, ART and the undersigned,
respectively, shall be deemed to include any successor or successors, or
assigns, whether immediate or remote, to Sub or ARI, and any heirs,
representatives or assigns of the undersigned.
This Guaranty has been delivered at Chicago, Illinois, and shall be
construed in accordance with and governed by the laws of the State of Illinois,
without regard to conflict of laws principles. Wherever possible each provision
of this Guaranty shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Guaranty shall be
prohibited by or invalid under each law, such provision shall be ineffective
only to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Guaranty.
The undersigned hereby submits to the nonexclusive jurisdiction of the
United States Federal and State of Illinois courts located in Cook County,
Illinois for all purposes of or in connection with this Guaranty, provided that
nothing in this Guaranty shall affect MCM's right to bring any action or
proceeding against the undersigned or its property in the courts of any other
jurisdiction.
The undersigned hereby consents to process being served in any suit,
action or proceeding of the nature referred to above by the mailing of a copy
thereof by registered or certified mail, postage prepaid, return receipt
requested, to his address shown opposite his signature hereto. The undersigned
agrees that such service, to the fullest extent permitted by law, (i) shall be
deemed in every respect effective service of process upon him in any such suit,
action or proceeding and (ii) shall be taken and held to be valid personal
service upon and personal delivery to him. Nothing herein shall affect MCM's
right to serve process in any other manner permitted by law, or limit MCM's
right to bring proceedings against the undersigned in the courts of any other
jurisdiction.
THE UNDERSIGNED HEREBY IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN
ANY ACTION OR PROCEEDING (I) TO ENFORCE OR DEFEND ANY
<PAGE>
RIGHTS UNDER OR IN CONNECTION WITH THIS GUARANTY, OR ANY AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION HEREWITH OR THEREWITH, OR (II) ARISING FROM ANY DISPUTE OR
CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS GUARANTY, OR ANY SUCH
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR
COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
SIGNED AND DELIVERED as of January 29, 1998.
/s/ Eugene I. Schuster
-----------------------------------
EUGENE I. SCHUSTER
Address:
c/o Venture Funding, Ltd.
3011 West Grand Blvd.
Suite 321
Detroit, Michigan
Telephone: (313) 871-3606
Facsimile: (313) 873-4935
<PAGE>
Exhibit 10.4
[LETTERHEAD OF RAZORFISH]
August 31, 1999
Art Renaissance
816 East Dana Street
Mountain View, CA 94041
Attn:Joseph Schuster
Re: Razorfish San Francisco, Inc. and Art Renaissance, Inc.
Dear Joseph:
Razorfish is planning to begin a project with Art Renaissance on October 18,
1999 to be implemented in the Q2 2000 timeframe. Razorfish will assess Art
Renaissance's business objectives, develop a digital strategy to meet those
objectives, and implement the appropriate solution. In preliminary discussions,
functionality to be considered in the project includes a Website with e-commerce
and auctioning capabilities and kiosks that would allow viewing art in a
"virtual living room".
This letter represents our agreement with you until such time as we enter into a
more detailed agreement. Please review this letter and, if it is consistent with
your understanding of our respective responsibilities, please return a signed
copy of this letter to me so that we may begin work on your behalf.
On October 18, 1999, we will begin our Clarify phase. During the Clarify phase,
we will work with Art Renaissance to gain a better understanding of the
business, clarify immediate business needs and determine long-term goals. In the
third week of the phase, a Clarify document will be delivered including:
o business objectives
o competitive analysis
o target audience
o recommended digital strategy
o project schedule
o project budget
The fourth week of the Clarify phase will be used for reviewing the document and
making any needed updates. As we complete the Clarify phase, we will work
together to create a more detailed agreement concerning the scope and terms of
the remainder of the project.
Project Fees and Billing
You agree to pay Razorfish on a time and materials basis for all services
performed and all costs incurred on your behalf. Razorfish assigns hourly rates
for each member of its staff based on years of experience. specialization in
training and level of professional attainment. Our hourly rates presently range
from $90 per hour for a research analyst to $350 per hour for our most senior
and experienced solutions and design directors.
(Copyright) Razorfish, Inc. 1999
Private and confidential.
Revised Aug. 1999
Page 1
<PAGE>
Estimated fees for the Clarify phase are $69,675. Razorfish will notify you when
time and materials reaches $35,000 and we agree to obtain Art Renaissance's
written authorization for any additional work if our fees for the Clarify phase
will exceed our original estimate by more than 10%.
Project related expenses will be included in bi-weekly billing. To simplify
processing of certain incidental project costs such as telephone, fax and
photocopies, an administrative fee in the amount of 2% of billing will be added
to each invoice; all other expenses will be billed at cost. All Razorfish
invoices are due and payable upon receipt.
General Responsibilities of Razorfish and Art Renaissance
We will keep you apprised of developments as necessary to perform our services
and will consult with you as necessary to ensure the timely, effective and
efficient completion of our work.
We understand that you will provide us with factual information and materials as
we require to perform the services, that you will make any business or technical
decisions and determinations that are appropriate to facilitate the completion
of our services, and will remit payment of our billing statements in accordance
with Razorfish's standard billing procedures. It is Razorfish policy to halt
work on a project, even at the risk of missing agreed upon deadlines, if
invoices are not promptly paid.
Art Renaissance may terminate its relationship with Razorfish at any time upon
30 days written notice. In the event of such termination, Art Renaissance shall
remain liable to Razorfish for all services performed and for all costs incurred
on Art Renaissance's behalf (subject to non-cancelable contracts) through the
effective date of termination.
Please feel free to contact me at (415) 343-2222 if I can answer any questions
about this letter. On behalf of Razorfish, we look forward to beginning our
relationship.
Best Regards,
Len Sellers
Managing Director
APPROVED AND AGREED BY Art Renaissance
By:
/s/ Joseph A. Schuster
----------------------------
Joseph A. Schuster
Its: Vice President of Development
Date: September 13, 1999
(Copyright) Razorfish, Inc. 1999
Private and confidential.
Revised Aug. 1999
Page 2
<PAGE>
Exhibit 10.7
COMPROMISE AGREEMENT
This Compromise Agreement ("Agreement") is entered into as of the 10th day
of September, 1999 by and between MCM LIMITED PARTNERSHIP, an Illinois limited
partnership ("MCM") and EUGENE I. SCHUSTER ("Schuster"), ART RENAISSANCE, INC.
("ARI") and ART RENAISSANCE CHICAGO, INC. ("ARCI"). The "Parties" or the
"Parties Hereto" shall mean MCM on the one hand and Schuster, ARI and ARCI on
the other hand.
WHEREAS, MCM sold certain of its assets and consigned its inventory to
Schuster's companies, ARI and ARCI, pursuant to an Asset Purchase and
Consignment Agreement (the "Sales Contract"); and
WHEREAS, in accordance with an amendment to the Sales Contract executed by
ARI, ARCI and by Schuster personally (the "Amendment"), and as a condition of
the Amendment, Schuster executed a personal guaranty (the "Personal Guaranty")
in favor of MCM. Pursuant to the Personal Guaranty, Schuster guaranteed full and
complete performance by ARCI and ARI of their obligations to MCM under the Sales
Contract and the Amendment; and
WHEREAS, Schuster, ARI, and ARCI owe MCM certain sums for the purchase and
consignment of MCM's assets under the Sales Contract, the Amendment, and the
Personal Guaranty; and
WHEREAS, the Parties now wish to compromise and resolve and to provide a
mechanism for payment of sums owed to MCM for the purchase and consignment of
its assets under the Sales Contract, the Amendment and the Personal Guaranty in
accordance with the terms of this Agreement.
NOW, THEREFORE, the Parties agree as follows:
1. Schuster shall pay MCM, (or cause ARI or ARCI to pay to MCM) the sum of
ONE MILLION NINE HUNDRED THIRTY THOUSAND FOUR HUNDRED SIX Dollars ($1,930,406,
the "Compromise Amount") on or before Janaury 31, 2000 in full and complete
satisfaction of all amounts due and owing to MCM from Schuster, ARI and/or ARCI
for the purchase and consignment of MCM's assets under the Sales Contract, the
Amendment, and the Personal Guaranty, but specificially excluding any amounts
that are or may become due and owing to MCM under any subleases, continuing
indemnifications or other obligations pursuant to the Sales Contract, the
Amendment, the Personal Guaranty or otherwise.
2. Schuster shall pay MCM (or cause ARI or ARCI to pay MCM) weekly
payments (the "Weekly Payments") in the amount of $12,500.00. The first Weekly
Payment is due on or before October 15, 1999 and subsequent Weekly Payments are
due on or before each Friday thereafter until January 28, 2000 or until such
time as the Compromise Amount has been paid in full, which ever is
<PAGE>
sooner. Weekly Payments received by MCM shall be credited against the Compromise
Amount.
3. Schuster shall bear his own costs and attorneys' fees with respect to
the preparation and execution of this Agreement and all documents required
herein in addition to those fees and costs of MCM.
4. Confession of Judgment. In the event that any Weekly Payment called for
in paragraph 2 above is not paid in full by its due date (or within five
calendar days of said due date), or in the event that the Compromise Amount is
not paid in full on or before January 31, 2000, Schuster agrees to the entry of
Judgment against him by any court of competent jurisdiction for the Compromise
Amount, less any payments received by MCM pursuant to this Agreement. Schuster
further agrees that no appeal will be prosecuted from said Judgment. Schuster
further agrees that no defenses shall be raised and no proceedings shall be
taken in law or in equity to interfere in any manner with the entry, execution
or enforcement of siad Judgment. MCM shall give Schuster five (5) days written
notice, through his attorneys, Horwood Marcus & Berk, Chartered, prior to
appearing in court to obtain said Judgment.
5. Schuster further agrees that if he breaches this Agreement, he shall be
liable to MCM for and shall indemnify MCM for al costs, expenses, liabilities,
and fees, including reasonable attorneys' fees, that may be incurred by MCM as a
result of such breach, in addition to such other remedies that may be available
at law or in equity.
6. This Agreement may be executed in counterparts, with each counterpart
to be deemed an original and given full force and effect.
7. Each Party to this Agreement represents and warrants that the person
executing this Agreement on behalf of said Party is fully and duly empowered and
authorized to execute on behalf of such party and to bind such party to this
Agreement.
8. No addition to or modification of any provision contained in this
Agreement shall be effective unless fully set forth in writing signed by all the
Parties Hereto. No waiver of any rights hereunder shall be effective unless
fully set forth in writing signed by the waiving Party.
9. Schuster recognizes and agrees that nothing contained herein shall be
deemed an election of remedies by MCM with respect to any person or entity or a
waiver of any rights or remedies which are currently, or may hereafter become,
available to MCM under any agreement. Schuster agrees and acknowledged that he,
ARI, and ARCI have continuing indemnification and sublease obligations to MCM
under the Sales Contract, the
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Amendment, the Personal Guaranty, and otherwise, and that said obligations are
not released, settled, waived or compromised by this Agreement.
10. The terms of this Agreement shall be governed by the law of the State
of Illinois.
IN WITNESS WHEREOF, the Parties have executed this Compromise Agreemnt as
of the date first set forth above.
EUGENE I. SCHUSTER MCM LIMITED PARTNERSHIP, an
Illinois limited partnership
/s/ Eugene I. Schuster By: /s/ MCM Limited Partnership
- ------------------------------------- -------------------------------
ART RENAISSANCE, INC.
By: /s/ Eugene I. Schuster, CEO
---------------------------------
ART RENAISSANCE CHICAGO, INC.
By: /s/ Eugene I. Schuster, President
---------------------------------
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Exhibit 10.8
- --------------------------------------------------------------------------------
LOAN AGREEMENT
BY AND BETWEEN
ART RENAISSANCE, INC.
AND
THE BANK OF BLOOMFIELD HILLS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3-29-96
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT, made this 29th day of March, 1996, by and between Art
Renaissance, Inc., a Delaware corporation, of New York, New York (herein called
"Company"), and The Bank of Bloomfield Hills, a Michigan banking corporation, of
Bloomfield Hills, Michigan (herein called "Bank");
WITNESSETH:
1. TERM CREDIT
1.1 Bank agrees to lend to Company on the date hereof the principal sum of
One Million Five Hundred Fifty Thousand Dollars ($1,550,000). The borrowing
hereunder shall be evidenced by a Term Note (herein called "Term Note").
1.2 The indebtedness represented by the Term Note shall be repaid in
monthly principal installments each equal to Fifteen Thousand Dollars ($15,000),
commencing on June 1, 1996 and on the first day of each month thereafter until
April 1, 1999, when the entire unpaid balance of principal and interest thereon
shall be due and payable. Company agrees to pay interest on the unpaid principal
balance of the Term Note from time to time outstanding at a per annum rate equal
to two and one half percent (2-1/2%) above Bank's Prime Rate. Upon the
occurrence of any event of default hereunder, interest shall accrue on the
unpaid principal balance at the per annum rate of four and one half percent
(4-1/2%) above Bank's Prime Rate. Interest shall be payable monthly commencing
on May 1, 1996 and on the first day of each month thereafter. Interest shall be
computed on a daily basis using a year of 360 days, assessed for the actual
number of days elapsed, and in such computation effect shall be given to any
change in the interest rate resulting from a change in the Prime Rate on the
date of such change in the Prime Rate. "Prime Rate" shall mean the rate of
interest established by Bank as its prime rate as the same may be changed from
time to time, which rate may not necessarily be Bank's lowest rate for loans.
1.3 Company may prepay the Note in whole or in part at any time. If the
Note is prepaid prior to April 1, 1997, Company shall pay Bank a premium in the
amount of two (2%) per cent of the amount of the prepayment as a condition of
the prepayment. If the Note is prepaid after April 1, 1997, but prior to April
1, 1998, Company shall pay Bank a premium in the amount of one (1%) per cent of
the amount of the prepayment as a condition of the prepayment. The Note may be
prepaid at any time after April 1, 1998, without penalty.
1.4 The proceeds of the Term Note shall be used to retire a loan from
Chrysler Capital Corporation.
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2. CONDITIONS AND SECURITY.
2.1 Company agrees to furnish Bank, prior to the borrowing hereunder, in
form to be satisfactory to Bank, with (i) an opinion of Company's legal counsel;
(ii) certified copies of resolutions of the Board of Directors of Company
evidencing approval of the borrowings hereunder, (iii) certified copies of
Company's Articles of Incorporation and Bylaws, and (iv) a certificate of good
standing from the State of Company's incorporation and from each jurisdiction in
which it is required to be qualified to do business.
2.2 As security for all indebtedness of Company to Bank, Company agrees to
furnish, execute and deliver to Bank or cause to be furnished, executed and
delivered to Bank prior to or simultaneously with the borrowing hereunder, in
form to be satisfactory to Bank and supported by appropriate resolution in
certified form authorizing same, the following (all of which is herein
collectively called the "Collateral"):
(a) Security Agreement granting to Bank first priority security
interests in and covering all of Company's assets, including but not
limited to machinery and equipment, furniture and fixtures, and
other tangible personal property, whether now owned or hereafter
acquired, present and future accounts receivable, inventories,
contract rights, chattel paper, inventory, general intangibles and
instruments, patents, trademarks, copyrights and other intellectual
property, and such additional documents as relate thereto or shall
be required by the terms of said Security Agreement or this
Agreement.
(b) Guaranties from Eugene I. Schuster (herein called "Schuster),
Venture Funding, Ltd., a Michigan corporation (herein called
("Venture"), and Growth Realty, Inc., a Michigan corporation (herein
called "Growth") ("Guaranties").
(c) Subordination Agreements from Schuster, Venture and Growth
("Subordinated Debt Holders") pursuant to which the Subordinated
Debt Holders subordinate all indebtedness and obligations (except,
so long as there is no default, current obligations for consulting
fees, interest, expense reimbursement and repayment of advances made
on behalf of the Company) of Company to them to all of Company's
indebtedness and obligations to the Bank ("Subordination
Agreements").
(d) A Security Agreement granting to Bank a first priority security
interest in Growth's right to receive Two Million Five Hundred
Thousand ($2,500,000) Dollars of subordinated debt from Mego
Financial Corp., a New York corporation (herein called "Mego"), and
Six Hundred Forty-four Thousand Six Hundred Eighty-five and 56/100
($644,685.56) Dollars of cash balances owed by Mego to Growth
pursuant to an Assignment Agreement between Growth and others and
Mego dated October 25, 1987, and an Assignment and Assumption
Agreement between Growth and others and Mego dated February
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1, 1988, as amended. Growth shall direct that Mego remit all
payments of subordinated debt and cash balances directly to Bank. As
long as Company is not in default, Bank will remit to Growth the
interest portion of payments received from Mego. The principal
portion of payments received from Mego (and the interest portion if
Company is in default) shall be used to purchase a Certificate of
Deposit in the name of Growth at then current market rates of
interest, which Certificates of Deposit shall be held as Collateral.
This Collateral also secures obligations of Cellex Biosciences, Inc.
("Cellex") to Bank.
(e) A Security Agreement (Pledge) from Growth of One Hundred Fifty-three
Thousand (153,000) shares of Mego common stock. This Collateral also
secures obligations of Cellex to Bank.
(f) Financing Statements required or requested by Bank to perfect all
security interests to be conferred upon Bank under this Agreement
and to accord Bank a perfected first priority security position
under the Uniform Commercial Code, except for Permitted Exceptions
listed on Schedule A attached.
(g) Such documents or certificates as may reasonably be requested by
Bank and/or are required under the terms of any and every Security
Agreement.
(h) Such other documents or agreements of security and appropriate
assurances of validity and perfected first priority of lien or
security interest as Bank may request at any time.
To the extent that Company has heretofore given a security interest to Bank to
certain of the foregoing and such documents and agreements comply with the
requirements of this Agreement, it is hereby agreed that such documents and
agreements shall remain in full force and effect for the purposes of this
Agreement, but Bank may, if it deems it necessary or desirable, require
execution of a new agreement or agreements or amendments to such agreements.
3. REPRESENTATIONS AND WARRANTIES
Company represents and warrants and such representations and warranties
shall be deemed to be continuing representations and warranties during the
entire life of this Agreement:
3.1 Company is a corporation duly organized and existing in good standing
under the laws of the State of Delaware; Company is in good standing in each
jurisdiction in which it is required to be qualified to do business; execution,
delivery and performance of this Agreement and other documents and instruments
required under this Agreement, and the
3
<PAGE>
issuance of the Note by Company are within its corporate powers, have been duly
authorized, are not in contravention of law or the terms of Company's Articles
of Incorporation or Bylaws, and do not require the consent or approval of any
governmental body, agency or authority; and this Agreement and other documents
and instruments required under this Agreement and Note, when issued and
delivered, will be valid and binding in accordance with their terms.
3.2 The execution, delivery and performance of this Agreement and any
other documents and instruments required under this Agreement, and the issuance
of the Note by Company are not in contravention of the unwaived terms of any
indenture, agreement or undertaking to which Company is a party or by which it
is bound.
3.3 No litigation or other proceeding before any court or administrative
agency is pending, or to the knowledge of the officers of Company is threatened
against Company, the outcome of which could materially impair the Company's
financial condition or the ability of Company to carry on its business.
3.4 There are no security interests in, liens, mortgages, or other
encumbrances on any of Company's assets, except to Bank or as otherwise
permitted by this Agreement.
3.5 Company does not maintain or contribute to any employee benefit
pension plan subject to Title IV of the Employee Retirement Income Security Act
of 1974 ("ERISA").
3.6 All tax returns and tax reports of Company required by law to be filed
have been duly filed or extensions obtained, and all taxes, assessments and
other governmental charges or levies (other than those presently payable without
penalty and those currently being contested in good faith for which adequate
reserves have been established) upon Company (or any of its properties) which
are due and payable have been paid. The charges, accruals and reserves on the
books of Company in respect of the Federal income tax for all periods are
adequate in the opinion of Company.
3.7 There are no subsidiaries of Company other than:
Art Renaissance (California) Incorporated
Art Renaissance of Beverly Hills Incorporated
Art Renaissance Boston Incorporated
Art Renaissance Los Angeles Incorporated
Art Renaissance Carmel Incorporated
Art Renaissance Hawaii Incorporated
Art Renaissance Eclipse Incorporated
Art Renaissance Varick St. Incorporated
Dyansen Fine Art Auction, Inc.
4
<PAGE>
3.8 Company is, in the conduct of its business, in compliance in all
material respects with all federal, state or local laws, statutes, ordinances
and regulations applicable to it, the enforcement of which, if Company were not
in compliance, would materially adversely affect its business or the value of
its property or assets. Company has all approvals, authorizations, consents,
licenses, orders and other permits of all governmental agencies and authorities,
whether federal, state or local, required to permit the operation of its
business as presently conducted, except such approvals, authorizations,
consents, licenses, orders and other permits with respect to which the failure
to have can be cured without having a material adverse effect on the operation
of such business.
3.9 No representation or warranty by Company in this Agreement, nor any
statement or certificate (including financial statements) furnished or to be
furnished to Bank pursuant hereto contains or will contain any materially untrue
statement of any material fact or omits or will omit to state a material fact
necessary to make such representation, warranty, statement or certificate not
misleading.
3.10 Except as disclosed in attached Schedule 3.10, Company is not a party
to any litigation or administrative proceeding, nor so far as is known by
Company is any litigation or administrative proceeding threatened against
Company, which in either case (A) asserts or alleges that Company violated
Environmental Laws (as defined in Section 7.1), (B) asserts or alleges that
Company is required to clean up, remove, or take remedial or other response
action due to the disposal, depositing, discharge, leaking or other release of
any hazardous substances or materials, (C) asserts or alleges that Company is
required to pay all or a portion of the cost of any past, present, or future
cleanup, removal or remedial or other response action which arises out of or is
related to the disposal, depositing, discharge, leaking or other release of any
hazardous substances or materials by Company.
3.11 Except as disclosed in attached Schedule 3.10 to the best knowledge
of Company, there are no conditions existing currently which would subject
Company to damages, penalties, injunction relief or cleanup costs under any
applicable Environmental Laws or which require or are likely to require cleanup,
removal, remedial action or other response pursuant to applicable Environmental
Laws by Company.
3.12 Company is not subject to any judgment, decree, order or citation
related to or arising out of applicable Environmental Laws and to the best
knowledge of the Company, except as disclosed in attached Schedule 3.10, Company
has not been named or listed as a potentially responsible party by any
governmental body or agency in a matter arising under any applicable
Environmental Laws.
3.13 Company has all permits, licenses and approvals required under
applicable Environmental Laws.
5
<PAGE>
4. AFFIRMATIVE COVENANTS
Company covenants and agrees that it will, so long as any indebtedness
remains outstanding under this Agreement:
4.1 Furnish Bank:
(a) Within one hundred ten (110) days after and as of the end of each
fiscal year of Company, balance sheets and statements of profit and
loss and surplus reconciliation of Company audited by independent
certified public accountants satisfactory to Bank;
(b) Within ninety (90) days after the end of each fiscal year of
Company, copies of all management letters and other reports of
substance submitted to Company by independent certified public
accountants in connection with any annual audit of the books of
Company;
(c) Within sixty (60) days after May 31 of each year, an annual personal
financial statement of Eugene I. Schuster as of May 31 of that year.
(d) Within twenty (20) days after the same is filed, a copy of the
federal income tax return of Eugene I. Schuster.
(e) Within twenty (20) days after the same is filed, the form 10-K
report of Mego.
(f) Within twenty (20) days after the same is filed, the form 10-Q
report of Mego.
(g) Within twenty (20) days after the same is filed, the federal income
tax return of Venture.
(h) Such information as required by the terms and conditions of any
security agreements referred to in this Agreement;
(i) Promptly, and in form to be satisfactory to Bank, such other
information as Bank may reasonably request from time to time.
4.2 Pay and discharge all taxes and other governmental charges, and all
material contractual obligations calling for the payment of money, before the
same shall become overdue, unless and to the extent only that such payment is
being contested in good faith.
4.3 Maintain insurance coverage on its physical assets and against other
business risks in such amounts and of such types as are customarily carried by
companies similar in size and nature, and in the event of acquisition of
additional property, real or personal, or of incurrence of additional risks of
any nature, increase such insurance coverage in such manner
6
<PAGE>
and to such extent as prudent business judgment and present practice would
dictate; and in the case of all policies covering property mortgaged or pledged
to Bank or property in which Bank shall have a security interest of any kind
whatsoever, other than those policies protecting against casualty liabilities to
strangers, all such insurance policies shall provide that the loss payable
thereunder shall be payable to Company and Bank as their respective interests
may appear, all said policies or copies thereof, including all endorsements
thereon and those required hereunder, to be deposited with Bank.
4.4 Permit Bank, through its authorized attorneys, accountants and
representatives, to examine Company's books, accounts, records, ledgers and
assets of every kind and description at all reasonable times upon oral or
written request of Bank, which shall include but shall not be limited to
collateral audits of Company conducted by Bank, at Company's own cost and
expense. Prior to the occurrence of an event of default hereunder, the Bank
shall conduct collateral audits no more frequently than once a year and
Company's liability for reimbursement of audit fees shall be limited to an
aggregate amount not to exceed $3,000 each year. Following the occurrence of an
event of default, these limitations on frequency of assets and expense
reimbursement shall no longer be in effect.
4.5 Promptly notify Bank of any condition or event which constitutes or
with the running of time and/or the giving of notice would constitute an event
of default under this Agreement, and promptly inform Bank of the existence or
occurrence of any condition or event which could have a material adverse effect
upon Company's financial condition.
4.6 Maintain in good standing all licenses required by the States of
Delaware, New York, California, Hawaii and Louisiana or any agency thereof, or
other governmental authority that may be necessary or required for Company to
carry on its general business objects and purposes unless the failure to so
maintain such licenses would not have a material adverse effect on the financial
condition or operations of Company.
4.7 Furnish Bank, upon Bank's request, in form satisfactory to Bank with
pledges, assignments, mortgages, lien instruments or other security instruments
covering any or all of Company's real or personal property, of every nature and
description, whether now owned or hereafter acquired, to the extent that Bank
may in its sole discretion require.
4.8 Comply with all material requirements imposed by ERISA as presently in
effect or hereafter promulgated, including but not limited to, the minimum
funding requirements of any Pension Plan.
4.9 Promptly notify Bank after the occurrence thereof in writing of any of
the following events:
(a) The termination of a pension plan subject to Title IV of ERISA (a
"Pension Plan");
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<PAGE>
(b) The appointment of a trustee by a United States District Court to
administer a Pension Plan;
(c) The commencement by the Pension Benefit Guaranty Corporation, or any
successor thereto of any proceeding to terminate a Pension Plan;
(d) The failure of a Pension Plan to satisfy the minimum funding
requirements for any plan year as established in Section 412 of the
Internal Revenue Code of 1954, as amended or any similar provision
under the Internal Revenue Code of 1986, as amended;
(e) The withdrawal of Company from a Pension Plan; or
(f) A reportable event, within the meaning of Title IV of ERISA.
4.10 On the date hereof, Bank is relying upon eighty (80%) per cent of
Mego's indebtedness to Growth and sixty (60%) per cent of the market value of
Mego stock as the principal collateral for the combined loans to Company and
Cellex. if at any time the outstanding principal balance of the combined
indebtedness of Company and Cellex less the value of any cash collateral held by
Bank exceed eighty (80%) per cent of the cash balances due from Mego to Growth
plus sixty (60%) percent of the market value of the Mego shares, as such value
is determined from time to time in the sole, but reasonable discretion of Bank
(herein called the "Margin Requirement"), Company shall, upon ten (10) days
prior written notice from Bank, pay or cause to be paid to Bank an amount
sufficient to reduce the Indebtedness such that the remaining principal
outstanding thereunder is equal to or less than the Margin Requirement. Bank
shall apply payments made under this paragraph in payment of the Indebtedness in
such order and manner of application as Bank in its sole discretion elects. In
the alternative, Company may provide or cause to be provided to Bank additional
collateral in the form of cash or other property acceptable to Bank and with a
value, as determined by Bank, that when added to the Collateral will constitute
compliance with the Margin Requirement.
4.11 If, after the date of this Agreement, Bank shall have determined that
the adoption of any applicable law, rule, regulation or guideline regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Bank with any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency has or would have the effect of reducing the rate of return on the
capital of Bank (or the person controlling Bank) as a consequence of Bank's
obligations or the financial accommodations provided by Bank hereunder
(including its commitment) to a level below that which Bank (or the person
controlling Bank) could have achieved but for such adoption, change or
compliance (taking into consideration the policies of Bank (or the person
controlling Bank) with respect to capital adequacy) by an amount deemed by Bank
(or such
8
<PAGE>
person), in its sole discretion, to be material, then from time to time Company
shall pay to Bank within ten (10) business days of receiving notice thereof,
such additional amount or amounts as will compensate Bank (or such person) for
such reduction.
5. NEGATIVE COVENANTS
Company covenants and agrees that, so long as any indebtedness to Bank
remains outstanding under this Agreement, it will not, without the prior written
consent of Bank:
5.1 Purchase, acquire or redeem any of its capital stock or make any
material change in its capital structure or general business objects or purpose.
5.2 Enter into any merger or consolidation or sell, lease, transfer, or
dispose of all, substantially all, or any material part of its assets, except in
the ordinary course of its business.
5.3 Guarantee, endorse, or otherwise become secondarily liable for or upon
the obligations of others, except by endorsement for deposit in the ordinary
course of business.
5.4 Become or remain obligated for any indebtedness for borrowed money, or
for any indebtedness incurred in connection with the acquisition of any
property, real or personal, tangible or intangible, except:
(a) Indebtedness to Bank;
(b) Current unsecured trade, utility or non-extraordinary accounts
payable arising in the ordinary course of Company's business;
(c) Indebtedness to shareholders of Company for borrowed money which is
subordinated to Company's indebtedness to Bank pursuant to a written
subordination agreement in form and substance acceptable to Bank
("Subordinated Debt");
(d) Purchase money indebtedness for the acquisition of fixed assets in
an amount not to exceed $200,000 in the aggregate during any fiscal
year of Company.
5.5 Purchase or otherwise acquire or become obligated for the purchase of
all or substantially all of the assets or business interests of any person, firm
or corporation or any shares of stock of any corporation, trusteeship or
association or in any other manner effectuate or attempt to effectuate an
expansion of present business by acquisition.
5.6 Make or allow to remain outstanding any investment (whether such
investment shall be of the character of investment in shares of stock, evidences
of indebtedness or other
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securities or otherwise) in, or any loans or advances to, any person, firm,
corporation or other entity or association.
5.7 Affirmatively pledge or mortgage any of its assets, whether now owned
or hereafter acquired, or create, suffer or permit to exist any lien, security
interest in, or encumbrance thereon, except:
(a) To Bank;
(b) Purchase money security interests in fixed assets to secure the
indebtedness permitted in Section 5.4(d) above to the extent created
substantially contemporaneously with the acquisition of such fixed
assets and the extent encumbering only the fixed assets so acquired;
(c) Existing security interests described in Schedule A attached hereto
to the extent such security interests are subordinated to Bank's
security interests in the same property pursuant to written
subordination agreements in form and substance satisfactory to Bank.
5.8 Sell, assign, transfer or confer a security interest in any account,
contract, note, trade acceptance or other receivable, except to Bank, except
that Company may grant purchase money security interests up to $1,500,000 for
inventory purchases.
5.9 Incur capital expenditures during any fiscal year of Company in an
amount in excess of Company's depreciation expense for such year.
5.10 Make loans, advances of credit or extensions of credit to any
officer, director or shareholder of Company or any member of their immediate
families or entity controlled by any of the foregoing or to any other person,
except for sales on open account or in the ordinary course of business.
5.11 Declare or pay any dividends on, or make any other distribution
(whether by reduction of capital or otherwise) with respect to any shares of its
stock.
6. ENVIRONMENTAL PROVISIONS
6.1 For the purposes of this Agreement the term "Environmental Laws" shall
mean all federal, state and local laws including statutes, regulations,
ordinances, codes, rules, and other governmental restrictions and requirements,
relating to environmental pollution, contamination or other impairment of any
nature, any hazardous or other toxic substances of any nature, whether liquid,
solid and/or gaseous, including smoke, vapor, fumes, soot, acids, alkalis,
chemicals, wastes, by-products, and recycled materials. These Environmental Laws
shall include but not be limited to the Federal Solid Waste Disposal Act, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
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Conservation and Recovery Act of 1976, the Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Federal Superfund
Amendments and Reauthorization Act of 1986, regulations of the Environmental
Protection Agency, regulations of the Nuclear Regulatory Agency, regulations of
any state department of natural resources or state environmental protection
agency now or at any time hereafter in effect and local health department
ordinances.
6.2 Company shall comply in all material respects with all applicable
Environmental Laws.
6.3 Company shall provide to Bank, immediately upon receipt, copies of any
correspondence, notice, pleading, citation, indictment, complaint, order,
decree, or other document from any source asserting or alleging a circumstance
or condition which requires or may require a financial contribution by Company
or a cleanup, removal, remedial action, or other response by or on the part of
Company under applicable Environmental Laws or which seeks damages or civil,
criminal or punitive penalties from Company for an alleged violation of
Environmental Laws.
6.4 Company shall promptly notify Bank in writing as soon as Company
becomes aware of any condition or circumstance which makes the environmental
warranties contained in this Agreement incomplete or inaccurate in any material
respect as of any date.
6.5 In the event of any condition or circumstance that makes any
environmental warranty, representation and/or agreement contained herein
incomplete or inaccurate in any material respect as of any date, Company shall,
at the reasonable request of Bank, at its sole expense, retain an environmental
professional consultant, reasonably acceptable to Bank, to conduct a thorough
and complete environmental audit regarding the changed condition and/or
circumstance and any environmental concerns arising from that changed condition
and/or circumstance. A copy of the environmental consultant's report will be
promptly delivered to both Bank and Company upon completion.
6.6 At any time Company, directly or indirectly through any professional
consultant or other representative, determines to undertake an environmental
audit, assessment or investigation, Company shall promptly provide Bank with
written notice of the initiation of the environmental audit, fully describing
the purpose and intended scope of the environmental audit. Upon receipt, Company
will promptly provide to Bank copies of all final findings and conclusions of
any such environmental investigation. Preliminary findings and conclusions shall
be provided if final reports have not been completed and delivered to Bank
within 60 days following completion of the preliminary findings and conclusions.
6.7 Company shall maintain all permits, licenses and approvals required
under applicable Environmental Laws.
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7. EVENTS OF DEFAULT
7.1 Upon non-payment of any installment of the principal or interest on
the Note within fifteen (15) days after due date in accordance with the terms
thereof, or upon non-payment of any other outstanding indebtedness of Company to
Bank hereunder and continuance thereof for fifteen (15) days, the Note shall
automatically become immediately due and payable.
7.2 Upon occurrence of any of the following events of default:
(a) Default in the observance or performance of any of the conditions,
covenants or agreements of Company set forth in Sections 4.1(a) and
(b), 4.3, 4.5, or Section 5;
(b) Default in observance or performance of any of the other conditions,
covenants or agreements of Company herein set forth, and continuance
thereof for thirty (30) days after notice to Company by Bank;
(c) Any representation or warranty made by Company herein or in any
instrument submitted pursuant hereto proves untrue in any material
respect;
(d) Default in the observance or performance of any of the conditions,
covenants or agreements of Company or any other person set forth in
any collateral document of security which may be given to secure the
indebtedness hereunder or in any other collateral document related
to or connected with this Agreement or the indebtedness hereunder,
and continuation of such default beyond any period of grace
specified in any such document;
(e) Default in the payment of any other obligation of Company or any
Guarantor for borrowed money (other than to Bank) in an aggregate
amount in excess of Fifty Thousand Dollars ($50,000), or in the
observance or performance of any conditions, covenants or agreements
related or given with respect thereto;
(f) Judgments for the payment of money in excess of the sum of Fifty
Thousand Dollars ($50,000) in the aggregate shall be rendered
against Company or any Guarantor and such judgments shall remain
unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a
period of thirty (30) consecutive days from the date of its entry;
(g) The occurrence of any "reportable event", as defined in the Employee
Retirement Income Security Act of 1974 and any amendments thereto,
which is determined to constitute grounds for termination by the
Pension Benefit Guaranty Corporation of any employee pension benefit
plan maintained by or on behalf of Company for the benefit of any of
its employees or for the appointment by the appropriate United
States District Court of a trustee to administer such plan and such
reportable event is not corrected and such determination is not
revoked within thirty (30) days after notice thereof has
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been given to the plan administrator or Company; or the institution
of proceedings by the Pension Benefit Guaranty Corporation to
terminate any such employee benefit pension plan or to appoint a
trustee to administer such plan; or the appointment of a trustee by
the appropriate United States District Court to administer any such
employee benefit pension plan;
(h) The revocation of any Subordination Agreement or the revocation
(which shall not include termination in accordance with its terms)
of the Guaranties;
(i) If there shall be any change for any reason whatsoever in the
management, ownership or control of Company which shall in the
reasonable judgment of Bank materially adversely affect future
prospects for the successful operation of Company;
(j) Default by Mego with respect to any payment due to Growth and
assigned to Bank, and continuance thereof for ten (10) days after
notice to Company by Bank;
(k) The failure of Mego to make payments to Bank as assignee of Growth
in the principal amount of Six Hundred Forty-four Thousand Six
Hundred Eighty-five ($644,685) Dollars on or before March 1, 1997,
and additional installments in the amount of Three Hundred
Fifty-seven Thousand One Hundred Forty-two ($357,142) Dollars on or
before March 1, 1997, September 1, 1997, March 1, 1998, September 1,
1998 and March 1, 1999 and continuance thereof for ten (10) days
after notice to Company by Bank;
(l) Default by Mego or Preferred Equities Corporation, its wholly owned
subsidiary, under the terms of any borrowing, loan agreement or
credit facility provided by any bank or other financial institution.
then, or at any time thereafter, unless such default is remedied, Bank may give
notice to Company declaring all outstanding indebtedness hereunder and under the
Notes to be due and payable, whereupon all indebtedness then outstanding
hereunder and under the Note shall immediately become due and payable without
further notice and demand.
7.3 If a creditors' committee shall have been appointed for the business
of Company or any Guarantor; or if Company or any Guarantor shall have made a
general assignment for the benefit of creditors or shall have been adjudicated
bankrupt, or shall have filed a voluntary petition in bankruptcy or for
reorganization or to effect a plan or arrangement with creditors; or shall file
an answer to a creditor's petition or other petition filed against it, admitting
the material allegations thereof for an adjudication in bankruptcy or for
reorganization; or shall have applied for or permitted the appointment of a
receiver, or trustee or custodian for any of its property or assets; or such
receiver, trustee or custodian shall have been appointed for any of its property
or assets (otherwise than upon application
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or consent of Company or any Guarantor as applicable) and such receiver, trustee
or custodian so appointed shall not have been discharged within forty-five (45)
days after the date of his appointment or if an order shall be entered and shall
not be dismissed or stayed within forty-five (45) days from its entry, approving
any petition for reorganization of Company or any Guarantor, then the Notes and
all indebtedness then outstanding hereunder shall automatically become
immediately due and payable.
7.4 No waiver of any default by Bank nor any dispensation or forbearance
granted to Company shall constitute a waiver of any other default, or a
dispensation or forbearance other than that expressly granted.
8. MISCELLANEOUS
8.1 This Agreement shall be binding upon and shall inure to the benefit of
Company and Bank and their respective successors and assigns.
8.2 No delay or failure of Bank in exercising any right, power or
privilege hereunder shall affect such right, power or privilege, nor shall any
single or partial exercise thereof preclude any further exercise thereof, or the
exercise of any other power, right or privilege. The rights of Bank under this
Agreement are cumulative and not exclusive of any right or remedies which Bank
would otherwise have.
8.3 Where the character or amount of any asset or liability or item of
income or expense is required to be determined or any consolidated or other
accounting computation is required to be made for the purposes of this
Agreement, it shall be done in accordance with generally accepted accounting
principles consistently applied.
8.4 All notices to Company with respect to this Agreement shall be deemed
to be completed upon mailing by certified mail as follows:
To Company:
17 John Street
New York, New York 10038
Attention: John Addario
To Bank:
505 North Woodward Avenue, Suite 1300
Bboomfield Hills, Michigan 48304
Attention: Robert Burch
8.5 Company shall pay all closing costs and expenses, including, by way of
description and not limitation, reasonable outside attorney fees and lien search
fees incurred by Bank in connection with the commitment, consummation and
closing of this Agreement.
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All of said amounts required to be paid by Company may, at Bank's option, be
charged by Bank as an advance against the proceeds of the Note. All costs,
including attorney fees and auditor fees, incurred by Bank in reviewing,
revising, protecting or enforcing any of its rights against Company or defending
Bank from any claims or liabilities by any party or otherwise incurred by Bank
in connection with an event of default or the enforcement of this Agreement or
the related documents shall also be paid by Company.
8.6 On any default as defined in this Agreement or any default in payment
of any liability above mentioned, Bank may, except as otherwise provided herein,
without notice to anyone, declare the Note due forthwith, take all action,
remedial and otherwise, as provided herein or in any Security Agreement or other
document, instrument, or agreement of security or of collateral, and collect,
deal with and dispose of all or any part of any security without notice in any
manner permitted or authorized by the Michigan Uniform Commercial Code or other
applicable law (including public or private sale) and after deducting expenses
(including reasonable attorneys' fees and expenses) Bank may apply the proceeds
and any deposits or credits in part or full payment of any of said liabilities,
whether due or not, in any manner or order Bank elects.
8.7 This Agreement shall become effective upon the execution hereof by
Bank and Company.
8.8 No amendments or waiver of any provision of this Agreement nor consent
to any departure by Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the Bank, and then such amendment, waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given. No amendment, waiver or consent with respect to any
provision of this Agreement shall affect any other provision of this Agreement.
8.9 THIS AGREEMENT AND THE NOTE HAVE BEEN DELIVERED AT BLOOMFIELD HILLS,
MICHIGAN, AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF MICHIGAN. Whenever possible each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
8.10 Company hereby irrevocably submits to the non-exclusive jurisdiction
of the United States District Court for the Eastern District of Michigan or
Michigan state court sitting in Oakland County, Michigan in any action or
proceeding arising out of or relating to this Agreement and Company hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in any such United States Federal or Michigan state
court. Company irrevocably consents to the service of any and all process in any
such action or proceeding brought in any court in or of the State of Michigan by
the
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delivery of copies of such process to Company at its address specified in
Section 8.4 or by certified mail directed to such address.
8.11 COMPANY AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED, EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS CHOICE, KNOWINGLY AND
VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN
THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY
WAY RELATED TO, THIS AGREEMENT, THE INDEBTEDNESS EVIDENCED BY THE NOTE OR THE
NOTE.
WITNESS the due execution hereof as of the day and year first above
written.
THE BANK OF BLOOMFIELD HILLS
By: /s/ Ann M. Deering
------------------------------------
Ann M. Deering
Its: Vice President
ART RENAISSANCE, INC.
By: /s/ Eugene I. Schuster
------------------------------------
Eugene I. Schuster
Its: President
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Exhibit 10.10
- --------------------------------------------------------------------------------
LOAN AGREEMENT
BY AND BETWEEN
ART RENAISSANCE, INC.
AND
THE BANK OF BLOOMFIELD HILLS
================================================================================
$400,000 90 DAY LOAN
$1,000,000 TERM LOAN
FEBRUARY 6, 1997
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT, made this 6th day of February _____, 1997, by and
between Art Renaissance, Inc., a Delaware corporation, of New York, New York
(herein called "Company"), and The Bank of Bloomfield Hills, a Michigan banking
corporation, of Bloomfield Hills, Michigan (herein called "Bank");
WITNESSETH:
1. CREDIT FACILITIES.
1.1 Bank agrees to lend to Company on the date hereof the principal sum of
One Million Four Hundred Thousand ($1,400,000) Dollars. The borrowing hereunder
shall be evidenced by a ninety (90) day note for Four Hundred Thousand
($400,000) Dollars (herein called "90 Day Note") and a term note in the amount
of One Million ($1,000,000) Dollars (herein called "Term Note") (collectively
called the "Notes").
1.1.1 90 Day Note. The indebtedness represented by the 90 Day Note shall
be repaid on or before May 7, 1997, together with interest thereon
at a per annum rate equal to two and one-half (2 1/2%) per cent
above the prime or base rate as announced from time to time by
Citibank, N.A. ("Prime Rate").
1.1.2 Term Note. The indebtedness represented by the Term Note shall be
repaid in monthly principal installments each equal to Twenty
Thousand ($20,000) Dollars, commencing on January 1, 1998, and on
the first day of each month thereafter until April 1999, when the
entire unpaid balance of principal and interest thereon shall be due
and payable. Company agrees to pay interest on the unpaid principal
balance of the Term Note from time to time outstanding at a per
annum rate equal to two and one-half (2 1/2%) per cent above the
Prime Rate. Interest shall be paid monthly commencing on March 1,
1997, and on the first day of each month thereafter.
1.2 Upon the occurrence of any event of default hereunder, interest on the
90 Day Note and on the Term Note shall accrue on the unpaid principal balance at
the per annum rate of four and one-half (4 1/2%) per cent above the Prime Rate.
1.3 Interest shall be computed on a daily basis using a year of 360 days,
assessed for the actual number of days of lapse, and such computation effect
shall be given to any change in the interest rate resulting from a change in
Prime Rate on the date of such change in rate.
1.4 Company may prepay either of the Notes in whole or in part at any time
without penalty.
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1.5 The proceeds of the 90 Day Note shall be used for working capital, and
the proceeds of the Term Note shall be used for gallery acquisition.
1.6 Bank agrees to issue an Irrevocable Letter of Credit (herein called
"LOC") to International Art Publishers of Costa Mesa, California in the amount
of One Hundred Fifty Thousand ($150,000) Dollars to expire one year from date of
issuance. Company and Growth Realty, Inc., a Michigan corporation (herein called
"Growth") shall execute Bank's Application and Agreement for Irrevocable Standby
Letter of Credit in form acceptable to Bank.
2. CONDITIONS AND SECURITY.
2.1 Company agrees to furnish Bank, prior to the borrowing hereunder, in
form to be satisfactory to Bank, with (i) an opinion of Company's legal counsel;
(ii) certified copies of resolutions of the Board of Directors of Company
evidencing approval of the borrowings hereunder, (iii) certified copies of
Company's Articles of Incorporation and Bylaws, and (iv) a certificate of good
standing from the State of Company's incorporation and from each jurisdiction in
which it is required to be qualified to do business.
2.2 As security for all indebtedness of Company to Bank, Company agrees to
furnish, execute and deliver to Bank or cause to be furnished, executed and
delivered to Bank prior to or simultaneously with the borrowing hereunder, in
form to be satisfactory to Bank and supported by appropriate resolution in
certified form authorizing same, the following (all of which is herein
collectively called the "Collateral"):
(a) Security Agreement dated March 29, 1996, granting to Bank first
priority security interests in and covering all of Company's assets,
which secures future advances such as this loan.
(b) Guaranties from Venture Funding, Ltd., a Michigan corporation
(herein called ("Venture"), and Growth ("Guaranties").
(c) Subordination Agreements from Eugene I. Schuster, Venture and Growth
("Subordinated Debt Holders") pursuant to which the Subordinated
Debt Holders subordinate all indebtedness and obligations (except,
so long as there is no default, current obligations for consulting
fees, interest, expense reimbursement and repayment of advances made
on behalf of the Company) of Company to them to all of Company's
indebtedness and obligations to the Bank ("Subordination
Agreements").
(d) Security Agreement dated March 29, 1996, granting to Bank a first
priority security interest in Growth's right to receive Two Million
Five Hundred Thousand ($2,500,000) Dollars of subordinated debt from
Mego Financial Corp., a New York corporation (herein called "Mego"),
and Six Hundred
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Forty-four Thousand Six Hundred Eighty-five and 56/100 ($644,685.56)
Dollars of cash balances owed by Mego to Growth pursuant to an
Assignment Agreement between Growth and others and Mego dated
October 25, 1987, and an Assignment and Assumption Agreement between
Growth and others and Mego dated February 1, 1988, as amended, which
secures future obligations such as the guaranty of the loan. Growth
has directed that Mego remit all payments of subordinated debt and
cash balances directly to Bank. As long as Company is not in
default, Bank will remit to Growth the interest portion of payments
received from Mego. The principal portion of payments received from
Mego (and the interest portion if Company is in default) shall be
used to purchase a Certificate of Deposit in the name of Growth at
then current market rates of interest, which Certificates of Deposit
shall be held as Collateral. This Collateral also secures
obligations of Cellex Biosciences, Inc. ("Cellex") to Bank.
(e) Security Agreement (Pledge) dated March 29, 1996, from Growth of One
Hundred Fifty-three Thousand (153,000) shares of Mego common stock,
which secures future obligations such as the guaranty of the loan.
This Collateral also secures obligations of Cellex to Bank.
(f) Security Agreement (Pledge) dated February 6, 1997 from Growth of
One Hundred Fifty Thousand (150,000) shares of Mego common stock.
(g) Financing Statements required or requested by Bank to perfect all
security interests to be conferred upon Bank under this Agreement
and to accord Bank a perfected first priority security position
under the Uniform Commercial Code, except for Permitted Exceptions
listed on Schedule A attached.
(h) Such documents or certificates as may reasonably be requested by
Bank and/or are required under the terms of any and every Security
Agreement.
(i) Such other documents or agreements of security and appropriate
assurances of validity and perfected first priority of lien or
security interest as Bank may request at any time.
(j) The collateral described in Article II of the Letter of Credit
Agreement which is part of the Application and Agreement for
Irrevocable Standby Letter of Credit.
To the extent that Company has heretofore given a security interest to Bank to
certain of the foregoing and such documents and agreements comply with the
requirements of this Agreement, it is hereby agreed that such documents and
agreements shall remain in full force and effect for the purposes of this
Agreement, but Bank may, if it deems it necessary or
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<PAGE>
desirable, require execution of a new agreement or agreements or amendments to
such agreements.
3. REPRESENTATIONS AND WARRANTIES
Company represents and warrants and such representations and warranties
shall be deemed to be continuing representations and warranties during the
entire life of this Agreement:
3.1 Company is a corporation duly organized and existing in good standing
under the laws of the State of Delaware; Company is in good standing in each
jurisdiction in which it is required to be qualified to do business; execution,
delivery and performance of this Agreement and other documents and instruments
required under this Agreement, and the issuance of the Note by Company are
within its corporate powers, have been duly authorized, are not in contravention
of law or the terms of Company's Articles of Incorporation or Bylaws, and do not
require the consent or approval of any governmental body, agency or authority;
and this Agreement and other documents and instruments required under this
Agreement and Note, when issued and delivered, will be valid and binding in
accordance with their terms.
3.2 The execution, delivery and performance of this Agreement and any
other documents and instruments required under this Agreement, and the issuance
of the Note by Company are not in contravention of the unwaived terms of any
indenture, agreement or undertaking to which Company is a party or by which it
is bound.
3.3 No litigation or other proceeding before any court or administrative
agency is pending, or to the knowledge of the officers of Company is threatened
against Company, the outcome of which could materially impair the Company's
financial condition or the ability of Company to carry on its business.
3.4 There are no security interests in, liens, mortgages, or other
encumbrances on any of Company's assets, except to Bank or as otherwise
permitted by this Agreement.
3.5 Company does not maintain or contribute to any employee benefit
pension plan subject to Title IV of the Employee Retirement Income Security Act
of 1974 ("ERISA").
3.6 All tax returns and tax reports of Company required by law to be filed
have been duly filed or extensions obtained, and all taxes, assessments and
other governmental charges or levies (other than those presently payable without
penalty and those currently being contested in good faith for which adequate
reserves have been established) upon Company (or any of its properties) which
are due and payable have been paid. The charges, accruals and reserves on the
books of Company in respect of the Federal income tax for all periods are
adequate in the opinion of Company.
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3.7 There are no subsidiaries of the Company other than:
Art Renaissance (California) Incorporated
Art Renaissance of Beverly Hills Incorporated
Art Renaissance Boston Incorporated
Art Renaissance Los Angeles Incorporated
Art Renaissance Carmel Incorporated
Art Renaissance Hawaii Incorporated
Art Renaissance Eclipse Incorporated
Art Renaissance Varick St. Incorporated
Dyansen Fine Art Auction, Inc.
3.8 Company is, in the conduct of its business, in compliance in all
material respects with all federal, state or local laws, statutes, ordinances
and regulations applicable to it, the enforcement of which, if Company were not
in compliance, would materially adversely affect its business or the value of
its property or assets. Company has all approvals, authorizations, consents,
licenses, orders and other permits of all governmental agencies and authorities,
whether federal, state or local, required to permit the operation of its
business as presently conducted, except such approvals, authorizations,
consents, licenses, orders and other permits with respect to which the failure
to have can be cured without having a material adverse effect on the operation
of such business.
3.9 No representation or warranty by Company in this Agreement, nor any
statement or certificate (including financial statements) furnished or to be
furnished to Bank pursuant hereto contains or will contain any materially untrue
statement of any material fact or omits or will omit to state a material fact
necessary to make such representation, warranty, statement or certificate not
misleading.
3.10 Except as disclosed in attached Schedule 3.10, Company is not a party
to any litigation or administrative proceeding, nor so far as is known by
Company is any litigation or administrative proceeding threatened against
Company, which in either case (A) asserts or alleges that Company violated
Environmental Laws (as defined in Section 7.1), (B) asserts or alleges that
Company is required to clean up, remove, or take remedial or other response
action due to the disposal, depositing, discharge, leaking or other release of
any hazardous substances or materials, (C) asserts or alleges that Company is
required to pay all or a portion of the cost of any past, present, or future
cleanup, removal or remedial or other response action which arises out of or is
related to the disposal, depositing, discharge, leaking or other release of any
hazardous substances or materials by Company.
3.11 Except as disclosed in attached Schedule 3.10 to the best knowledge
of Company, there are no conditions existing currently which would subject
Company to damages, penalties, injunction relief or cleanup costs under any
applicable Environmental
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<PAGE>
Laws or which require or are likely to require cleanup, removal, remedial action
or other response pursuant to applicable Environmental Laws by Company.
3.12 Company is not subject to any judgment, decree, order or citation
related to or arising out of applicable Environmental Laws and to the best
knowledge of the Company, except as disclosed in attached Schedule 3.10, Company
has not been named or listed as a potentially responsible party by any
governmental body or agency in a matter arising under any applicable
Environmental Laws.
3.13 Company has all permits, licenses and approvals required under
applicable Environmental Laws.
4. AFFIRMATIVE COVENANTS
Company covenants and agrees that it will, so long as any indebtedness
remains outstanding under this Agreement:
4.1 Furnish Bank:
(a) Within one hundred ten (110) days after and as of the end of each
fiscal year of Company, balance sheets and statements of profit and
loss and surplus reconciliation of Company audited by independent
certified public accountants satisfactory to Bank;
(b) Within ninety (90) days after the end of each fiscal year of
Company, copies of all management letters and other reports of
substance submitted to Company by independent certified public
accountants in connection with any annual audit of the books of
Company;
(c) Within sixty (60) days after May 31 of each year, an annual personal
financial statement of Eugene I. Schuster as of May 31 of that year.
(d) Within twenty (20) days after the same is filed, a copy of the
federal income tax return of Eugene I. Schuster.
(e) Within twenty (20) days after the same is filed, the form 10-K
report of Mego.
(f) Within twenty (20) days after the same is filed, the form 10-Q
report of Mego.
(g) Within twenty (20) days after the same is filed, the federal income
tax return of Venture.
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<PAGE>
(h) Such information as required by the terms and conditions of any
security agreements referred to in this Agreement;
(i) Promptly, and in form to be satisfactory to Bank, such other
information as Bank may reasonably request from time to time.
4.2 Pay and discharge all taxes and other governmental charges, and all
material contractual obligations calling for the payment of money, before the
same shall become overdue, unless and to the extent only that such payment is
being contested in good faith.
4.3 Maintain insurance coverage on its physical assets and against other
business risks in such amounts and of such types as are customarily carried by
companies similar in size and nature, and in the event of acquisition of
additional property, real or personal, or of incurrence of additional risks of
any nature, increase such insurance coverage in such manner and to such extent
as prudent business judgment and present practice would dictate; and in the case
of all policies covering property mortgaged or pledged to Bank or property in
which Bank shall have a security interest of any kind whatsoever, other than
those policies protecting against casualty liabilities to strangers, all such
insurance policies shall provide that the loss payable thereunder shall be
payable to Company and Bank as their respective interests may appear, all said
policies or copies thereof, including all endorsements thereon and those
required hereunder, to be deposited with Bank.
4.4 Permit Bank, through its authorized attorneys, accountants and
representatives, to examine Company's books, accounts, records, ledgers and
assets of every kind and description at all reasonable times upon oral or
written request of Bank, which shall include but shall not be limited to
collateral audits of Company conducted by Bank, at Company's own cost and
expense. Prior to the occurrence of an event of default hereunder, the Bank
shall conduct collateral audits no more frequently than once a year and
Company's liability for reimbursement of audit fees shall be limited to an
aggregate amount not to exceed $3,000 each year. Following the occurrence of an
event of default, these limitations on frequency of assets and expense
reimbursement shall no longer be in effect.
4.5 Promptly notify Bank of any condition or event which constitutes or
with the running of time and/or the giving of notice would constitute an event
of default under this Agreement, and promptly inform Bank of the existence or
occurrence of any condition or event which could have a material adverse effect
upon Company's financial condition.
4.6 Maintain in good standing all licenses required by the States of
Delaware, New York, California, Hawaii and Louisiana or any agency thereof, or
other governmental authority that may be necessary or required for Company to
carry on its general business objects and purposes unless the failure to so
maintain such licenses would not have a material adverse effect on the financial
condition or operations of Company.
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4.7 Furnish Bank, upon Bank's request, in form satisfactory to Bank with
pledges, assignments, mortgages, lien instruments or other security instruments
covering any or all of Company's real or personal property, of every nature and
description, whether now owned or hereafter acquired, to the extent that Bank
may in its sole discretion require.
4.8 Comply with all material requirements imposed by ERISA as presently in
effect or hereafter promulgated, including but not limited to, the minimum
funding requirements of any Pension Plan.
4.9 Promptly notify Bank after the occurrence thereof in writing of any of
the following events:
(a) The termination of a pension plan subject to Title IV of ERISA (a
"Pension Plan");
(b) The appointment of a trustee by a United States District Court to
administer a Pension Plan;
(c) The commencement by the Pension Benefit Guaranty Corporation, or any
successor thereto of any proceeding to terminate a Pension Plan;
(d) The failure of a Pension Plan to satisfy the minimum funding
requirements for any plan year as established in Section 412 of the
Internal Revenue Code of 1954, as amended or any similar provision
under the Internal Revenue Code of 1986, as amended;
(e) The withdrawal of Company from a Pension Plan; or
(f) A reportable event, within the meaning of Title IV of ERISA.
4.10 On the date hereof, Bank is relying upon eighty (80%) per cent of
Mego's indebtedness to Growth and sixty (60%) per cent of the market value of
Mego stock as the principal collateral for the combined loans to Company and
Cellex. If at any time the outstanding principal balance of the combined
indebtedness of Company and Cellex less the value of any cash collateral held by
Bank exceed eighty (80%) per cent of the cash balances due from Mego to Growth
plus sixty (60%) percent of the market value of the Mego shares, as such value
is determined from time to time in the sole, but reasonable discretion of Bank
(herein called the "Margin Requirement"), Company shall, upon ten (10) days
prior written notice from Bank, pay or cause to be paid to Bank an amount
sufficient to reduce the Indebtedness such that the remaining principal
outstanding thereunder is equal to or less than the Margin Requirement. Bank
shall apply payments made under this paragraph in payment of the Indebtedness in
such order and manner of application as Bank in its sole discretion elects. In
the alternative, Company may provide or cause to be provided to Bank additional
collateral in the form of cash or other property acceptable to Bank and with a
value, as
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determined by Bank, that when added to the Collateral will constitute compliance
with the Margin Requirement.
4.11 If, after the date of this Agreement, Bank shall have determined that
the adoption of any applicable law, rule, regulation or guideline regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Bank with any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency has or would have the effect of reducing the rate of return on the
capital of Bank (or the person controlling Bank) as a consequence of Bank's
obligations or the financial accommodations provided by Bank hereunder
(including its commitment) to a level below that which Bank (or the person
controlling Bank) could have achieved but for such adoption, change or
compliance (taking into consideration the policies of Bank (or the person
controlling Bank) with respect to capital adequacy) by an amount deemed by Bank
(or such person), in its sole discretion, to be material, then from time to time
Company shall pay to Bank within ten (10) business days of receiving notice
thereof, such additional amount or amounts as will compensate Bank (or such
person) for such reduction.
5. NEGATIVE COVENANTS
Company covenants and agrees that, so long as any indebtedness to Bank
remains outstanding under this Agreement, it will not, without the prior written
consent of Bank:
5.1 Purchase, acquire or redeem any of its capital stock or make any
material change in its capital structure or general business objects or purpose.
5.2 Enter into any merger or consolidation or sell, lease, transfer, or
dispose of all, substantially all, or any material part of its assets, except in
the ordinary course of its business.
5.3 Guarantee, endorse, or otherwise become secondarily liable for or upon
the obligations of others, except by endorsement for deposit in the ordinary
course of business.
5.4 Become or remain obligated for any indebtedness for borrowed money, or
for any indebtedness incurred in connection with the acquisition of any
property, real or personal, tangible or intangible, except:
(a) Indebtedness to Bank;
(b) Current unsecured trade, utility or non-extraordinary accounts
payable arising in the ordinary course of Company's business;
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(c) Indebtedness to shareholders of Company for borrowed money which is
subordinated to Company's indebtedness to Bank pursuant to a written
subordination agreement in form and substance acceptable to Bank
("Subordinated Debt");
(d) Purchase money indebtedness for the acquisition of fixed assets in
an amount not to exceed $200,000 in the aggregate during any fiscal
year of Company.
5.5 Purchase or otherwise acquire or become obligated for the purchase of
all or substantially all of the assets or business interests of any person, firm
or corporation or any shares of stock of any corporation, trusteeship or
association or in any other manner effectuate or attempt to effectuate an
expansion of present business by acquisition.
5.6 Make or allow to remain outstanding any investment (whether such
investment shall be of the character of investment in shares of stock, evidences
of indebtedness or other securities or otherwise) in, or any loans or advances
to, any person, firm, corporation or other entity or association.
5.7 Affirmatively pledge or mortgage any of its assets, whether now owned
or hereafter acquired, or create, suffer or permit to exist any lien, security
interest in, or encumbrance thereon, except:
(a) To Bank;
(b) Purchase money security interests in fixed assets to secure the
indebtedness permitted in Section 5.4(d) above to the extent created
substantially contemporaneously with the acquisition of such fixed
assets and the extent encumbering only the fixed assets so acquired;
(c) Existing security interests described in Schedule A attached hereto
to the extent such security interests are subordinated to Bank's
security interests in the same property pursuant to written
subordination agreements in form and substance satisfactory to Bank.
5.8 Sell, assign, transfer or confer a security interest in any account,
contract, note, trade acceptance or other receivable, except to Bank, except
that Company may grant purchase money security interests up to $1,500,000 for
inventory purchases.
5.9 Incur capital expenditures during any fiscal year of Company in an
amount in excess of Company's depreciation expense for such year.
5.10 Make loans, advances of credit or extensions of credit to any
officer, director or shareholder of Company or any member of their immediate
families or entity controlled
10
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by any of the foregoing or to any other person, except for sales on open account
or in the ordinary course of business.
5.11 Declare or pay any dividends on, or make any other distribution
(whether by reduction of capital or otherwise) with respect to any shares of its
stock.
6. ENVIRONMENTAL PROVISIONS
6.1 For the purposes of this Agreement the term "Environmental Laws" shall
mean all federal, state and local laws including statutes, regulations,
ordinances, codes, rules, and other governmental restrictions and requirements,
relating to environmental pollution, contamination or other impairment of any
nature, any hazardous or other toxic substances of any nature, whether liquid,
solid and/or gaseous, including smoke, vapor, fumes, soot, acids, alkalis,
chemicals, wastes, by-products, and recycled materials. These Environmental Laws
shall include but not be limited to the Federal Solid Waste Disposal Act, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976, the Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Federal Superfund
Amendments and Reauthorization Act of 1986, regulations of the Environmental
Protection Agency, regulations of the Nuclear Regulatory Agency, regulations of
any state department of natural resources or state environmental protection
agency now or at any time hereafter in effect and local health department
ordinances.
6.2 Company shall comply in all material respects with all applicable
Environmental Laws.
6.3 Company shall provide to Bank, immediately upon receipt, copies of any
correspondence, notice, pleading, citation, indictment, complaint, order,
decree, or other document from any source asserting or alleging a circumstance
or condition which requires or may require a financial contribution by Company
or a cleanup, removal, remedial action, or other response by or on the part of
Company under applicable Environmental Laws or which seeks damages or civil,
criminal or punitive penalties from Company for an alleged violation of
Environmental Laws.
6.4 Company shall promptly notify Bank in writing as soon as Company
becomes aware of any condition or circumstance which makes the environmental
warranties contained in this Agreement incomplete or inaccurate in any material
respect as of any date.
6.5 In the event of any condition or circumstance that makes any
environmental warranty, representation and/or agreement contained herein
incomplete or inaccurate in any material respect as of any date, Company shall,
at the reasonable request of Bank, at its sole expense, retain an environmental
professional consultant, reasonably acceptable to Bank, to conduct a thorough
and complete environmental audit regarding the changed condition and/or
circumstance and any environmental concerns arising from that changed condition
and/or
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circumstance. A copy of the environmental consultant's report will be promptly
delivered to both Bank and Company upon completion.
6.6 At any time Company, directly or indirectly through any professional
consultant or other representative, determines to undertake an environmental
audit, assessment or investigation, Company shall promptly provide Bank with
written notice of the initiation of the environmental audit, fully describing
the purpose and intended scope of the environmental audit. Upon receipt, Company
will promptly provide to Bank copies of all final findings and conclusions of
any such environmental investigation. Preliminary findings and conclusions shall
be provided if final reports have not been completed and delivered to Bank
within 60 days following completion of the preliminary findings and conclusions.
6.7 Company shall maintain all permits, licenses and approvals required
under applicable Environmental Laws.
7. EVENTS OF DEFAULT
7.1 Upon non-payment of any installment of the principal or interest on
the Note within fifteen (15) days after due date in accordance with the terms
thereof, or upon nonpayment of any other outstanding indebtedness of Company to
Bank hereunder and continuance thereof for fifteen (15) days, or non-payment of
any other indebtedness to Bank within fifteen (15) days after due date, the Note
shall automatically become immediately due and payable.
7.2 Upon occurrence of any of the following events of default:
(a) Default in the observance or performance of any of the conditions,
covenants or agreements of Company set forth in Sections 4.1(a) and
(b), 4.3, 4.5, or Section 5;
(b) Default in observance or performance of any of the other conditions,
covenants or agreements of Company herein set forth, and continuance
thereof for thirty (30) days after notice to Company by Bank;
(c) Default in the observance or performance of the conditions,
covenants or agreements of Company and Growth in the Letter of
Credit Agreement which is part of the Application and Agreement for
Irrevocable Standby Letter of Credit;
(d) Any representation or warranty made by Company herein or in any
instrument submitted pursuant hereto proves untrue in any material
respect;
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(e) Default in the observance or performance of any of the conditions,
covenants or agreements of Company or any other person set forth in
any collateral document of security which may be given to secure the
indebtedness hereunder or in any other collateral document related
to or connected with this Agreement or the indebtedness hereunder,
and continuation of such default beyond any period of grace
specified in any such document;
(f) Default in the payment of any other obligation of Company or any
Guarantor for borrowed money (other than to Bank) in an aggregate
amount in excess of Fifty Thousand Dollars ($50,000), or in the
observance or performance of any conditions, covenants or agreements
related or given with respect thereto;
(g) Judgments for the payment of money in excess of the sum of Fifty
Thousand Dollars ($50,000) in the aggregate shall be rendered
against Company or any Guarantor and such judgments shall remain
unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a
period of thirty (30) consecutive days from the date of its entry;
(h) The occurrence of any "reportable event", as defined in the Employee
Retirement Income Security Act of 1974 and any amendments thereto,
which is determined to constitute grounds for termination by the
Pension Benefit Guaranty Corporation of any employee pension benefit
plan maintained by or on behalf of Company for the benefit of any of
its employees or for the appointment by the appropriate United
States District Court of a trustee to administer such plan and such
reportable event is not corrected and such determination is not
revoked within thirty (30) days after notice thereof has been given
to the plan administrator or Company; or the institution of
proceedings by the Pension Benefit Guaranty Corporation to terminate
any such employee benefit pension plan or to appoint a trustee to
administer such plan; or the appointment of a trustee by the
appropriate United States District Court to administer any such
employee benefit pension plan;
(i) The revocation of any Subordination Agreement or the revocation
(which shall not include termination in accordance with its terms)
of the Guaranties;
(j) If there shall be any change for any reason whatsoever in the
management, ownership or control of Company which shall in the
reasonable judgment of Bank materially adversely affect future
prospects for the successful operation of Company;
(k) Default by Mego with respect to any payment due to Growth and
assigned to Bank, and continuance thereof for ten (10) days after
notice to Company by Bank;
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(l) The failure of Mego to make payments to Bank as assignee of Growth
in the amount of Three Hundred Fifty-seven Thousand One Hundred
Forty-two ($357,142) Dollars on or before March 1, 1997, September
1, 1997, March 1, 1998, September 1, 1998 and March 1, 1999 and
continuance thereof for ten (10) days after notice to Company by
Bank;
(m) Default by Mego or Preferred Equities Corporation, its wholly owned
subsidiary, under the terms of any borrowing, loan agreement or
credit facility provided by any bank or other financial institution.
then, or at any time thereafter, unless such default is remedied, Bank may give
notice to Company declaring all outstanding indebtedness hereunder and under the
Notes to be due and payable, whereupon all indebtedness then outstanding
hereunder and under the Note shall immediately become due and payable without
further notice and demand.
7.3 If a creditors' committee shall have been appointed for the business
of Company or any Guarantor; or if Company or any Guarantor shall have made a
general assignment for the benefit of creditors or shall have been adjudicated
bankrupt, or shall have filed a voluntary petition in bankruptcy or for
reorganization or to effect a plan or arrangement with creditors; or shall file
an answer to a creditor's petition or other petition filed against it, admitting
the material allegations thereof for an adjudication in bankruptcy or for
reorganization; or shall have applied for or permitted the appointment of a
receiver, or trustee or custodian for any of its property or assets; or such
receiver, trustee or custodian shall have been appointed for any of its property
or assets (otherwise than upon application or consent of Company or any
Guarantor as applicable) and such receiver, trustee or custodian so appointed
shall not have been discharged within forty-five (45) days after the date of his
appointment or if an order shall be entered and shall not be dismissed or stayed
within forty-five (45) days from its entry, approving any petition for
reorganization of Company or any Guarantor, then the Notes and all indebtedness
then outstanding hereunder shall automatically become immediately due and
payable.
7.4 No waiver of any default by Bank nor any dispensation or forbearance
granted to Company shall constitute a waiver of any other default, or a
dispensation or forbearance other than that expressly granted.
8. MISCELLANEOUS
8.1 This Agreement shall be binding upon and shall inure to the benefit of
Company and Bank and their respective successors and assigns.
8.2 No delay or failure of Bank in exercising any right, power or
privilege hereunder shall affect such right, power or privilege, nor shall any
single or partial exercise thereof preclude any further exercise thereof, or the
exercise of any other power, right or
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<PAGE>
privilege. The rights of Bank under this Agreement are cumulative and not
exclusive of any right or remedies which Bank would otherwise have.
8.3 Where the character or amount of any asset or liability or item of
income or expense is required to be determined or any consolidated or other
accounting computation is required to be made for the purposes of this
Agreement, it shall be done in accordance with generally accepted accounting
principles consistently applied.
8.4 All notices to Company with respect to this Agreement shall be deemed
to be completed upon mailing by certified mail as follows:
To Company:
17 John Street
New York, New York 10038
Attention: John Addario
To Bank:
505 North Woodward Avenue, Suite 1300
Bloomfield Hills, Michigan 48304
Attention: Robert M. Burch, Vice Chairman
8.5 Company shall pay all closing costs and expenses, including, by way of
description and not limitation, reasonable outside attorney fees and lien search
fees incurred by Bank in connection with the commitment, consummation and
closing of this Agreement. All of said amounts required to be paid by Company
may, at Bank's option, be charged by Bank as an advance against the proceeds of
the Note. All costs, including attorney fees and auditor fees, incurred by Bank
in reviewing, revising, protecting or enforcing any of its rights against
Company or defending Bank from any claims or liabilities by any party or
otherwise incurred by Bank in connection with an event of default or the
enforcement of this Agreement or the related documents shall also be paid by
Company.
8.6 On any default as defined in this Agreement or any default in payment
of any liability above mentioned, Bank may, except as otherwise provided herein,
without notice to anyone, declare the Note due forthwith, take all action,
remedial and otherwise, as provided herein or in any Security Agreement or other
document, instrument, or agreement of security or of collateral, and collect,
deal with and dispose of all or any part of any security without notice in any
manner permitted or authorized by the Michigan Uniform Commercial Code or other
applicable law (including public or private sale) and after deducting expenses
(including reasonable attorneys' fees and expenses) Bank may apply the proceeds
and any deposits or credits in part or full payment of any of said liabilities,
whether due or not, in any manner or order Bank elects.
8.7 This Agreement shall become effective upon the execution hereof by
Bank and Company.
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<PAGE>
8.8 No amendments or waiver of any provision of this Agreement nor consent
to any departure by Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the Bank, and then such amendment, waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given. No amendment, waiver or consent with respect to any
provision of this Agreement shall affect any other provision of this Agreement.
8.9 THIS AGREEMENT AND THE NOTE HAVE BEEN DELIVERED AT BLOOMFIELD HILLS,
MICHIGAN, AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF MICHIGAN. Whenever possible each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
8.10 Company hereby irrevocably submits to the non-exclusive jurisdiction
of the United States District Court for the Eastern District of Michigan or
Michigan state court sitting in Oakland County, Michigan in any action or
proceeding arising out of or relating to this Agreement and Company hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in any such United States Federal or Michigan state
court. Company irrevocably consents to the service of any and all process in any
such action or proceeding brought in any court in or of the State of Michigan by
the delivery of copies of such process to Company at its address specified in
Section 8.4 or by certified mail directed to such address.
8.11 COMPANY AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS CHOICE, KNOWINGLY AND
VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN
THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY
WAY RELATED TO, THIS AGREEMENT, THE INDEBTEDNESS EVIDENCED BY THE NOTE OR THE
NOTE.
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WITNESS the due execution hereof as of the day and year first above
written.
THE BANK OF BLOOMFIELD HILLS
By: /s/ Robert M Burch
---------------------------------
Robert M Burch
Its: Vice Chairman
ART RENAISSANCE, INC.
By: /s/ Eugene I. Schuster
---------------------------------
Eugene I. Schuster
Its: President
17
<PAGE>
Exhibit 10.11
This Debenture and shares of Common Stock issuable on conversion of this
Debenture have not been registered under either the Securities Act of 1933 or
applicable state securities laws and may not be sold, transferred, assigned,
offered, pledged or otherwise distributed for value unless there is an effective
registration statement under such Act and such laws covering such securities, or
the Company receives an opinion of counsel acceptable to the Company stating
that such sale, transfer, assignment, offer, pledge or other distribution for
value is exempt from the registration and prospectus delivery requirements of
such Act and such laws.
ART RENAISSANCE, INC.
$600,000 May 2, 1997
(Date of Issue)
1. The Convertible Debenture. ART RENAISSANCE, INC., a Delaware
corporation (the "Company"), for value received, hereby promises to pay to the
order of Willora Company, Inc., or its successors or assigns (the "Holder"), the
principal amount of Six Hundred Thousand Dollars ($600,000), together with
interest at the rate of 10% per annum on the unpaid principal balance hereof
from the date of issue, which principal and interest shall be payable as
follows:
(a) Accrued interest shall be due and payable on November 1, 1997 and
quarterly thereafter throughout the term of this Convertible Debenture;
(b) All of the principal and all accrued but unpaid interest shall be due
and payable in full on May 1, 1999;
(c) Provided, however, at the election of the Holder, in the event the
Company's Common Stock is listed on a national securities exchange, all
principal and all accrued but unpaid interest shall be due and payable at such
time.
Interest shall be computed on the basis of a 360-day year. Payments of principal
and interest shall be made in lawful money of the United States of America at
the principal office of the Holder of this Convertible Debenture.
2. Transferability. The Convertible Debenture may be converted into shares
of Company Common Stock, .01 par value per share (the "Common Stock") of the
Company pursuant to the terms of Section 5 hereof (the "Conversion Shares"), and
the Convertible Debenture and the Conversion Shares may not be transferred,
sold, assigned, pledged or otherwise distributed for value unless there is an
effective registration statement under the Securities Act of 1933, as amended
(the "Act") covering such securities, or the Company receives an opinion of
counsel acceptable to the Company stating that such sale, transfer, assignment,
offer, pledge or other distribution is exempt from registration under the Act
and applicable state securities laws.
3. Exchange of Convertible Debenture. At any time at the request of any
Holder of the Convertible Debenture and upon compliance with the provisions of
Section 2 above and surrender of such Convertible Debenture for such purpose to
the Company at its principal office or such other office or agency as it may
authorize for such purpose, the Company at its expense (except for any
<PAGE>
transfer tax arising out of the exchange) shall execute and deliver in exchange
therefor a new Convertible Debenture or Convertible Debentures, in the
denomination or denominations ($1,000 and integral multiples thereof only, plus
one Convertible Debenture in a lesser denomination if required) as such Holder
may request, in an aggregate principal amount equal to the unpaid portion of the
principal amount of the Convertible Debenture surrendered and substantially in
the form thereof, dated as of the date of the Convertible Debenture so
surrendered and payable to, or to such person(s) as directed by, the Holder.
4. Replacement of Convertible Debenture. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Convertible Debenture and in the case of any such loss, theft or destruction,
upon delivery of a bond of indenmity reasonably satisfactory to the Company if
requested by the Company, or in the case of any such mutilation, upon surrender
and cancellation of such Convertible, the Company shall issue a new Convertible
Debenture identical in form to the lost, stolen, destroyed or mutilated
Convertible Debenture.
5. Conversion of Convertible Debenture.
(a) Right of Conversion. Subject to and upon compliance with the
provisions of Section 2 above and this Section, the Holder of this
Convertible Debenture or any Convertible Debentures issued in exchange for
it shall have the right, at the Holder's option, at any time beginning 45
days following the date hereof and prior to the date of final maturity of
this Convertible Debenture, to convert the principal amount, as well as
any accrued but unpaid interest due thereon if so elected by the Holder,
of any such Convertible Debenture, in whole or in part, into that number
of fully paid and nonassessable shares of Company Common Stock (calculated
as to each conversion to the nearest 1/100 of a share) obtained by first:
dividing the principal amount of the Convertible Debenture into the value
of all of the Company's issued and outstanding Common Stock as determined
by appraisal in conjunction with, and immediately preceding, any initial
public offering of the Company's Common Stock; the amount so determined
shall than be divided by the number of then issued and outstanding shares
of Common Stock of the Company, as adjusted (the "Conversion Price"). The
surrender of the Convertible Debenture shall be made at the Conversion
Price and in the manner provided in Subsection (b) of this Section.
(b) Surrender of Convertible Debenture. In order to exercise the
conversion privilege, the Holder of the Convertible Debenture to be
converted shall surrender such Convertible Debenture to the Company at its
principal office or at such other agency maintained for such purpose by
the Company, and shall give written notice to the Company at such office
or agency that the Holder elects to convert such Convertible Debenture
specified in said notice. Such notice shall also state the name or names,
together with address or addresses, in which the certificate or
certificates for shares of Common Stock which shall be issuable on such
conversion shall be issued. The Convertible Debenture surrendered for
conversion shall, unless the shares issuable on conversion are to be
issued in the same name as the name of the original Holder, be accompanied
by instruments of transfer, in form reasonably satisfactory to the
Company, duly executed by each holder or such Holder's duly authorized
attorney. After the surrender of such Convertible Debenture, as aforesaid,
the Company shall issue and shall deliver at such office or agency to such
Holder, or on such Holder's written order, a certificate or certificates
for the number of full
<PAGE>
shares of common stock issuable upon the conversion of such Convertible
Debenture or portion thereof in accordance with the provisions of this
Section. Any fractional interest in respect of a share arising upon such
conversion shall be settled as provided in Subsection (c) of this Section.
In the exercise of this conversion right, the Holder may elect to be paid
cash for accrued but unpaid interest on the Convertible Debenture or may
convert such interest into Common Stock at the same price, terms and
conditions as set forth above.
(c) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Convertible Debenture. Instead of any
fractional interest in a share of capital stock which would otherwise be
deliverable upon the conversion of any convertible Debenture, the Company
shall make an adjustment therefor to the nearest 1/100 of a share in cash
at the Conversion Price on the day of conversion. If more than one
Convertible Debenture shall be surrendered for conversion at one time by
the same Holder, the number of full shares issuable upon conversion of all
such Convertible Debentures surrendered for conversion shall be computed
on the basis of the aggregate principal amount of the Convertible
Debentures, or specified portions thereof to be converted, so surrendered.
(d) Registration. In the event the Company makes a public offering
of its Common Stock and in connection therewith a listing for said stock
is applied for, the following provisions shall apply to such Common Stock:
(1) Piggyback Registration Rights. The Company shall advise
the Holder of this Convertible Debenture or any then Holder of the
Convertible Debenture or any then Holder of Common Stock who acquired such
stock upon conversion of the Convertible Debenture (such persons being
collectively referred to herein as "Holders") by written notice at least
four (4) weeks prior to the filing of any Registration Statement under the
Securities Act of 1933, as amended, the "Act"), covering securities of the
Company and will, upon the request of any such Holder, include in any such
registration statement or post effective amendment thereto, such
information as may be required to permit a public offering of the Common
Stock held by the Holder. The Company shall supply prospectuses and other
documents as the Holder may request in order to facilitate the public sale
or other disposition of its Common Stock, and furnish indemnification in
the manner as set forth in Subsection d(2)(b) of this Section 5 Such
Holders shall furnish information and indemnification as set forth in
Subsection d(2)(b) of this Section 5, except that the maximum amount which
may be recovered from the Holder shall be limited to the amount of
proceeds received by the Holder from the sale of its Common Stock.
(2) The following provision of this Section 5 shall also be
applicable:
(a) The Company shall bear the entire cost and expense
of any registration of securities initiated by it under Subsection
(1) of this Section 5 notwithstanding that Holder's Common Stock
acquired through exercise of the Convertible Debenture may be
included in any such registration.
(b) The Company shall indemnify and hold harmless each
such holder and each underwriter, within the meaning of the Act, who
may purchase from or sell for any such holder any Common Stock
acquired through exercise of the
<PAGE>
Convertible Debenture from and against any and all losses, claims,
damages and liabilities caused by any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement or any post-effective amendment thereto or any
registration statement under the Act or any prospectus included
therein required to be filed or furnished by reason of this Section
5 or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses,
claims, damages or liabilities are caused by any such untrue
statement or alleged untrue statement or omission or alleged
omission based upon information furnished or required to be
furnished in writing to the Company by such Holder or underwriter
expressly for use therein, which indemnification shall include such
person, if any, who controls any such underwriter within the meaning
of such Act; provided, however, that the Company shall not be
obliged so to indemnify any such Holder or underwriter or
controlling person unless such Holder or underwriter shall at the
same time indemnify the Company, its directors, each officer signing
the related registration statement and each person, if any, who
controls the Company within the meaning of such Act, from and
against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material
fact contained in any registration statement or any prospectus
required to be filed or furnished by reason of this Section 5 or
caused by any untrue statement or alleged untrue statement omission
based upon information furnished in writing to the Company by any
such Holder or underwriter expressly for use therein.
(c) Liquidated Damages. In the event that the Holder has fully
complied with the surrender provisions of Section 5(b) and the
Company fails to deliver to the Holder the certificate or
certificates for the shares of Common Stock in compliance with the
conversion privileges provided herein, then beginning with the
fifteenth day following the date that the Holder has fully complied
with the surrender provisions of Section 5(1), the Company shall
grant to the Holder a warrant to purchase 5,000 shares of the
Company Common Stock at the price of five cents ($.05) per share for
each day that the Company fails to so issue the shares of Common
Stock. Due to the difficulty in determining the actual damages
associated with the failure to timely issue the Common Stock to the
Holder, the Company and Holder agree that this liquidated damages
provision is reasonable and is not intended as a penalty. The
warrant price and number of shares is not subject to adjustment due
to changes in the Company capital structure including, but not
limited to stock splits, stock dividends or reorganizations.
6. Conversion Adjustments. The provisions of this Convertible Debenture
are subject to adjustment as provided in this Section 5.
(a) The Conversion Price shall be adjusted from time to time to
reflect a discount to the Conversion Price.
(1) If the Company fails to register its Common Stock with the
Securities and Exchange Commission pursuant to an initial public
offering of such Common Stock within six (6) months from the Date of
Issue of this convertible Debenture or
<PAGE>
if the effective date of such registration has not occurred by the
end of the ninth month from the Date of Issue, the Holder shall be
entitled to a discount to the Conversion Price of 10%.
(2) Beginning with the 10th month from the Date of Issue and
with each month (or portion thereof) thereafter to term, until such
time as the Holder of the Convertible Debenture exercises its Right
of Conversion, the Holder shall be entitled to an [additional]
discount of 1.25% per month [for example in month 11, the discount
would be 2.5%, however, if the discount in (1) above had also been
earned the total discount would be 12.5%].
(3) It is expressly understood that the discount provisions of
Sections 6(a)(2) and 6(a)(2) shall be mutually exclusive.
(b) In case of any consolidation or merger to which the Company is a
party other than merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another
corporation of the property of the company as an entirety or substantially
as an entirety, or in the case of any statuary exchange of securities with
another corporation (including any exchange effected in connection with a
merger of a third corporation into the Company), the Holder of each
Convertible Debenture then outstanding shall have the right thereafter to
convert such Convertible Debenture into the kind and amount of shares of
stock and other securities and property which he would have owned or have
been entitled to receive immediately after such consolidation, merger,
statutory exchange, sale, or conveyance had such Convertible Debenture
been converted immediately prior to the effective date of such
consolidation, merger, statutory exchange sale, or conveyance and in any
such case, if necessary, appropriate adjustment shall be made in the
application of the provision set forth in this Section with respect to the
rights and interest thereafter of any Holders of the Convertible
Debenture, to the end that the provisions set forth in this Section shall
thereafter correspondingly be made applicable, as nearly as may reasonably
be, in relation to any shares of stock and other securities and property
thereafter deliverable on the exercise of the Convertible Debenture. The
provisions of this Subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
7. Events of Default. Each of the following events shall be an Event of
Default ("Event of Default") for purposes of the Convertible Debenture:
(a) Convertible Debenture Terms. The Company defaults in the due and
punctual performance or observance of any material terms contained in the
Convertible Debenture, and such default continues for a period of five (5)
consecutive days after written notice thereof to the Company by the Holder
of the Convertible Debenture or Common Stock issued upon conversion of the
Convertible Debenture; or
(b) Insolvency Matters. The Company makes an assignment for the
benefit of creditors, or files a voluntary petition in bankruptcy, or as
adjudicated a bankrupt or insolvent, or files any petition or answer
seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present
or
<PAGE>
future statute, law or regulation, or files any answer admitting or fails
to deny the material allegations of a petition filed against the Company
for any such relief, or seeks or consents to or acquiesces in the
appointment of any trustee, receiver or liquidator of the Company or all
or any substantial part of the properties of the Company, or the Company
or its directors or majority stockholders take any action looking to the
dissolution or liquidation of the Company.
8. Modification and Waiver. No purported amendment, modification or waiver
of any provision hereof shall be binding unless set forth in a written document
signed by the Company and the Holder of the Convertible Debenture (in the case
of amendments or modifications) or by the party to be charged thereby (in the
case of waivers). Any waiver shall be limited to the provision hereof in the
circumstances or events specifically made subject thereto, and shall not be
deemed a waiver of any other term hereof or the same circumstance or event upon
any reoccurrence thereof.
9. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been given, when received, if personally delivered (including, without
limitation, delivery by courier or delivered by telex, telegram or facsimile, or
five (5) days after depositing in the U.S. Mails for delivery by first class
mail, postage prepaid and addressed as provided blow, (a) if to any Holder of
the Convertible Debenture, addressed so such Holder at its address as shown on
the books of the Company, or at such other address as such Holder may specify by
written notice to the Company with a copy to the Agent or (b) if the Company at
17 Johns Street, 15th Floor, New York, New York, or such other address as the
Company may specify by written notice to the Holder of the convertible Debenture
or Common Stock issued upon conversion of the Convertible Debenture.
10. Successors and Assigns. All the terms and provisions of the
Convertible Debenture shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the Company and each
Holder of the Convertible Debenture, whether or not so expressed.
11. Applicable Law. The laws of the State of New York, without regard to
its conflicts of law principles, shall govern the validity of the Convertible
Debenture, the construction of its terms and interpretation of the rights and
duties of the Company and each Holder of the Convertible Debenture.
12. Waiver of Demand. Presentment and Notice of Dishonor. Except as
otherwise set forth herein, the undersigned and each endorser or guarantor
hereof hereby waives demand, presentment, protest, notice of protest and notice
of dishonor.
13. Corporate Obligation. No recourse under or upon any obligation,
covenant or agreement contained in the Convertible Debenture, or for any claim
based hereon or otherwise in respect hereof, shall be had against any promoter,
subscriber to shares, incorporator, stockholder, officer, or director, as such,
past, present or future, of the Company or of any successor corporation, either
directly or through the Company or any successor or corporation or through any
trustee, receiver, or any other person, whether by virtue of any constitution,
statue, or rule of law, or by the enforcement of any assessment or penalty or
otherwise, except as expressly agreed to by the party charged.
<PAGE>
14. Subordination. The Company will cause and the debt obligations of
Venture Funding, Ltd. and Eugene I. Schuster to be subordinated to this
Convertible Debenture pursuant to a certain Subordination Agreement of even date
herewith.
15. Most Favored Nations Provision. If at any time between the execution
date of this agreement and an initial public offering of the Company's Common
Stock, the Company shall privately place any debt obligation(s) on different
terms and conditions than as set forth herein (with the exception of
securitization provisions), the Holder shall have the option to retain the
current agreement of the parties as reflected in this agreement (and a certain
Warrant and Subordination Agreement of even date) or to amend portions of this
agreement and substitute therefor certain terms and conditions offered in any
such subsequent private placement(s) of debt. The Company shall promptly notify
the Holder of any such private placement and provide to the Holder a copy of all
enabling and operating documents related thereto. The Holder will have thirty
days thereafter to elect to amend certain portions of this agreement (and a
certain Warrant and Subordination Agreement of even date) by written notice of
its intent within the thirty day period. The substitution of certain terms and
conditions of the other private placement shall relate only to the interest
rate, warrant terms and conversion privileges provided therein and shall not
change in any manner the term of the debt or the security/securitization
provisions provided herein. By electing to substitute the other private
placement terms for the terms of this agreement, the Holder must accept all or
none of terms and conditions related to the other private placement's interest
rate, warrant terms and conversion privileges; the Holder may not select from
among such provisions (cherry pick).
IN WITNESS WHEREOF, the Company has caused the Convertible Debenture to be
signed by its duly authorized officer, and the Guarantor has signed the
Convertible Debenture, as of the date first written above.
ART RENAISSANCE, INC.
By: /s/ Eugene I. Schuster
------------------------------------
Its: CEO
-------------------------------
<PAGE>
Exhibit 10.12
- --------------------------------------------------------------------------------
LOAN AGREEMENT
BY AND BETWEEN
ART RENAISSANCE, INC.
AND
THE BANK OF BLOOMFIELD HILLS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$2,500,000 LINE OF CREDIT
OCTOBER 30, 1997
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT, made this 30th day of October, 1997, by and between
Art Renaissance, Inc., a Delaware corporation, of New York, New York (herein
called "Company"), and The Bank of Bloomfield Hills, a Michigan banking
corporation, of Bloomfield Hills, Michigan (herein called "Bank");
WITNESSETH:
1. CREDIT FACILITIES.
1.1 Bank agrees to grant to Company on the date hereof a line of credit in
the principal sum of Two Million Five Hundred Thousand ($2,500,000) Dollars. The
borrowing hereunder shall be evidenced by a multiple advance note (herein called
"Note").
1.2 The indebtedness represented by the Note shall be repaid on or before
October 31, 1998. Company agrees to pay interest on the unpaid principal balance
on the Note from time to time outstanding at a per annum rate equal to two and
one-half (2 1/2%) per cent above the prime or base rate as announced from time
to time by Citibank, N.A. ("Prime Rate"). Interest shall be paid quarterly
commencing on January 30, 1998 and continuing on the thirtieth days of April,
July, and October 1998. Upon the occurrence of any event of default hereunder,
interest shall accrue on the unpaid principal balance at the per annum rate of
four and one-half (4 1/2%) per cent above the Prime Rate.
1.3 Interest shall be computed on a daily basis using a year of 360 days,
assessed for the actual number of days of lapse, and such computation effect
shall be given to any change in the interest rate resulting from a change in
Prime Rate on the date of such change in rate.
1.4 Company may prepay the Note in whole or in part at any time without
penalty.
1.5 The proceeds of the Note shall be used to pay existing debt and for
working capital.
2. CONDITIONS AND SECURITY.
2.1 Company agrees to furnish Bank, prior to the borrowing hereunder, in
form to be satisfactory to Bank, with (i) an opinion of Company's legal counsel;
(ii) certified copies of resolutions of the Board of Directors of Company
evidencing approval of the borrowings hereunder, (iii) certified copies of
Company's Articles of Incorporation and Bylaws, and (iv) a certificate of good
standing from the State of Company's incorporation and from each jurisdiction in
which it is required to be qualified to do business.
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2.2 As security for all indebtedness of Company to Bank, Company agrees to
furnish, execute and deliver to Bank or cause to be furnished, executed and
delivered to Bank prior to or simultaneously with the borrowing hereunder, in
form to be satisfactory to Bank and supported by appropriate resolution in
certified form authorizing same, the following (all of which is herein
collectively called the "Collateral"):
(a) Security Agreement dated March 29, 1996, granting to Bank first
priority security interests in and covering all of Company's assets,
which secures future advances such as advances under the line of
credit.
(b) Guaranties from Eugene I. Schuster, Venture Funding, Ltd., a
Michigan corporation (herein called "Venture"), Growth Realty, Inc.,
a Michigan corporation, (herein called "Growth"), Venture Funding
Holdings, L.L.C., a Michigan limited liability company, (herein
called "Venture Holdings"), and Growth Realty Holdings, L.L.C., a
Michigan limited liability company, (herein called "Growth
Holdings") ("Guaranties").
(c) Subordination Agreements from Eugene I. Schuster, Venture and Growth
("Subordinated Debt Holders") pursuant to which the Subordinated
Debt Holders subordinate all indebtedness and obligations (except,
so long as there is no default, current obligations for consulting
fees, interest, expense reimbursement and repayment of advances made
on behalf of the Company) of Company to them to all of Company's
indebtedness and obligations to the Bank ("Subordination
Agreements").
(d) Security Agreement dated March 29, 1996, granting to Bank a first
priority security interest in Growth's right to receive Two Million
Five Hundred Thousand ($2,500,000) Dollars of subordinated debt from
Mego Financial Corp., a New York corporation (herein called "Mego"),
and Six Hundred Forty-four Thousand Six Hundred Eighty-five and
56/100 ($644,685.56) Dollars of cash balances owed by Mego to Growth
pursuant to an Assignment Agreement between Growth and others and
Mego dated October 25, 1987, and an Assignment and Assumption
Agreement between Growth and others and Mego dated February 1, 1988,
as amended, which secures future obligations such as the guaranty of
advances under the line of credit. Growth has directed that Mego
remit all payments of subordinated debt and cash balances directly
to Bank. As long as Company is not in default, Bank will remit to
Growth the interest portion of payments received from Mego. The
principal portion of payments received from Mego (and the interest
portion if Company is in default) shall be used to purchase a
Certificate of Deposit in the name of Growth at then current market
rates of interest, which Certificates of Deposit shall be held as
Collateral. This Collateral also secures obligations of Cellex
Biosciences, Inc. ("Cellex") to Bank. At the date hereof, the
balance of the
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<PAGE>
Subordinated Debt and Cash Balances from Mego total One Million
Seventy-one Thousand ($1,071,000) Dollars.
(e) Security Agreement (Pledge) dated March 29, 1996, from Growth of One
Hundred Fifty-three Thousand (153,000) shares of Mego common stock,
which secures future obligations such as the guaranty of the loan.
This Collateral also secures obligations of Cellex to Bank.
(f) Security Agreement (Pledge) dated February 6, 1997 from Growth of
One Hundred Fifty Thousand (150,000) shares of Mego common stock.
(g) Security Agreement (Pledge) of even date herewith from Growth of One
Hundred Thousand (100,000) shares of Mego Mortgage Corporation
(herein called "Mego Mortgage") common stock.
(h) A first security interest in works of art owned by Eugene I.
Schuster more fully described in the exhibit attached to the UCC-1
delivered to Bank, subject and subordinate to the security interest
of Indiana Development Finance Authority disclosed by a financing
statement filed March 30, 1995, number 54221B, by the UCC Unit of
the Secretary of the State of Michigan and listed on Exhibit 1
attached to such financing statement.
(i) Security Agreement (Pledge) of a warrant dated March 24, 1995, as
amended from time to time to and including September 25, 1997, to
purchase Three Hundred Thousand (300,000) shares of common stock of
Cellex Biosciences, Inc. ("Cellex") at $1.5625 per share held by
Venture.
(j) Security Agreement (Pledge) of a warrant dated June 22, 1995 as
amended from time to time to and including September 25, 1997, to
purchase Five Hundred Twenty Thousand Five Hundred Seventy-one
(520,571) shares of common stock of Cellex at $1.5625 per share held
by Venture.
(k) Security Agreement (Pledge) of a warrant dated August 20, 1993 as
amended from time to time to and including September 25, 1997 to
purchase Thirty-seven Thousand Five Hundred (37,500) shares of
common stock of Cellex at $1.5625 per share held by Venture.
(l) Security Agreement (Pledge) of a warrant dated September 25, 1997,
to purchase Five Hundred Thousand (500,000) shares of common stock
of Cellex at $1.5625 per share held by Venture Holdings.
(m) The collateral described in Article II of the Letter of Credit
Agreement which is part of the Application and Agreement for
Irrevocable Standby Letter of Credit.
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(n) Financing Statements required or requested by Bank to perfect all
security interests to be conferred upon Bank under this Agreement
and to accord Bank a perfected first priority security position
under the Uniform Commercial Code, except for Permitted Exceptions
listed on Schedule A attached.
(o) Such documents or certificates as may reasonably be requested by
Bank and/or are required under the terms of any and every Security
Agreement.
(p) Such other documents or agreements of security and appropriate
assurances of validity and perfected first priority of lien or
security interest as Bank may request at any time.
(q) Security Agreement (Pledge) of even date herewith from Growth
Holdings of 235,000 shares of Mego Financial Corp and 111,860 shares
of Mego Mortgage Corporation common stock.
(r) Third Party Pledge Agreement of even date herewith from Growth of
244,228 shares of Mego Mortgage Corporation common stock.
To the extent that Company has heretofore given a security interest to Bank to
certain of the foregoing and such documents and agreements comply with the
requirements of this Agreement, it is hereby agreed that such documents and
agreements shall remain in full force and effect for the purposes of this
Agreement, but Bank may, if it deems it necessary or desirable, require
execution of a new agreement or agreements or amendments to such agreements.
3. REPRESENTATIONS AND WARRANTIES
Company represents and warrants and such representations and warranties
shall be deemed to be continuing representations and warranties during the
entire life of this Agreement:
3.1 Company is a corporation duly organized and existing in good standing
under the laws of the State of Delaware; Company is in good standing in each
jurisdiction in which it is required to be qualified to do business; execution,
delivery and performance of this Agreement and other documents and instruments
required under this Agreement, and the issuance of the Note by Company are
within its corporate powers, have been duly authorized, are not in contravention
of law or the terms of Company's Articles of Incorporation or Bylaws, and do not
require the consent or approval of any governmental body, agency or authority;
and this Agreement and other documents and instruments required under this
Agreement and Note, when issued and delivered, will be valid and binding in
accordance with their terms.
3.2 The execution, delivery and performance of this Agreement and any
other documents and instruments required under this Agreement, and the issuance
of the Note by Company are not in contravention of the unwaived terms of any
indenture, agreement or undertaking to which Company is a party or by which it
is bound.
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<PAGE>
3.3 No litigation or other proceeding before any court or administrative
agency is pending, or to the knowledge of the officers of Company is threatened
against Company, the outcome of which could materially impair the Company's
financial condition or the ability of Company to carry on its business.
3.4 There are no security interests in, liens, mortgages, or other
encumbrances on any of Company's assets, except to Bank or as otherwise
permitted by this Agreement.
3.5 Company does not maintain or contribute to any employee benefit
pension plan subject to Title IV of the Employee Retirement Income Security Act
of 1974 ("ERISA").
3.6 All tax returns and tax reports of Company required by law to be filed
have been duly filed or extensions obtained, and all taxes, assessments and
other governmental charges or levies (other than those presently payable without
penalty and those currently being contested in good faith for which adequate
reserves have been established) upon Company (or any of its properties) which
are due and payable have been paid. The charges, accruals and reserves on the
books of Company in respect of the Federal income tax for all periods are
adequate in the opinion of Company.
3.7 There are no subsidiaries of Company other than:
Art Renaissance (California) Incorporated
Art Renaissance of Beverly Hills Incorporated
Art Renaissance Boston Incorporated
Art Renaissance Los Angeles Incorporated
Art Renaissance Carmel Incorporated
Art Renaissance Hawaii Incorporated
Art Renaissance Eclipse Incorporated
Art Renaissance Varick St. Incorporated
Dyansen Fine Art Auction, Inc.
Art Renaissance Chicago, Inc.
3.8 Company is, in the conduct of its business, in compliance in all
material respects with all federal, state or local laws, statutes, ordinances
and regulations applicable to it, the enforcement of which, if Company were not
in compliance, would materially adversely affect its business or the value of
its property or assets. Company has all approvals, authorizations, consents,
licenses, orders and other permits of all governmental agencies and authorities,
whether federal, state or local, required to permit the operation of its
business as presently conducted, except such approvals, authorizations,
consents, licenses, orders and other permits with respect to which the failure
to have can be cured without having a material adverse effect on the operation
of such business.
3.9 No representation or warranty by Company in this Agreement, nor any
statement or certificate (including financial statements) furnished or to be
furnished to Bank
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<PAGE>
pursuant hereto contains or will contain any materially untrue statement of any
material fact or omits or will omit to state a material fact necessary to make
such representation, warranty, statement or certificate not misleading.
3.10 Except as disclosed in attached Schedule 3.10, Company is not a party
to any litigation or administrative proceeding, nor so far as is known by
Company is any litigation or administrative proceeding threatened against
Company, which in either case (A) asserts or alleges that Company violated
Environmental Laws (as defined in Section 7.1), (B) asserts or alleges that
Company is required to clean up, remove, or take remedial or other response
action due to the disposal, depositing, discharge, leaking or other release of
any hazardous substances or materials, (C) asserts or alleges that Company is
required to pay all or a portion of the cost of any past, present, or future
cleanup, removal or remedial or other response action which arises out of or is
related to the disposal, depositing, discharge, leaking or other release of any
hazardous substances or materials by Company.
3.11 Except as disclosed in attached Schedule 3.10 to the best knowledge
of Company, there are no conditions existing currently which would subject
Company to damages, penalties, injunction relief or cleanup costs under any
applicable Environmental Laws or which require or are likely to require cleanup,
removal, remedial action or other response pursuant to applicable Environmental
Laws by Company.
3.12 Company is not subject to any judgment, decree, order or citation
related to or arising out of applicable Environmental Laws and to the best
knowledge of the Company, except as disclosed in attached Schedule 3.10, Company
has not been named or listed as a potentially responsible party by any
governmental body or agency in a matter arising under any applicable
Environmental Laws.
3.13 Company has all permits, licenses and approvals required under
applicable Environmental Laws.
4. AFFIRMATIVE COVENANTS
Company covenants and agrees that it will, so long as any indebtedness
remains outstanding under this Agreement:
4.1 Furnish Bank:
(a) Within one hundred ten (110) days after and as of the end of each
fiscal year of Company, balance sheets and statements of profit and
loss and surplus reconciliation of Company audited by independent
certified public accountants satisfactory to Bank;
6
<PAGE>
(b) Within ninety (90) days after the end of each fiscal year of
Company, copies of all management letters and other reports of
substance submitted to Company by independent certified public
accountants in connection with any annual audit of the books of
Company;
(c) Within sixty (60) days after May 31 of each year, an annual personal
financial statement of Eugene I. Schuster as of May 31 of that year.
(d) Within twenty (20) days after the same is filed, a copy of the
federal income tax return of Eugene I. Schuster.
(e) Within twenty (20) days after the same is filed, the form 10-K
report of Mego, Mego Mortgage and Cellex.
(f) Within twenty (20) days after the same is filed, the form 10-Q
report of Mego, Mego Mortgage and Cellex.
(g) Within twenty (20) days after the same is filed, the federal income
tax return of Venture, Growth, Venture Holdings and Growth Holdings.
(h) Such information as required by the terms and conditions of any
security agreements referred to in this Agreement;
(i) Promptly, and in form to be satisfactory to Bank, such other
information as Bank may reasonably request from time to time.
4.2 Pay and discharge all taxes and other governmental charges, and all
material contractual obligations calling for the payment of money, before the
same shall become overdue, unless and to the extent only that such payment is
being contested in good faith.
4.3 Maintain insurance coverage on its physical assets and against other
business risks in such amounts and of such types as are customarily carried by
companies similar in size and nature, and in the event of acquisition of
additional property, real or personal, or of incurrence of additional risks of
any nature, increase such insurance coverage in such manner and to such extent
as prudent business judgment and present practice would dictate; and in the case
of all policies covering property mortgaged or pledged to Bank or property in
which Bank shall have a security interest of any kind whatsoever, other than
those policies protecting against casualty liabilities to strangers, all such
insurance policies shall provide that the loss payable thereunder shall be
payable to Company and Bank as their respective interests may appear, all said
policies or copies thereof, including all endorsements thereon and those
required hereunder, to be deposited with Bank, and cause Eugene I. Schuster to
maintain coverage as provided herein with respect to the works of art owned by
him.
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4.4 Permit Bank, through its authorized attorneys, accountants and
representatives, to examine Company's books, accounts, records, ledgers and
assets of every kind and description at all reasonable times upon oral or
written request of Bank, which shall include but shall not be limited to
collateral audits of Company conducted by Bank, at Company's own cost and
expense. Prior to the occurrence of an event of default hereunder, the Bank
shall conduct collateral audits no more frequently than once a year and
Company's liability for reimbursement of audit fees shall be limited to an
aggregate amount not to exceed $3,000 each year. Following the occurrence of an
event of default, these limitations on frequency of assets and expense
reimbursement shall no longer be in effect.
4.5 Promptly notify Bank of any condition or event which constitutes or
with the running of time and/or the giving of notice would constitute an event
of default under this Agreement, and promptly inform Bank of the existence or
occurrence of any condition or event which could have a material adverse effect
upon Company's financial condition.
4.6 Maintain in good standing all licenses required by the States of
Delaware, New York, California, Hawaii and Louisiana or any agency thereof, or
other governmental authority that may be necessary or required for Company to
carry on its general business objects and purposes unless the failure to so
maintain such licenses would not have a material adverse effect on the financial
condition or operations of Company.
4.7 Furnish Bank, upon Bank's request, in form satisfactory to Bank with
pledges, assignments, mortgages, lien instruments or other security instruments
covering any or all of Company's real or personal property, of every nature and
description, whether now owned or hereafter acquired, to the extent that Bank
may in its sole discretion require.
4.8 Comply with all material requirements imposed by ERISA as presently in
effect or hereafter promulgated, including but not limited to, the minimum
funding requirements of any Pension Plan.
4.9 Promptly notify Bank after the occurrence thereof in writing of any of
the following events:
(a) The termination of a pension plan subject to Title IV of ERISA (a
"Pension Plan");
(b) The appointment of a trustee by a United States District Court to
administer a Pension Plan;
(c) The commencement by the Pension Benefit Guaranty Corporation, or any
successor thereto of any proceeding to terminate a Pension Plan;
(d) The failure of a Pension Plan to satisfy the minimum funding
requirements for any plan year as established in Section 412 of the
Internal Revenue Code of
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1954, as amended or any similar provision under the Internal Revenue
Code of 1986, as amended;
(e) The withdrawal of Company from a Pension Plan; or
(f) A reportable event, within the meaning of Title IV of ERISA.
4.10 On the date hereof, Bank is relying upon eighty (80%) per cent of
Mego's indebtedness to Growth and sixty (60%) per cent of the market value of
Mego stock and Mego Mortgage stock as the principal collateral for the combined
loans to Company and Cellex. If at any time the outstanding principal balance of
the combined indebtedness of Company and Cellex less the value of any cash
collateral held by Bank exceed eighty (80%) per cent of the cash balances due
from Mego to Growth plus sixty (60%) percent of the market value of the Mego
shares, as such value is determined from time to time in the sole, but
reasonable discretion of Bank (herein called the "Margin Requirement"), Company
shall, upon ten (10) days prior written notice from Bank, pay or cause to be
paid to Bank an amount sufficient to reduce the Indebtedness such that the
remaining principal outstanding thereunder is equal to or less than the Margin
Requirement. Company shall not drawn on the line of credit if such draw will
cause the Indebtedness to exceed the Margin Requirement. Bank shall apply
payments made under this paragraph in payment of the Indebtedness in such order
and manner of application as Bank in its sole discretion elects. In the
alternative, Company may provide or cause to be provided to Bank additional
collateral in the form of cash or other property acceptable to Bank and with a
value, as determined by Bank, that when added to the Collateral will constitute
compliance with the Margin Requirement.
4.11 If, after the date of this Agreement, Bank shall have determined that
the adoption of any applicable law, rule, regulation or guideline regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Bank with any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency has or would have the effect of reducing the rate of return on the
capital of Bank (or the person controlling Bank) as a consequence of Bank's
obligations or the financial accommodations provided by Bank hereunder
(including its commitment) to a level below that which Bank (or the person
controlling Bank) could have achieved but for such adoption, change or
compliance (taking into consideration the policies of Bank (or the person
controlling Bank) with respect to capital adequacy) by an amount deemed by Bank
(or such person), in its sole discretion, to be material, then from time to time
Company shall pay to Bank within ten (10) business days of receiving notice
thereof, such additional amount or amounts as will compensate Bank (or such
person) for such reduction.
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5. NEGATIVE COVENANTS
Company covenants and agrees that, so long as any indebtedness to Bank
remains outstanding under this Agreement, it will not, without the prior written
consent of Bank:
5.1 Purchase, acquire or redeem any of its capital stock or make any
material change in its capital structure or general business objects or purpose.
5.2 Enter into any merger or consolidation or sell, lease, transfer, or
dispose of all, substantially all, or any material part of its assets, except in
the ordinary course of its business.
5.3 Guarantee, endorse, or otherwise become secondarily liable for or upon
the obligations of others, except by endorsement for deposit in the ordinary
course of business.
5.4 Become or remain obligated for any indebtedness for borrowed money, or
for any indebtedness incurred in connection with the acquisition of any
property, real or personal, tangible or intangible, except:
(a) Indebtedness to Bank;
(b) Current unsecured trade, utility or non-extraordinary accounts
payable arising in the ordinary course of Company's business;
(c) Indebtedness to shareholders of Company for borrowed money which is
subordinated to Company's indebtedness to Bank pursuant to a written
subordination agreement in form and substance acceptable to Bank
("Subordinated Debt");
(d) Purchase money indebtedness for the acquisition of fixed assets in
an amount not to exceed $200,000 in the aggregate during any fiscal
year of Company.
5.5 Purchase or otherwise acquire or become obligated for the purchase of
all or substantially all of the assets or business interests of any person, firm
or corporation or any shares of stock of any corporation, trusteeship or
association or in any other manner effectuate or attempt to effectuate an
expansion of present business by acquisition.
5.6 Make or allow to remain outstanding any investment (whether such
investment shall be of the character of investment in shares of stock, evidences
of indebtedness or other securities or otherwise) in, or any loans or advances
to, any person, firm, corporation or other entity or association.
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5.7 Affirmatively pledge or mortgage any of its assets, whether now owned
or hereafter acquired, or create, suffer or permit to exist any lien, security
interest in, or encumbrance thereon, except:
(a) To Bank;
(b) Purchase money security interests in fixed assets to secure the
indebtedness permitted in Section 5.4(d) above to the extent created
substantially contemporaneously with the acquisition of such fixed
assets and the extent encumbering only the fixed assets so acquired;
(c) Existing security interests described in Schedule A attached hereto
to the extent such security interests are subordinated to Bank's
security interests in the same property pursuant to written
subordination agreements in form and substance satisfactory to Bank.
5.8 Sell, assign, transfer or confer a security interest in any account,
contract, note, trade acceptance or other receivable, except to Bank, except
that Company may grant purchase money security interests up to $1,500,000 for
inventory purchases.
5.9 Incur capital expenditures during any fiscal year of Company in an
amount in excess of Company's depreciation expense for such year.
5.10 Make loans, advances of credit or extensions of credit to any
officer, director or shareholder of Company or any member of their immediate
families or entity controlled by any of the foregoing or to any other person,
except for sales on open account or in the ordinary course of business.
5.11 Declare or pay any dividends on, or make any other distribution
(whether by reduction of capital or otherwise) with respect to any shares of its
stock.
6. ENVIRONMENTAL PROVISIONS
6.1 For the purposes of this Agreement the term "Environmental Laws" shall
mean all federal, state and local laws including statutes, regulations,
ordinances, codes, rules, and other governmental restrictions and requirements,
relating to environmental pollution, contamination or other impairment of any
nature, any hazardous or other toxic substances of any nature, whether liquid,
solid and/or gaseous, including smoke, vapor, fumes, soot, acids, alkalis,
chemicals, wastes, by-products, and recycled materials. These Environmental Laws
shall include but not be limited to the Federal Solid Waste Disposal Act, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976, the Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Federal Superfund
Amendments and Reauthorization Act of 1986, regulations of the Environmental
Protection Agency,
11
<PAGE>
regulations of the Nuclear Regulatory Agency, regulations of any state
department of natural resources or state environmental protection agency now or
at any time hereafter in effect and local health department ordinances.
6.2 Company shall comply in all material respects with all applicable
Environmental Laws.
6.3 Company shall provide to Bank, immediately upon receipt, copies of any
correspondence, notice, pleading, citation, indictment, complaint, order,
decree, or other document from any source asserting or alleging a circumstance
or condition which requires or may require a financial contribution by Company
or a cleanup, removal, remedial action, or other response by or on the part of
Company under applicable Environmental Laws or which seeks damages or civil,
criminal or punitive penalties from Company for an alleged violation of
Environmental Laws.
6.4 Company shall promptly notify Bank in writing as soon as Company
becomes aware of any condition or circumstance which makes the environmental
warranties contained in this Agreement incomplete or inaccurate in any material
respect as of any date.
6.5 In the event of any condition or circumstance that makes any
environmental warranty, representation and/or agreement contained herein
incomplete or inaccurate in any material respect as of any date, Company shall,
at the reasonable request of Bank, at its sole expense, retain an environmental
professional consultant, reasonably acceptable to Bank, to conduct a thorough
and complete environmental audit regarding the changed condition and/or
circumstance and any environmental concerns arising from that changed condition
and/or circumstance. A copy of the environmental consultant's report will be
promptly delivered to both Bank and Company upon completion.
6.6 At any time Company, directly or indirectly through any professional
consultant or other representative, determines to undertake an environmental
audit, assessment or investigation, Company shall promptly provide Bank with
written notice of the initiation of the environmental audit, fully describing
the purpose and intended scope of the environmental audit. Upon receipt, Company
will promptly provide to Bank copies of all final findings and conclusions of
any such environmental investigation. Preliminary findings and conclusions shall
be provided if final reports have not been completed and delivered to Bank
within 60 days following completion of the preliminary findings and conclusions.
6.7 Company shall maintain all permits, licenses and approvals required
under applicable Environmental Laws.
7. EVENTS OF DEFAULT
7.1 Upon non-payment of any installment of the principal or interest on
the Note within fifteen (15) days after due date in accordance with the terms
thereof, or upon non-
12
<PAGE>
payment of any other outstanding indebtedness of Company to Bank hereunder and
continuance thereof for fifteen (15) days, or non-payment of any other
indebtedness to Bank within fifteen (15) days after due date, the Note shall
automatically become immediately due and payable.
7.2 Upon occurrence of any of the following events of default:
(a) Default in the observance or performance of any of the conditions,
covenants or agreements of Company set forth in Sections 4.1(a) and
(b), 4.3, 4.5, or Section 5;
(b) Default in observance or performance of any of the other conditions,
covenants or agreements of Company herein set forth, and continuance
thereof for thirty (30) days after notice to Company by Bank;
(c) Any representation or warranty made by Company herein or in any
instrument submitted pursuant hereto proves untrue in any material
respect;
(d) Default in the observance or performance of the conditions,
covenants or agreements of Company and Growth in the Letter of
Credit Agreement which is part of the Application and Agreement for
Irrevocable Standby Letter of Credit;
(e) Any representation or warranty made by Company herein or in any
instrument submitted pursuant hereto proves untrue in any material
respect;
(f) Default in the observance or performance of any of the conditions,
covenants or agreements of Company or any other person set forth in
any collateral document of security which may be given to secure the
indebtedness hereunder or in any other collateral document related
to or connected with this Agreement or the indebtedness hereunder,
and continuation of such default beyond any period of grace
specified in any such document;
(g) Default in the payment of any other obligation of Company or any
Guarantor for borrowed money (other than to Bank) in an aggregate
amount in excess of Fifty Thousand Dollars ($50,000), or in the
observance or performance of any conditions, covenants or agreements
related or given with respect thereto;
(h) Judgments for the payment of money in excess of the sum of Fifty
Thousand Dollars ($50,000) in the aggregate shall be rendered
against Company or any Guarantor and such judgments shall remain
unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a
period of thirty (30) consecutive days from the date of its entry;
13
<PAGE>
(i) The occurrence of any "reportable event", as defined in the Employee
Retirement Income Security Act of 1974 and any amendments thereto,
which is determined to constitute grounds for termination by the
Pension Benefit Guaranty Corporation of any employee pension benefit
plan maintained by or on behalf of Company for the benefit of any of
its employees or for the appointment by the appropriate United
States District Court of a trustee to administer such plan and such
reportable event is not corrected and such determination is not
revoked within thirty (30) days after notice thereof has been given
to the plan administrator or Company; or the institution of
proceedings by the Pension Benefit Guaranty Corporation to terminate
any such employee benefit pension plan or to appoint a trustee to
administer such plan; or the appointment of a trustee by the
appropriate United States District Court to administer any such
employee benefit pension plan;
(j) The revocation of any Subordination Agreement or the revocation
(which shall not include termination in accordance with its terms)
of the Guaranties;
(k) If there shall be any change for any reason whatsoever in the
management, ownership or control of Company which shall in the
reasonable judgment of Bank materially adversely affect future
prospects for the successful operation of Company;
(l) Default by Mego with respect to any payment due to Growth and
assigned to Bank, and continuance thereof for ten (10) days after
notice to Company by Bank;
(m) The failure of Mego to make payments to Bank as assignee of Growth
in the amount of Three Hundred Fifty-seven Thousand One Hundred
Forty-two ($357,142) Dollars on or before March 1, 1999 and
continuance thereof for ten (10) days after notice to Company by
Bank;
(n) Default by Mego or Preferred Equities Corporation, its wholly owned
subsidiary, under the terms of any borrowing, loan agreement or
credit facility provided by any bank or other financial institution.
then, or at any time thereafter, unless such default is remedied, Bank may give
notice to Company declaring all outstanding indebtedness hereunder and under the
Notes to be due and payable, whereupon all indebtedness then outstanding
hereunder and under the Note shall immediately become due and payable without
further notice and demand.
7.3 If a creditors' committee shall have been appointed for the business
of Company or any Guarantor; or if Company or any Guarantor shall have made a
general assignment for the benefit of creditors or shall have been adjudicated
bankrupt, or shall have filed a voluntary petition in bankruptcy or for
reorganization or to effect a plan or
14
<PAGE>
arrangement with creditors; or shall file an answer to a creditor's petition or
other petition filed against it, admitting the material allegations thereof for
an adjudication in bankruptcy or for reorganization; or shall have applied for
or permitted the appointment of a receiver, or trustee or custodian for any of
its property or assets; or such receiver, trustee or custodian shall have been
appointed for any of its property or assets (otherwise than upon application or
consent of Company or any Guarantor as applicable) and such receiver, trustee or
custodian so appointed shall not have been discharged within forty-five (45)
days after the date of his appointment or if an order shall be entered and shall
not be dismissed or stayed within forty-five (45) days from its entry, approving
any petition for reorganization of Company or any Guarantor, then the Notes and
all indebtedness then outstanding hereunder shall automatically become
immediately due and payable.
7.4 No waiver of any default by Bank nor any dispensation or forbearance
granted to Company shall constitute a waiver of any other default, or a
dispensation or forbearance other than that expressly granted.
8. MISCELLANEOUS
8.1 This Agreement shall be binding upon and shall inure to the benefit of
Company and Bank and their respective successors and assigns.
8.2 No delay or failure of Bank in exercising any right, power or
privilege hereunder shall affect such right, power or privilege, nor shall any
single or partial exercise thereof preclude any further exercise thereof, or the
exercise of any other power, right or privilege. The rights of Bank under this
Agreement are cumulative and not exclusive of any right or remedies which Bank
would otherwise have.
8.3 Where the character or amount of any asset or liability or item of
income or expense is required to be determined or any consolidated or other
accounting computation is required to be made for the purposes of this
Agreement, it shall be done in accordance with generally accepted accounting
principles consistently applied.
8.4 All notices to Company with respect to this Agreement shall be deemed
to be completed upon mailing by certified mail as follows:
To Company:
17 John Street
New York, New York 10038
Attention: John Addario
To Bank:
505 North Woodward Avenue, Suite 1300
Bloomfield Hills, Michigan 48304
Attention: Robert M. Burch, Vice Chairman
15
<PAGE>
8.5 Company shall pay all closing costs and expenses, including, by way of
description and not of limitation, reasonable outside attorney fees and lien
search fees incurred by Bank in connection with the commitment, consummation and
closing of this Agreement. All of said amounts required to be paid by Company
may, at Bank's option, be charged by Bank as an advance against the proceeds of
the Note. All costs, including attorney fees and auditor fees, incurred by Bank
in reviewing, revising, protecting or enforcing any of its rights against
Company or defending Bank from any claims or liabilities by any party or
otherwise incurred by Bank in connection with an event of default or the
enforcement of this Agreement or the related documents shall also be paid by
Company.
8.6 On any default as defined in this Agreement or any default in payment
of any liability above mentioned, Bank may, except as otherwise provided herein,
without notice to anyone, declare the Note due forthwith, take all action,
remedial and otherwise, as provided herein or in any Security Agreement or other
document, instrument, or agreement of security or of collateral, and collect,
deal with and dispose of all or any part of any security without notice in any
manner permitted or authorized by the Michigan Uniform Commercial Code or other
applicable law (including public or private sale) and after deducting expenses
(including reasonable attorneys' fees and expenses) Bank may apply the proceeds
and any deposits or credits in part or full payment of any of said liabilities,
whether due or not, in any manner or order Bank elects.
8.7 This Agreement shall become effective upon the execution hereof by
Bank and Company.
8.8 No amendments or waiver of any provision of this Agreement nor consent
to any departure by Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the Bank, and then such amendment, waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given. No amendment, waiver or consent with respect to any
provision of this Agreement shall affect any other provision of this Agreement.
8.9 THIS AGREEMENT AND THE NOTE HAVE BEEN DELIVERED AT BLOOMFIELD HILLS,
MICHIGAN, AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF MICHIGAN. Whenever possible each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
8.10 Company hereby irrevocably submits to the non-exclusive jurisdiction
of the United States District Court for the Eastern District of Michigan or
Michigan state court sitting in Oakland County, Michigan in any action or
proceeding arising out of or relating to this Agreement and Company hereby
irrevocably agrees that all claims in respect of such
16
<PAGE>
action or proceeding may be heard and determined in any such United States
Federal or Michigan state court. Company irrevocably consents to the service of
any and all process in any such action or proceeding brought in any court in or
of the State of Michigan by the delivery of copies of such process to Company at
its address specified in Section 8.4 or by certified mail directed to such
address.
8.11 COMPANY AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS CHOICE, KNOWINGLY AND
VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN
THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY
WAY RELATED TO, THIS AGREEMENT, THE INDEBTEDNESS EVIDENCED BY THE NOTE OR THE
NOTE.
WITNESS the due execution hereof as of the day and year first above
written.
THE BANK BLOOMFIELD HILLS
By: /s/ Robert M. Burch
-----------------------------------
Robert M. Burch
Its: Vice Chairman
ART RENAISSANCE, INC.
By: /s/ Eugene I. Schuster
-----------------------------------
Eugene I. Schuster
Its: President
17
<PAGE>
Exhibit 10.13
PROMISSORY NOTE
$ 400,000 New York, New York
__________ 1997
1. Payment. For value received, the undersigned, Art Renaissance, Inc., a
Delaware corporation ("Maker") located at 17 John Street, 15th Floor, New York,
New York shall pay to the order of Willora Company, Ltd. ("Payee") located at do
Sheldon Salcman, Soreq, Inc., 620 Wilson Ave., Suite 501, Toronto, Ontario,
Canada, or at such other address as the Payee may designate in writing to the
Maker, the principal sum of Four Hundred Thousand ($400,000) Dollars with
interest at ten (10%) percent per annum. This Note shall be due and payable on
the following date:
a) July 31, 1997, if Maker issues debt instruments (of any kind or
nature) in private placement(s) in the aggregate amount of $2,500,000 or greater
between May 2, 1997 and July 31, 1997, or
b) August 31, 1997, if Maker fails to issue debt instruments (of any
kind or nature) in a private placement in the aggregate of $2,500,000 or greater
between May 2, 1997 and July 31, 1997.
Maker hereby expressly agrees that the sum required under this Note shall be
unconditionally payable without deduction or offset whatsoever.
2. Prepayment. The Maker shall have the right to make prepayments of
principal, either in whole or in part, in advance of maturity without premium or
penalty. All prepayments shall be applied first to accrued but unpaid interest
and then to principal in reverse order of maturity.
3. Events of Default The occurrence of any of the following events shall
constitute an Event of Default under this Note:
A. Failure by Maker to make the payment when due under this Note; and
B. Any affirmative act of bankruptcy by Maker or its guarantor or the
voluntary or involuntary filing of any petition or action against Maker or
its guarantor under any bankruptcy, insolvency or moratorium law, or the
appointment of any receiver or trustee to take possession of the
properties of Maker or its guarantor or the commencement of any similar
action under any other law or laws for the relief of, or relating to,
debtors.
4. Remedies. If any such Event of Default occurs, then the Payee may, at
its option and without notice to Maker or its guarantor, declare the Note to be,
and upon the exercise of such option, the Note shall thereupon become
immediately due and payable. These remedies shall be in addition to any other
rights and remedies available to Payee, all of which shall be cumulative.
5. Attorneys Fees. If any such Event of Default occurs, the undersigned
promises to pay the cost of collection of enforcement of this Note, including
the Payee's reasonable attorney's fees, and if a lawsuit is commenced to collect
this Note, the undersigned promises to pay such
<PAGE>
additional costs and attorneys fees as may be occasioned by such lawsuit.
6. Notices. Any notice or communication permitted or required under this
Agreement shall be made either by overnight courier, letter (certified mail with
a return receipt requested), or by personal delivery, to the other party at
their respective addresses written above.
7. Waiver. Failure of Payee to complain of any act or omission on the part
of the Maker (no matter how long the same may continue) shall not be deemed to
be a waiver by Payee of any of its rights under this Note.
8. Binding Effect. All of the terms and conditions of this Note shall be
binding upon and inure to the benefit of the heirs, successors, administrators,
legal representatives and assigns, as the case may be, of the parties.
9. Applicable Law. This Agreement shall be construed in accordance with
the State of New York law.
10. Entire Agreement. This Note contains the entire understanding of the
parties with respect to its subject matter, and supersedes all prior and
contemporaneous agreements, understandings and negotiations. No modification or
alteration of this Note shall be deemed effective unless in writing and signed
by the parties.
11. Guarantee. The full and timely performance of the obligations and
promises made by the Maker pursuant to this Note is guaranteed by Eugene I.
Schuster, personally, pursuant to a separate agreement of Guaranty of even date.
IN WITNESS WHEREOF, the Maker has caused this Note to be signed on the
date first above written.
"Maker"
Art Renaissance, Inc.
By: /s/ Eugene I. Schuster
---------------------------------
Eugene I. Schuster
Its: President
2
<PAGE>
Exhibit 10.14
This Debenture and shares of Common Stock issuable on conversion of this
Debenture have not been registered under either the Securities Act of 1933 or
applicable state securities laws and may not be sold, transferred, assigned,
offered, pledged or otherwise distributed for value unless there is an effective
registration statement under such Act and such laws covering such securities, or
the Company receives an opinion of counsel acceptable to the Company stating
that such sale, transfer, assignment, offer, pledge or other distribution for
value is exempt from the registration and prospectus delivery requirements of
such Act and such laws.
ART RENAISSANCE, INC.
$500,000 January 30, 1998
(Date of Issue)
1. The Convertible Debenture. ART RENAISSANCE, INC., a Delaware
corporation (the "Company"), for value received, hereby promises to pay to the
order of Willora Company, Inc., or its successors or assigns (the "Holder"), the
principal amount of Five Hundred Thousand Dollars ($500,000), together with
interest at the rate of 10% per annum on the unpaid principal balance hereof
from the date of issue, which principal and interest shall be payable as
follows:
(a) All of the principal and all accrued but unpaid interest shall be due
and payable in full on June 30, 1998;
(b) Provided, however, at the election of the Holder, in the event the
Company's Common Stock is listed on a national securities exchange, all
principal and all accrued but unpaid interest tall be due and payable at such
time.
Interest shall be computed on the basis of a 360-day year. Payments at principal
and interest shall be made in lawful money of the United States of America at
the principal office of the Holder of this Convertible Debenture.
2. Transferability. The Convertible Debenture may be converted into shares
of Company Common Stock, .01 par value per share (the "Common Stock") of the
Company pursuant to the terms of Section 5 hereof (the "Conversion Shares"), and
the Convertible Debenture and the Conversion Shares may nor be transferred,
sold, assigned, pledged or otherwise distributed for value unless there is an
effective registration statement under the Securities Act of 1933, as amended
(the "Act") covering such securities, or the Company receives an opinion of
counsel acceptable to the Company stating that such sale, transfer, assignment,
offer, pledge or other distribution is exempt from registration under the Act
and applicable state securities laws.
3. Exchange of Convertible Debenture. At any time at the request of any
Holder of the Convertible Debenture and upon compliance with the provisions of
Section 2 above and surrender of such Convertible Debenture for such purpose to
the Company at its principal office or such other office or agency as it may
authorize for such purpose, the Company at its expense (except for any transfer
tax arising out of the exchange) shall execute and deliver in exchange therefor
a new Convertible Debenture or Convertible Debentures, in the denomination or
denominations ($1,000 and integral multiples thereof only, plus one Convertible
Debenture in a lesser denomination if
<PAGE>
required) as such Holder may request, in an aggregate principal amount equal to
the unpaid portion of the principal amount of the Convertible Debenture
surrendered and substantially in the form thereof dated as of the date of the
Convertible Debenture so surrendered and payable to, or to such person(s) as
directed by, the Holder.
4. Replacement of Convertible Debenture. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction o mutilation of the
Convertible Debenture and in the case of any such loss, theft or destruction,
upon delivery of a bond of indemnity reasonably satisfactory to the Company if
requested by the Company, or in the case of any such mutilation, upon surrender
and cancellation of such Convertible, the Company shall issue a new Convertible
Debenture identical in form to the lost, stolen, destroyed or mutilated
Convertible Debenture.
5. Conversion of Convertible Debenture.
(a) Right of Conversion. Subject to and upon compliance with the
provisions of Section 2 above and this Section, the Holder of this
Convertible Debenture or any Convertible Debentures issued in exchange for
it shall have the right, at the Holder's option, at any time beginning 45
days following the date hereof and prior to the date of final maturity of
this Convertible Debenture, to convert the principal amount, as well as
any accrued but unpaid interest due thereon if so elected by the Holder,
of any such Convertible Debenture, in whole or in part, into that number
of fully paid and nonassessable shares of Company Common Stock (calculated
as to each conversion to the nearest 1/100 of a share) obtained by first:
dividing the principal amount of the Convertible Debenture into the value
of all of the Company's issued and outstanding Common Stock as determined
by appraisal in conjunction with, and immediately preceding, any initial
public offering of the Company's Common Stock; the amount so determined
shall than be divided by the number of then issued and outstanding shares
of Common Stock of the Company, as adjusted (the "Conversion Price"). The
surrender of the Convertible Debenture shall be made at the Conversion
Price and in the manner provided in Subsection (b) of this Section.
(b) Surrender of Convertible Debenture. In order to exercise the
conversion privilege, the Holder of the Convertible Debenture to be
convened shall surrender such Convertible Debenture to the Company at its
principal office or at such other agency maintained for such purpose by
the Company, and shall give written notice to the Company at such office
or agency that the Holder elects to convert such Convertible Debenture
specified in said notice. Such notice shall also state the name or names,
together with address or addresses, in which the certificate or
certificates for shares of Common Stock which shall be issuable on such
conversion shall be issued. The Convertible Debenture surrendered for
conversion shall, unless the shares issuable on conversion are to be
issued in the same name as the name of the original Holder, be accompanied
by instruments of transfer, in form reasonably satisfactory to the
Company, duly executed by each holder or such Holder's duly authorized
attorney. After the surrender of such Convertible Debenture, as aforesaid,
the Company shall issue and shall deliver at such office or agency to such
Holder, or on such Holder's written order, a certificate or certificates
for the number of full shares of common stock issuable upon the conversion
of such Convertible Debenture or portion thereof in accordance with the
provisions of this Section. Any fractional interest in respect of a share
arising upon such conversion shall be settled as provided in Subsection
(c)
<PAGE>
of this Section. In the exercise of this conversion right, the Holder may
elect to be paid cash for accrued but unpaid interest on the Convertible
Debenture or may convert such interest into Common Stock at the same
price, terms and conditions as set forth above.
(c) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Convertible Debenture. Instead of any
fractional interest in a share of capital stock which would otherwise be
deliverable upon the conversion of any convertible Debenture, the Company
shall make an adjustment therefor to the nearest 1/100 of a share in cash
at the Conversion Price on the day of conversion. If more than one
Convertible Debenture shall be surrendered for conversion at one time by
the same Holder, the number of full shares issuable upon conversion of all
such Convertible Debentures surrendered for conversion shall be computed
on the basis of the aggregate principal amount of the Convertible
Debentures, or specified portions thereof to be converted, so surrendered.
(d) Registration. In the event the Company makes a public offering
of its Common Stock and in connection therewith a listing for said stock
is applied for, the following provisions shall apply to such Common Stock:
(1) Piggyback Registration Rights. The Company shall advise
the Holder of this Convertible Debenture or any then Holder of the
Convertible Debenture or any then Holder of Common Stock who acquired such
stock upon conversion of the Convertible Debenture (such persons being
collectively referred to herein as "Holders") by written notice at least
four (4) weeks prior to the filing of any Registration Statement under the
Securities Act of 1933, as amended, the "Act"), covering securities of the
Company and will, upon the request of any such Holder, include in any such
registration statement or post effective amendment thereto, such
information as may be required to permit a public offering of the Common
Stock held by the Holder. The Company shall supply prospectuses and other
documents as the Holder may request in order to facilitate the public sale
or other disposition of its Common Stock, and furnish indemnification in
the manner as set forth in Subsection d(2)(b) of this Section 5 Such
Holders shall furnish information and indemnification as set forth in
Subsection d(2)(b) of this Section 5, except that the maximum amount which
may be recovered from the Holder shall be limited to the amount of
proceeds received by the Holder from the sale of its Common Stock.
(2) The following provision of this Section 5 shall also be
applicable:
(a) The Company shall bear the entire cost and expense
of any registration of securities initiated by it under Subsection
(1) of this Section 5 notwithstanding that Holder's Common Stock
acquired through exercise of the Convertible Debenture may be
included in any such registration.
(b) The Company shall indemnify and hold harmless each
such holder and each underwriter, within the meaning of the Act, who
may purchase from or sell for any such holder any Common Stock
acquired through exercise of the Convertible Debenture from and
against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any post-effective
amendment thereto
<PAGE>
or any registration statement under the Act or any prospectus
included therein required to be filed or furnished by reason of this
Section 5 or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged
omission based upon information furnished or required to be
furnished in writing to the Company by such Holder or underwriter
expressly for use therein, which indemnification shall include such
person, if any, who controls any such underwriter within the meaning
of such Act; provided, however, that the Company shall not be
obliged so to indemnify any such Holder or underwriter or
controlling person unless such Holder or underwriter shall at the
same time indemnify the Company, its directors, each officer signing
the related registration statement and each person, if any, who
controls the Company within the meaning of such Act, from and
against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material
fact contained in any registration statement or any prospectus
required to be filed or furnished by reason of this Section 5 or
caused by any untrue statement or alleged untrue statement omission
based upon information furnished in writing to the Company by any
such Holder or underwriter expressly for use therein.
(c) Liquidated Damages. In the event that the Holder has fully
complied with the surrender provisions of Section 5(b) and the
Company fails to deliver to the Holder the certificate or
certificates for the shares of Common Stock in compliance with the
conversion privileges provided herein, then beginning with the
fifteenth day following the date that the Holder has fully complied
with the surrender provisions of Section 5(b), the Company shall
grant to the Holder a warrant to purchase 5,000 shares of the
Company Common Stock at the price of five cents ($.05) per share for
each day that the Company fails to so issue the shares of Common
Stock. Due to the difficulty in determining the actual damages
associated with the failure to timely issue the Common Stock to the
Holder, the Company and Holder agree that this liquidated damages
provision is reasonable and is not intended as a penalty. The
warrant price and number of shares is not subject to adjustment due
to changes in the Company capital structure including, but not
limited to stock splits, stock dividends or reorganizations.
6. Conversion Adjustments. The provisions of this Convertible Debenture
are subject to adjustment as provided in this Section 5.
(a) Beginning with the 4th month from the Date of Issue and with
each month (or portion thereof) thereafter to term, until such time as the
Holder of the Convertible Debenture exercises its Right of Conversion, the
Holder shall be entitled to a discount of 1.25% per month [for example in
month 5, the discount would be 2.5%].
(b) In case of any consolidation or merger to which the Company is a
party other than merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another
corporation of the property of the company as an entirety or substantially
as an entirety, or in the case of any statuary exchange of securities
<PAGE>
with another corporation (including any exchange effected in connection
with a merger of a third corporation into the Company), the Holder of each
Convertible Debenture then outstanding shall have the right thereafter to
convert such Convertible Debenture into the kind and amount of shares of
stock and other securities and property which he would have owned or have
been entitled to receive immediately after such consolidation, merger,
statutory exchange, sale, or conveyance had such Convertible Debenture
been converted immediately prior to the effective date of such
consolidation, merger, statutory exchange sale, or conveyance and in any
such case, if necessary, appropriate adjustment shall be made in the
application of the provision set forth in this Section with respect to the
rights and interest thereafter of any Holders of the Convertible
Debenture, to the end that the provisions set forth in this Section shall
thereafter correspondingly be made applicable, as nearly as may reasonably
be, in relation to any shares of stock and other securities and property
thereafter deliverable on the exercise of the Convertible Debenture. The
provisions of this Subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
7. Events of Default. Each of the following events shall be an Event of
Default ("Event of Default") for purposes of the Convertible Debenture:
(a) Convertible Debenture Terms. The Company defaults in the due and
punctual performance or observance of any material terms contained in the
Convertible Debenture, and such default continues for a period of five (5)
consecutive days after written notice thereof to the Company by the Holder
of the Convertible Debenture or Common Stock issued upon conversion of the
Convertible Debenture; or
(b) Insolvency Matters. The Company makes an assignment for the
benefit of creditors, or files a voluntary petition in bankruptcy, or as
adjudicated a bankrupt or insolvent, or files any petition or answer
seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present
or future statute, law or regulation, or files any answer admitting or
fails to deny the material allegations of a petition filed against the
Company for any such relief or seeks or consents to or acquiesces in the
appointment of any trustee, receiver or liquidator of the Company or all
or any substantial part of the properties of the Company, or the Company
or its directors or majority stockholders take any action looking to the
dissolution or liquidation of the Company.
8. Modification and Waiver. No purported amendment, modification or waiver
of any provision hereof shall be binding unless set forth in a written document
signed by the Company and the Holder of the Convertible Debenture (in the case
of amendments or modifications) or by the party to be charged thereby (in the
case of waivers). Any waiver shall be limited to the provision hereof in the
circumstances or events specifically made subject thereto, and shall not be
deemed a waiver of any other term hereof or the same circumstance or event upon
any reoccurrence thereof.
9. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been given, when received, if personally delivered (including, without
limitation, delivery by courier or delivered by telex, telegram or facsimile, or
five (5) days after depositing in the U.S. Mails for delivery by first class
<PAGE>
mail, postage prepaid and addressed as provided blow, (a) if to any Holder of
the Convertible Debenture, addressed so such Holder at its address as shown on
the books of the Company, or at such other address as such Holder may specify by
written notice to the Company with a copy to the Agent or (b) if the Company at
156 William Street, 12th Floor, New York, New York, or such other address as the
Company may specify by written notice to the Holder of the convertible Debenture
or Common Stock issued upon conversion of the Convertible Debenture.
10. Successors and Assigns. All the terms and provisions of the
Convertible Debenture shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the Company and each
Holder of the Convertible Debenture, whether or not so expressed.
11. Applicable Law. The laws of the State of New York, without regard to
its conflicts of law principles, shall govern the validity of the Convertible
Debenture, the construction of its terms and interpretation of the rights and
duties of the Company and each Holder of the Convertible Debenture.
12. Waiver of Demand, Presentment and Notice of Dishonor. Except as
otherwise set forth herein, the undersigned and each endorser or guarantor
hereof hereby waives demand, presentment, protest, notice of protest and notice
of dishonor.
13. Corporate Obligation. No recourse under or upon any obligation,
covenant or agreement contained in the Convertible Debenture, or for any claim
based hereon or otherwise in respect hereof, shall be had against any promoter,
subscriber to shares, incorporator, stockholder, officer, or director, as such,
past, present or future, of the Company or of any successor corporation, either
directly or through the Company or any successor or corporation or through any
trustee, receiver, or any other person, whether by virtue of any constitution,
statue, or rule of law, or by the enforcement of any assessment or penalty or
otherwise, except as expressly agreed to by the party charged.
14. Subordination. The Company will cause and the debt obligations of
Venture Funding, Ltd. and Eugene I. Schuster to be subordinated to this
Convertible Debenture pursuant to a certain Subordination Agreement of even date
herewith.
15. Most Favored Nations Provision. If at any time between the execution
date of this agreement and an initial public offering of the Company's Common
Stock, the Company shall privately place any debt obligation(s) on different
terms and conditions than as set forth herein (with the exception of
securitization provisions), the Holder shall have the option to retain the
current agreement of the parties as reflected in this agreement (and a certain
Warrant and Subordination Agreement of even date) or to amend portions of this
agreement and substitute therefor certain terms and conditions offered in any
such subsequent private placement(s) of debt. The Company shall promptly notify
the Holder of any such private placement and provide to the Holder a copy of all
enabling and operating documents related thereto. The Holder will have thirty
days thereafter to elect to amend certain portions of this agreement (and a
certain Warrant and Subordination Agreement of even date) by written notice of
its intent within the thirty day period. The substitution of certain terms and
conditions of the other private placement shall relate only to the interest rate
warrant terms and conversion privileges provided therein and shall not change in
any manner the term of the debt or the security/securitization provisions
provided herein. By electing to substitute
<PAGE>
the other private placement terms for the terms of this agreement, the Holder
must accept all or none of terms and conditions related to the other private
placement's interest rate, warrant terms and conversion privileges; the Holder
may not select from among such provisions (cherry pick).
IN WITNESS WHEREOF, the Company has caused the Convertible Debenture to be
signed by its duly authorized officer, and the Guarantor has signed the
Convertible Debenture, as of the date first written above.
ART RENAISSANCE, INC.
By: Eugene I. Schuster
------------------------------------
Its: CEO
-------------------------------
<PAGE>
Exhibit 10.15
PROMISSORY NOTE
$ 790,000.00 New York, New York
March 9, 1998
1. Payment. For value received, the undersigned, Art Renaissance, Inc., a
Delaware corporation ("Maker") located at 156 William, 12th Floor, New York, New
York shall pay to the order of HDA Homecare Pension Fund ("Payee") at such
address as the Payee may designate in writing to the Maker, the principal sum of
Seven Hundred Ninety Thousand and 00/100 ($790,000.00) Dollars with interest at
eleven (11%) percent per annum payable monthly by the 4th day of each month. The
principal balance of the Note shall be due and payable on March 9, 1999.
Provided, however, in the event securities of the Maker are registered
with the Securities and Exchange Commission, listed on a national securities
exchange and issued in a public offering (the "IPO"), Holder may, at its option,
accelerate the due date of this Note to a point in time which is five (5)
business days following the close of the IPO. This option to accelerate the due
date shall be exercised by delivering written notice to the Maker to such
effect.
Maker hereby expressly agrees that the sum required under this Note shall be
unconditionally payable without deduction or offset whatsoever.
2. Prepayment. The Maker shall have the right to make prepayments of
principal, either in whole or in part, in advance of maturity without premium or
penalty. All prepayments shall be applied first to accrued but unpaid interest
and then to principal in reverse order of maturity.
3. Events of Default. The occurrence of any of the following events shall
constitute an Event of Default under this Note:
A. Failure by Maker to make the payment when due under this Note; and
B. Any affirmative act of bankruptcy by Maker or the voluntary or
involuntary filing of any petition or action against Maker under any
bankruptcy, insolvency or moratorium law, or the appointment of any
receiver or trustee to take possession of the properties of Maker or the
commencement of any similar action under any other law or laws for the
relief of, or relating to, debtors.
4. Remedies. If any such Event of Default occurs, then the Payee may, at
its option and without notice to Maker, declare the Note to be, and upon the
exercise of such option, the Note shall thereupon become immediately due and
payable. These remedies shall be in addition to any other rights and remedies
available to Payee, all of which shall be cumulative.
5. Attorneys Fees. If any such Event of Default occurs, the undersigned
promises to pay the cost of collection of enforcement of this Note, including
the Payee's reasonable attorney's fees, and if a lawsuit is commenced to collect
this Note, the undersigned promises to pay such additional costs and attorneys
fees as may be occasioned by such lawsuit.
<PAGE>
6. Notices. Any notice or communication permitted or required under this
Agreement shall be made either by overnight courier, letter (certified mail with
a return receipt requested), or by personal delivery, to the other party at
their respective addresses written above.
7. Waiver. Failure of Payee to complain of any act or omission on the part
of the Maker (no matter how long the same may continue) shall not be deemed to
be a waiver by Payee of any of its rights under this Note.
8. Binding Effect. All of the terms and conditions of this Note shall be
binding upon and inure to the benefit of the heirs, successors, administrators,
legal representatives and assigns, as the case may be, of the parties.
9. Applicable Law. This Agreement shall be construed in accordance with
the State of New York law.
10. Entire Agreement. This Note contains the entire understanding of the
parties with respect to its subject matter, and supersedes all prior and
contemporaneous agreements, understandings and negotiations. No modification or
alteration of this Note shall be deemed effective unless in writing and signed
by the parties.
IN WITNESS WHEREOF, the Maker has caused this Note to be signed on the
date first above written.
"Maker"
Art Renaissance, Inc.
By: /s/ Eugene I. Schuster
--------------------------------
Eugene I. Schuster
Its: Chief Executive Officer
2
<PAGE>
Exhibit 10.16
This Debenture and shares of Common Stock issuable on conversion of this
Debenture have not been registered under either the Securities Act of 1933 or
applicable state securities laws and may not be sold, transferred, assigned,
offered, pledged or otherwise distributed for value unless there is an effective
registration statement under such Act and such laws covering such securities, or
the Company receives an opinion of counsel acceptable to the Company stating
that such sale, transfer, assignment, offer, pledge or other distribution for
value is exempt from the registration and prospectus delivery requirements of
such Act and such laws.
ART RENAISSANCE, INC.
$375,000 April 10, 1998
(Date of Issue)
1. The Convertible Debenture. ART RENAISSANCE, INC., a Delaware
corporation (the "Company"), for value received, hereby promises to pay to the
order of Gross Foundation, Inc., located at 1660 49th Street, Brooklyn, New
York, New York 11204, or its successors or assigns (the "Holder"), the principal
amount of Three Hundred Seventy Five Thousand Dollars ($375,000), together with
interest at the rate of 10% per annum on the unpaid principal balance hereof
from the date of issue, which principal and interest shall be payable as
follows:
(a) All of the principal and all accrued interest shall be due and payable
in full on June 30, 1999. Provided, if the Company is engaged in a public
offering and the underwriter has required a lock up of the stock issuable under
this Convertible Debenture as provided in Section 5(d)(2)(e), the due date of
this Convertible Debenture shall be automatically extended to that date which is
90 days after the termination of the lock up period. Provided, however, the
Holder shall have the right after May 31, 1999 and during the lock up period to
demand payment of this Convertible Debenture in full upon 30 days notice to the
Company.
(1) In the event the term of this Convertible Debenture is extended
due to a lock up requirement as provided in Section 5(d)(2)(e), accrued interest
will be due on June 30, 1999 and on the first day of each calendar quarter
thereafter until this Convertible Debenture is paid in full;
(b) Provided, however, at the election of the Holder, in the event the
Company's Common Stock is listed on a national securities exchange, all
principal and all accrued but unpaid interest shall be due and payable at such
time.
Interest shall be computed on the basis of a 360-day year. Payments of principal
and interest shall be made in lawful money of the United States of America at
the principal office of the Holder of this Convertible Debenture.
2. Transferability. The Convertible Debenture may be converted into shares
of Company Common Stock, .01 par value per share (the "Common Stock") of the
Company pursuant to the terms of Section 5 hereof (the "Conversion Shares"), and
the Convertible Debenture and the Conversion Shares may not be transferred,
sold, assigned, pledged or otherwise distributed for value unless there is an
effective registration statement under the Securities Act of 1933, as amended
(the
<PAGE>
"Act") covering such securities, or the Company receives an opinion of counsel
acceptable to the Company stating that such sale, transfer, assignment, offer,
pledge or other distribution is exempt from registration under the Act and
applicable state securities laws.
3. Exchange of Convertible Debenture. At any time at the request of any
Holder of the Convertible Debenture and upon compliance with the provisions of
Section 2 above and surrender of such Convertible Debenture for such purpose to
the Company at its principal office or such other office or agency as it may
authorize for such purpose, the Company at its expense (except for any transfer
tax arising out of the exchange) shall execute and deliver in exchange therefor
a new Convertible Debenture or Convertible Debentures, in the denomination or
denominations ($1,000 and integral multiples thereof only, plus one Convertible
Debenture in a lesser denomination if required) as such Holder may request, in
an aggregate principal amount equal to the unpaid portion of the principal
amount of the Convertible Debenture surrendered and substantially in the form
thereof, dated as of the date of the Convertible Debenture so surrendered and
payable to, or to such person(s) as directed by, the Holder.
4. Replacement of Convertible Debenture. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Convertible Debenture and in the case of any such loss, theft or destruction,
upon delivery of a bond of indemnity reasonably satisfactory to the Company if
requested by the Company, or in the case of any such mutilation, upon surrender
and cancellation of such Convertible, the Company shall issue a new Convertible
Debenture identical in form to the lost, stolen, destroyed or mutilated
Convertible Debenture.
5. Conversion of Convertible Debenture.
(a) Right of Conversion. Subject to and upon compliance with the
provisions of Section 2 above and this Section, the Holder of this
Convertible Debenture or any Convertible Debentures issued in exchange for
it shall have the right, at the Holder's option, at any time beginning 45
days following the date hereof and prior to the date of final maturity of
this Convertible Debenture, to convert the principal amount, as well as
any accrued but unpaid interest due thereon if so elected by the Holder,
of any such Convertible Debenture, in whole or in part, into that number
of fully paid and nonassessable shares of Company Common Stock (calculated
as to each conversion to the nearest 1/100 of a share) obtained by first:
dividing the principal amount of the Convertible Debenture into the value
of all of the Company's issued and outstanding Common Stock as determined
by appraisal in conjunction with, and immediately preceding, any initial
public offering of the Company's Common Stock; the amount so determined
shall than be divided by the number of then issued and outstanding shares
of Common Stock of the Company, as adjusted (the "Conversion Price"). The
surrender of the Convertible Debenture shall be made at the Conversion
Price and in the manner provided in Subsection (b) of this Section.
(b) Surrender of Convertible Debenture. In order to exercise the
conversion privilege, the Holder of the Convertible Debenture to be
converted shall surrender such Convertible Debenture to the Company at its
principal office or at such other agency maintained for such purpose by
the Company, and shall give written notice to the Company at such office
or agency that the Holder elects to convert such Convertible Debenture
<PAGE>
specified in said notice. Such notice shall also state the name or names,
together with address or addresses, in which the certificate or
certificates for shares of Common Stock which shall be issuable on such
conversion shall be issued. The Convertible Debenture surrendered for
conversion shall, unless the shares issuable on conversion are to be
issued in the same name as the name of the original Holder, be accompanied
by instruments of transfer, in form reasonably satisfactory to the
Company, duly executed by each holder or such Holder's duly authorized
attorney. After the surrender of such Convertible Debenture, as aforesaid,
the Company shall issue and shall deliver at such office or agency to such
Holder, or on such Holder's written order, a certificate or certificates
for the number of full shares of common stock issuable upon the conversion
of such Convertible Debenture or portion thereof in accordance with the
provisions of this Section. Any fractional interest in respect of a share
arising upon such conversion shall be settled as provided in Subsection
(c) of this Section. In the exercise of this conversion right, the Holder
may elect to be paid cash for accrued but unpaid interest on the
Convertible Debenture or may convert such interest into Common Stock at
the same price, terms and conditions as set forth above.
(c) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Convertible Debenture. Instead of any
fractional interest in a share of capital stock which would otherwise be
deliverable upon the conversion of any convertible Debenture, the Company
shall make an adjustment therefor to the nearest 1/100 of a share in cash
at the Conversion Price on the day of conversion. If more than one
Convertible Debenture shall be surrendered for conversion at one time by
the same Holder, the number of full shares issuable upon conversion of all
such Convertible Debentures surrendered for conversion shall be computed
on the basis of the aggregate principal amount of the Convertible
Debentures, or specified portions thereof to be converted, so surrendered.
(d) Registration. In the event the Company makes a public offering
of its Common Stock and in connection therewith a listing for said stock
is applied for, the following provisions shall apply to such Common Stock:
(1) Piggyback Registration Rights. The Company shall advise
the Holder of this Convertible Debenture or any then Holder of the
Convertible Debenture or any then Holder of Common Stock who acquired such
stock upon conversion of the Convertible Debenture (such persons being
collectively referred to herein as "Holders") by written notice at least
four (4) weeks prior to the filing of any Registration Statement under the
Securities Act of 1933, as amended, the "Act"), covering securities of the
Company and will, upon the request of any such Holder, include in any such
registration statement or post effective amendment thereto, such
information as may be required to permit a public offering of the Common
Stock held by the Holder. The Company shall supply prospectuses and other
documents as the Holder may request in order to facilitate the public sale
or other disposition of its Common Stock, and furnish indemnification in
the manner as set forth in Subsection d(2)(b) of this Section 5 Such
Holders shall furnish information and indemnification as set forth in
Subsection d(2)(b) of this Section 5, except that the maximum amount which
may be recovered from the Holder shall be limited to the amount of
proceeds received by the Holder from the sale of its Common Stock.
<PAGE>
(2) The following provision of this Section 5 shall also be
applicable:
(a) The Company shall bear the entire cost and expense
of any registration of securities initiated by it under Subsection
(1) of this Section 5 notwithstanding that Holder's Common Stock
acquired through exercise of the Convertible Debenture may be
included in any such registration.
(b) The Company shall indemnify and hold harmless each
such holder and each underwriter, within the meaning of the Act, who
may purchase from or sell for any such holder any Common Stock
acquired through exercise of the Convertible Debenture from and
against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any post-effective
amendment thereto or any registration statement under the Act or any
prospectus included therein required to be filed or furnished by
reason of this Section 5 or caused by any omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are
caused by any such untrue statement or alleged untrue statement or
omission or alleged omission based upon information furnished or
required to be furnished in writing to the Company by such Holder or
underwriter expressly for use therein, which indemnification shall
include such person, if any, who controls any such underwriter
within the meaning of such Act; provided, however, that the Company
shall not be obliged so to indemnify any such Holder or underwriter
or controlling person unless such Holder or underwriter shall at the
same time indemnify the Company, its directors, each officer signing
the related registration statement and each person, if any, who
controls the Company within the meaning of such Act, from and
against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material
fact contained in any registration statement or any prospectus
required to be filed or furnished by reason of this Section 5 or
caused by any untrue statement or alleged untrue statement omission
based upon information furnished in writing to the Company by any
such Holder or underwriter expressly for use therein.
(c) Liquidated Damages. In the event that the Holder has
fully complied with the surrender provisions of Section 5 (b) and
the Company fails to deliver to the Holder the certificate or
certificates for the shares of Common Stock in compliance with the
conversion privileges provided herein within seven days following
the date that the Holder has fully complied with the surrender
provisions of Section 5 (b), the Company shall grant to the Holder a
warrant to purchase 5,000 shares of the Company Common Stock at the
price of $300.00 per share for each month (30 day period) or portion
thereof that the Company fails to deliver the Common Stock to the
Holder. Such warrant(s) shall be exercisable at any time within the
two year period following the date the Holder has fully complied
with the surrender provisions of Section 5 (b). Due to the
difficulty in determining the actual damages associated with the
failure to timely issue the Common Stock to the Holder, the Company
and Holder agree that this liquidated damages provision is
reasonable
<PAGE>
and is not intended as a penalty. The warrant price and number of
shares is not subject to adjustment due to changes in the Company
capital structure including, but not limited to stock splits, stock
dividends or reorganizations.
(d) Lock up. If the Holder is given written notice to
such effect by the underwriter assisting the Company in its initial
public offering, the Common Stock owned by the Holder as a result of
the Holder's exercise of the conversion rights granted the Holder
herein, shall not be sold, exchanged or otherwise disposed for a
period of six months following the initial public offering.
Provided, however, if the underwriter requests a lock up period
extending beyond said initial six month period, a longer period, but
not to exceed an additional six months, may be added to the initial
lock up period. The extension of the initial lock up period shall
apply to the Holder, if a majority of those lenders currently
providing convertible bridge financing to the Company (consisting of
Willora Company, Inc. and Gross Foundation, Inc.) shall agree in
writing to such an extension. A determination of what constitutes a
"majority" of those lenders shall be based on dollars lent to the
Company, with one such dollar constituting one vote to determine the
majority. The number of dollars lent to the Company shall be based
on indebtedness immediately prior to the exercise of any conversion
right granted in the bridge financing. A list of the lenders
currently providing convertible bridge financing are attached hereto
as Exhibit A.
(e) Lock up of Convertible Debenture. In the event the
underwriter demands a lock up, which lock up operates to prevent the
conversion of this Convertible Debenture into shares of Common Stock
or such lock up would apply to shares of the Common Stock of the
Holder if the Holder converted this Convertible Debenture, then
notwithstanding anything provided herein to the contrary, the period
of time during which the Holder may convert this Convertible
Debenture into Common Stock shall be extended for 90 days beyond the
date of termination of the applicable lock up period. The maturity
date of the Convertible Debenture shall be similarly extended as
provided in Section 1(a).
6. Conversion Adjustments. The provisions of this Convertible Debenture
are subject to adjustment as provided in this Section 5.
(a) The Conversion Price shall be adjusted from time to time
to reflect a discount to the Conversion Price.
(1) If the Company fails to file a registration
statement with regard to its Common Stock with the Securities
and Exchange Commission pursuant to an initial public offering
of such Common Stock by July 31, 1998, or if the effective
date of such registration has not occurred by November 30,
1998, the Holder shall be entitled to a discount to the
Conversion Price of 10%.
<PAGE>
(2) Beginning with the month of December, 1998 and with
each month (or portion thereof) thereafter until maturity,
until such time as the Holder of the Convertible Debenture
exercises its Right of Conversion, the Holder shall be
entitled to an [additional] discount of 1.25% per month [for
example in January, 1999, the discount would be 2.5%
hereunder, however, if the discount in (1) above has also been
earned the total discount would be 12.5%]. If the Company
Common Stock can not be delivered as the result of a lock up
imposed by the underwriter, the discount rate shall increase
to 2% per month beginning with the first full month of the
lock up period.
(b) In case of any consolidation or merger to which the
Company is a party other than merger or consolidation in which the
Company is the continuing corporation, or in case of any sale or
conveyance to another corporation of the property of the company as
an entirety or substantially as an entirety, or in the case of any
statuary exchange of securities with another corporation (including
any exchange effected in connection with a merger of a third
corporation into the Company), the Holder of each Convertible
Debenture then outstanding shall have the right thereafter to
convert such Convertible Debenture into the kind and amount of
shares of stock and other securities and property which he would
have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale, or conveyance had
such Convertible Debenture been converted immediately prior to the
effective date of such consolidation, merger, statutory exchange
sale, or conveyance and in any such case, if necessary, appropriate
adjustment shall be made in the application of the provision set
forth in this Section with respect to the rights and interest
thereafter of any Holders of the Convertible Debenture, to the end
that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be,
in relation to any shares of stock and other securities and property
thereafter deliverable on the exercise of the Convertible Debenture.
The provisions of this Subsection shall similarly apply to
successive consolidations, mergers, statutory exchanges, sales or
conveyances.
7. Events of Default. Each of the following events shall be an Event of
Default ("Event of Default") for purposes of the Convertible Debenture:
(a) Convertible Debenture Terms. The Company defaults in the due and
punctual performance or observance of any material terms contained in the
Convertible Debenture, and such default continues for a period of five (5)
consecutive days after written notice thereof to the Company by the Holder
of the Convertible Debenture or Common Stock issued upon conversion of the
Convertible Debenture; or
(b) Insolvency Matters. The Company makes an assignment for the
benefit of creditors, or files a voluntary petition in bankruptcy, or as
adjudicated a bankrupt or insolvent, or files any petition or answer
seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present
or
<PAGE>
future statute, law or regulation, or files any answer admitting or fails
to deny the material allegations of a petition filed against the Company
for any such relief, or seeks or consents to or acquiesces in the
appointment of any trustee, receiver or liquidator of the Company or all
or any substantial part of the properties of the Company, or the Company
or its directors or majority stockholders take any action looking tot he
dissolution or liquidation of the Company.
8. Modification and Waiver. No purported amendment, modification or waiver
of any provision hereof shall be binding unless set forth in a written document
signed by the Company and the Holder of the Convertible Debenture (in the case
of amendments or modifications) or by the party to be charged thereby (in the
case of waivers). Any waiver shall be limited to the provision hereof in the
circumstances or events specifically made subject thereto, and shall not be
deemed a waiver of any other term hereof or the same circumstance or event upon
any reoccurrence thereof.
9. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been given, when received, if personally delivered (including, without
limitation, delivery by courier or delivered by telex, telegram or facsimile, or
five (5) days after depositing in the U.S. Mails for delivery by first class
mail, postage prepaid and addressed as provided blow, (a) if to any Holder of
the Convertible Debenture, addressed so such Holder at its address as shown on
the books of the Company, or at such other address as such Holder may specify by
written notice tot he Company with a copy to the Agent or (b) if the Company at
156 William Street, 12th Floor, New York, New York 10038, or such other address
as the Company may specify by written notice to the Holder of the convertible
Debenture or Common Stock issued upon conversion of the Convertible Debenture.
10. Successors and Assigns. All the terms and provisions of the
Convertible Debenture shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the Company and each
Holder of the Convertible Debenture, whether or not so expressed.
11. Applicable Law. The laws of the State of New York, without regard to
its conflicts of law principles, shall govern the validity of the Convertible
Debenture, the construction of its terms and interpretation of the rights and
duties of the Company and each Holder of the Convertible Debenture.
12. Waiver of Demand, Presentment and Notice of Dishonor. Except as
otherwise set forth herein, the undersigned and each endorser or guarantor
hereof hereby waives demand, presentment, protest, notice of protest and notice
of dishonor.
13. Corporate Obligation. No recourse under or upon any obligation,
covenant or agreement contained in the Convertible Debenture, or for any claim
based hereon or otherwise in respect hereof, shall be had against any promoter,
subscriber to shares, incorporator, stockholder, officer, or director, as such,
past, present or future, of the Company or of any successor corporation, either
directly or through the Company or any successor or corporation or through any
trustee, receiver, or any other person, whether by virtue of any constitution,
statue, or rule of law, or by the enforcement of any assessment or penalty or
otherwise, except as expressly agreed to by the party charged.
<PAGE>
14. Subordination and Guaranty. The Company will cause the debt
obligations of Venture Funding, Ltd. and Eugene I. Schuster to be subordinated
to this Convertible Debenture pursuant to a certain Subordination Agreement of
even date herewith. In addition, this Convertible Debenture shall be guaranteed
by Venture Funding, Ltd. and Eugene I. Schuster pursuant to a certain Guaranty
of even date herewith.
15. Most Favored Nations Provision. If at any time between the execution
date of this agreement and an initial public offering of the Company's Common
Stock, the Company shall privately place any debt obligation(s) on different
terms and conditions than as set forth herein (with the exception of
securitization provisions), the Holder shall have the option to retain the
current agreement of the parties as reflected in this agreement (and a certain
Warrant and Subordination Agreement of even date) or to amend portions of this
agreement and substitute therefor certain terms and conditions offered in any
such subsequent private placement(s) of debt. The Company shall promptly notify
the Holder of any such private placement and provide to the Holder a copy of all
enabling and operating documents related thereto. The Holder will have thirty
days thereafter to elect to amend certain portions of this agreement (and a
certain Warrant and Subordination Agreement of even date) by written notice of
its intent within the thirty day period. The substitution of certain terms and
conditions of the other private placement shall relate only to the interest
rate, warrant terms and conversion privileges provided therein and shall not
change in any manner the term of the debt or the security/securitization
provisions provided herein. By electing to substitute the other private
placement terms for the terms of this agreement, the Holder must accept all or
none of terms and conditions related to the other private placement's interest
rate, warrant terms and conversion privileges; the Holder may not select from
among such provisions (cherry pick).
IN WITNESS WHEREOF, the Company has caused the Convertible Debenture to be
signed by its duly authorized officer, and the Guarantor has signed the
Convertible Debenture, as of the date first written above.
ART RENAISSANCE, INC.
By: /s/ Eugene Ivan Schuster
------------------------------
Its: C.E.O.
<PAGE>
Exhibit 10.17
NOTE
Note no. 9088300 Bloomfield Hills, Michigan
$500,000.00 September 18, 1998
As of September 1,1998
FOR VALUE RECEIVED, the undersigned, Art Renaissance, Inc., a Delaware
corporation (herein called "Company") promises to pay to the order of The Bank
of Bloomfield Hills, a Michigan banking corporation (herein called "Bank") at
its Main Office at 505 North Woodward Avenue, Suite 1300, Bloomfield Hills,
Michigan, the principal sum of Five Hundred Thousand and 00/100 Dollars
($500,000.00), together with interest thereon as set forth below from September
1,1998.
The principal indebtedness outstanding under this Note shall be repaid on
or before March 1, 1999.
The indebtedness outstanding under this Note from time to time shall bear
interest at a per annum rate equal to two (2%) percent above the prime rate or
base rate as announced from time to time by Citibank, N.A. (Prime Rate). The
interest rate shall not be more than twenty-five percent (25%) or less than nine
and one half percent (9.50%). Upon the occurrence of any event of default
hereunder or under the Loan Agreement dated October 14, 1996, by and between
Company and Bank (as may be amended from time to time, the "Loan Agreement"),
interest shall accrue on the unpaid balance hereunder at a per annum rate equal
to four percent (4%) above the Prime Rate. Interest shall be payable quarterly
on the unpaid principal balance from time to time outstanding commencing
December 1, 1998 and on the first day of each quarter. Interest shall be
computed on a daily basis using a year of 360 days for actual number of days
elapsed, and, in such computation, effect shall be given to any change in the
interest rate resulting from a change in the Prime Rate on the date of such
change in the Prime Rate.
This Note evidences borrowing under, is subject to, is secured pursuant
to, shall be prepaid in accordance with, and may be matured under the terms of
the Loan Agreement, to which reference is hereby made. As additional security,
Bank is granted a lien on all property and assets (including deposits and other
credits) of Company at any time in possession or control of (or owing by) Bank
for any purpose.
All agreements between Company and Bank pertaining to the indebtedness
described herein are expressly limited so that in no event whatsoever shall the
amount of interest paid or agreed to be paid to Bank exceed the highest rate of
interest permissible under applicable law. If, from any circumstances
whatsoever, fulfillment of any provision of the Loan Agreement, this Note or any
other instrument securing this Note or all or any part of the indebtedness
secured thereby, at the time performance of such provision shall be due, shall
involve exceeding the interest limitation validly prescribed by law which a
court of competent jurisdiction may deem applicable hereto, then, the obligation
to be fulfilled shall be reduced to an amount computed at the highest rate of
interest permissible under such
<PAGE>
applicable law, and if, for any reason whatsoever, Bank shall ever receive as
interest an amount which would be deemed unlawful under such applicable law,
such interest shall be automatically applied to the payment of the principal
amount described herein or otherwise owed by Company to Bank, (whether or not
then due and payable) and not to the payment of interest.
In the event any payment due under this Note shall become overdue for a
period in excess of ten (10) days the Company shall pay to the Bank a "late
payment charge" equal to Fifty ($50) Dollars to defray the expense incidental to
handling such delinquent payment and not as a penalty. Acceptance of payment of
a late payment charge shall not waive any default under this Note.
UPON THE FAILURE OF COMPANY TO PAY ANY INSTALLMENT OF PRINCIPAL OR
INTEREST WHEN DUE OR UPON THE OCCURRENCE OF ANY EVENT OF DEFAULT OF THE LOAN
AGREEMENT, OR OTHER LOAN DOCUMENT, AND THE CONTINUATION OF SUCH DEFAULT FOR
FIFTEEN (15) DAYS, THE UNPAID BALANCE OF THIS NOTE SHALL AUTOMATICALLY BECOME
IMMEDIATELY DUE AND PAYABLE WITHOUT NOTICE TO COMPANY, and without notice, the
Note and all other obligations and indebtedness of the Company to the Bank,
whether absolute or contingent, direct, present or future, and however evidenced
shall become and shall be immediately due and payable, anything in this Note or
any of the loan documents to the contrary notwithstanding.
Company hereby waives presentment for payment, demand, protest and notice
of dishonor and nonpayment of this Note and agrees that no obligation hereunder
shall be discharged by reason of any extension, indulgence, release, or
forbearance granted by any holder of this Note to any party now or hereafter
liable hereon or any present or subsequent owner of any property, real or
personal, which is now or hereafter security for this Note. Any transferees of,
or endorser, guarantor or surety paying this Note in full shall succeed to all
rights of Bank, and Bank shall be under no further responsibility for the
exercise thereof or the loan evidenced hereby. Nothing herein shall limit any
right granted Bank by other instrument or by law.
If the interest and principal hereof are not paid when due (whether by
demand or otherwise), Company shall pay the holder hereof all its reasonable
costs of collection of said principal and interest including, but not limited
to, reasonable attorney fees.
THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY
IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING
(OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE,
KNOWINGLY AND VOLUNTARILY AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO
TRIAL BY JURY IN THE EVENT OF LITIGATION
2
<PAGE>
CONSENT AND REAFFIRMATION
To: The Bank of Bloomfield Hills
505 North Woodward, Suite 1300
Bloomfield Hills, MI 48304
Re: $500,000.00 loan to Art Renaissance, Inc.
Dear Sir/Madam:
Pursuant to the terms of a Guaranty dated September 25, 1996, the
undersigned is a guarantor of the Obligations of Art Renaissance, Inc.
("Obligor") to The Bank of Bloomfield Hills ("the Guaranteed Party").
Guarantor consents to renewal of Obligor's note dated October 14, 1996,
reaffirms its guaranty of the Indebtedness as defined in the Guaranty, and
reaffirms its obligations under a Third Party Pledge Agreement dated September
25, 1996, and confirms that the Guaranty and Third Party Pledge Agreement remain
in full force and effect.
GROWTH REALTY, INC.
/s/ Eugene I Schuster
---------------------
BY: Eugene I Schuster
<PAGE>
REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO THIS NOTE.
Notwithstanding anything herein to the contrary, nothing shall limit any
rights granted Bank by other instruments or by law.
ART RENAISSANCE, INC.
BY: /s/ Eugene I Schuster
-----------------------
Eugene I Schuster
ITS: President
<PAGE>
Exhibit 10.18
REIMBURSEMENT AGREEMENT
This Reimbursement Agreement is made as of the 14th day of December, 1998,
by and between Art Renaissance, Inc., a Delaware corporation ("ARI"), Art
Renaissance Chicago, Inc. ("AR Chicago"), Eugene I. Schuster, an individual
resident of Florida ("Schuster"), Venture Funding, Ltd., a Michigan corporation
("Venture"), Growth Realty, Inc., a Michigan corporation ("Growth"), Growth
Funding, Ltd., a Michigan corporation ("Growth Funding"), and Growth Realty
Holdings, LLC, ("Growth Holdings") and Adam Schuster ("Adam")
RECITALS:
A. On March 29, 1996, ARI entered into a Reimbursement Agreement with
Venture and Growth in the amount of $1,550,000. The current balance
is $1,100,000 secured by guarantees from Venture, Schuster, Growth
Realty, Mego Financial stock, a second mortgage on Schuster's
Michigan home, and the Mego debenture.
B. On August 29, 1996, ARI entered into a Reimbursement Agreement with
Venture and Growth in the amount of $500,000 guaranteed and
collateralized by Jack McConnaughy and guaranteed by Schuster and
Venture which has periodically renewed.
C. On August 31, 1995, ARI entered into a loan with the Bank of
Bloomfield Hills ("BBH"), which has been renewed until January 28,
1999, in the amount of $750,000 and secured by a Certificate of
Deposit ("C.D.") #501598 owned and pledged by Venture.
D. ARI entered into a loan on February 6, 1997, which was renewed
December 14, 1998, in the amount of S1,642,997.72, secured by C.D.
#502106 owned and pledged by Eugene Schuster and Joseph Schuster in
the amount of $125,000, and also secured by C.D. #50197 in the
amount of $1,438,946.69 owned and pledged by Growth Realty, Inc.
and also secured by C.D. #502231 in the amount of $79,051.03 owned
and pledged by Growth Realty Holdings, LLC.
E. ARI entered into a loan with BBH on October 30, 1997, renewed
October 30, 1998 in the amount of $1,207,585.25
1
<PAGE>
secured by guarantees by Schuster, Venture, Growth Realty and Mego
Financial stock.
F. ARI entered into a loan in the amount of $500,000 renewed January
12, 1998 and due January 12, 1999, secured by: C.D. #502105 in the
amount of $100,000 owned and pledged by Venture; C.D. #502107 in the
amount of $100,000 owned and pledged by Eugene Schuster and Joseph
Schuster; C.D. #502108 in the amount of $100,000 owned and pledged
by Joseph Schuster and Adam Schuster; C.D. #502109 in the amount of
$100,000 owned and pledged by Sarah Schuster and Joseph Schuster;
and C.D. #502110 in the amount of $100,000 owned and pledged by Adam
Schuster and Joseph Schuster.
G. ARI acknowledges that it owes Venture on "Old Loan Note #1"
$326,198. (See Attached Schedule)
H. ARI acknowledges that it owes Venture on the "Chrysler Note #2"
$450,000. (See Attached Schedule)
I. ARI acknowledges that it owes Adam Schuster on a loan in the amount
$974,080 with additional accrued interest of $323,416 guaranteed by
Venture and Schuster. (See Attached Schedule)
J. ARI further acknowledges that it owes Venture interest on loans,
evidenced in G & H above, in the amount of $42,231.00; management
fees in the amount of $652,669; payment for art in the amount of
$45,424.00; and Venture expenses in the amount of $21,005.00, these
amounts are as of September 30, 1998. (See Attached Schedule)
K. On or about May 2, 1997, Willora Company, Ltd. provided a
convertible note of $600,000 due May 1, 1999, Schuster and Venture
provided a guarantee.
L. On or before May 2, 1997, Willora Company, Ltd. provided a short
term note of $400,000 due August 31, 1997, and Schuster provided a
guarantee.
M. On or before January 30, 1998, Willora Company, Ltd. provided a
convertible note of $500,000 due on June 30, 1998, and Schuster
provided a guarantee.
2
<PAGE>
N. On or before May 9, 1998, HDA Homecare Pension Fund provided a one
year note of $790,000 with interest due on the 4th monthly.
0. On or before March 27, 1998, Gross Foundation, Inc. provided a
convertible note of $375,000 due on March 27, 1999 or at the public
offering at the election of the lender, Schuster and Venture
provided a guarantee.
P. ARI acknowledges that Schuster and Venture have also guaranteed the
following: (1) ARI New Orleans Gallery, 631 Royal Street, rent for
24 months at $5,000 per month, and (2) a $150,000 line of credit
with Fingerhut Group Publishing, Inc., (3) JAG Capital (Corporate
Office) $36,000.
Q. ARI acknowledges that Schuster has guaranteed $1,699,309 owed to MCM
Limited by Art Renaissance Chicago, Inc. and/or Art Renaissance,
Inc. in accordance with an Asset Purchase and Consignment Agreement
dated May 31, 1997 and amended January 29, 1998.
AGREEMENTS:
IN CONSIDERATION of the premises, and for other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Reimbursement Obligation in Favor of Schuster, Venture, Growth, Growth
Funding, Growth Holdings or Adam. To the extent that Schuster, Venture, Growth,
Growth Funding, Growth Holdings, or Adam makes a Payment their guarantees or
money due as evidenced in Paragraph J below, such party shall be entitled to
reimbursement from Art Renaissance, Inc., Art Renaissance Chicago, Inc., Dyansen
Galleries or Merrill Chase Galleries, on a joint and several basis, for such
Payment, as used herein, "Payment" shall mean (i) any payment with respect to
the Willora Guarantees, the Gross Guarantee, or the HDA Homecare Pension Fund;
(ii) the loss of collateral in satisfaction of the obligations covered by such
Guarantees; or (iii) the failure to receive payment of the Venture Loan within
ten days following demand for repayment by Venture. Payment shall be deemed to
have been made by Schuster, Venture, Growth, Growth Funding, Growth Holdings or
Adam whether such Payment was voluntary or was obtained through enforcement
against the properties of Schuster, Venture, Growth, Growth Funding, Growth
Holdings or Adam. "Payment" shall also include payment of attorneys' fees and
other
3
<PAGE>
costs and expenses incurred by Schuster, Venture, Growth, Growth Funding, Growth
Holdings, or Adam in connection with:
A. On March 29, 1996, ARI entered into a Reimbursement Agreement with
Venture and Growth in the amount of $1,550,000. The current balance
is $1,100,000 secured by guarantees from Venture, Schuster, Growth
Realty, Mego Financial stock, a second mortgage on Schuster's
Michigan home, and the Mego debenture.
B. On August 29, 1996, ARI entered into a Reimbursement Agreement with
Venture and Growth in the amount of $500,000 guaranteed and
collateralized by Jack McConnaughy and guaranteed by Schuster and
Venture which has periodically renewed.
C. On August 31, 1995, ARI entered into a loan with the Bank of
Bloomfield Hills ("BBH"), which has been renewed until January 28,
1999, in the amount of $750,000 and secured by a Certificate of
Deposit ("C.D.") #501598 owned and pledged by Venture.
D. ARI entered into a loan on February 6, 1997, which was renewed
December 14, 1998, in the amount of $1,642,997.72, secured by C.D.
#502106 owned and pledged by Eugene Schuster and Joseph Schuster in
the amount of $125,000, and also secured by C.D. #501597 in the
amount of $1,438,946.69 owned and pledged by Growth Realty, Inc. and
also secured by C.D. #502231 in the amount of $79,051.03 owned and
pledged by Growth Realty Holdings, LLC.
E. ARI entered into a loan with BBH on October 30, 1997, renewed
October 30, 1998 in the amount of $1,207,585.25 secured by
guarantees by Schuster, Venture, Growth Realty and Mego Financial
stock.
F. ARI entered into a loan in the amount of $500,000 renewed January
12, 1998 and due January 12, 1999, secured by: C.D. #502105 in the
amount of $100,000 owned and pledged by Venture; C.D. #502107 on the
amount of $100,000 owned and pledged by Eugene Schuster and Joseph
Schuster; C.D. #502108 in the amount or $100,000 owned and pledged
by Joseph Schuster and Adam Schuster; C.D. #502109 in the amount of
$100,000 owned and pledged by Sarah Schuster and Joseph Schuster;
and C.D. #502110 in the amount of $100,000 owned and pledged by Adam
Schuster and Joseph Schuster.
4
<PAGE>
G. ARI acknowledges that it owes Venture on "Old Loan Note #1"
$326,198. (See Attached Schedule)
H. ARI acknowledges that it owes Venture on the "Chrysler Note #2"
$450,000. (See Attached Schedule)
I. ARI acknowledges that it owes Adam Schuster on a loan in the amount
$974,080 with additional accrued interest of $323,416 guaranteed by
Venture and Schuster. (See Attached Schedule)
J. ARI further acknowledges that it owes Venture interest on loans,
evidenced in G & H above, in the amount of $42,231.00; management
fees in the amount of $652,669; payment for art in the amount of
$45,424.00; and Venture expenses in the amount of $21,005.00, these
amounts are as of September 30, 1998. (See Attached Schedule)
K. On or about May 2, 1997, Willora Company, Ltd. provided a
convertible note of $600,000 due May 1, 1999, Schuster and Venture
provided a guarantee.
L. On or before May 2, 1997, Willora Company, Ltd. provided a short
term note of $400,000 due August 31, 1997, and Schuster provided a
guarantee.
M. On or before January 30, 1998, Willora Company, Ltd. provided a
convertible note of $500,000 due on June 30, 1998 and Schuster
provided a guarantee.
N. On or before May 9, 1998, HDA Homecare Pension Fund provided a one
year note of $790,000 with interest due on the 4th monthly.
0. On or before March 27, 1998, Gross Foundation, Inc. provided a
convertible note of $375,000 due on March 27, 1999 or at the public
offering at the election the lender, Schuster and Venture provided a
guarantee.
P. ARI acknowledges that Schuster and Venture have also guaranteed the
following: (1) ARI New Orleans Gallery, 631 Royal Street, rent for
24 months at $5,000 per month, and (2) a $150,000 line of credit
with Fingerhut Group Publishing, Inc., (3) JAG Capital (Corporate
Office) $36,000.
5
<PAGE>
Q. ARI acknowledges that Schuster has guaranteed $1,699,309 owed to MCM
Limited by Art Renaissance Chicago, Inc. and/or Art Renaissance,
Inc. in accordance with an Asset Purchase and Consignment Agreement
dated May 31, 1997 and amended January 29, 1998.
2. Security Interest in Favor of Schuster, Venture, Growth, Growth
Funding, Growth Holdings, and Adam. Art Renaissance, Inc. and its subsidiaries
hereby grants to Schuster, Venture, Growth, Growth Funding, Growth Holdings, and
Adam a second security interest in all of its assets, including after-acquired
property, including, but not limited to, accounts receivable, inventory, goods,
equipment, tools, furniture and fixtures, supplies, materials, leasehold
improvements, contract rights (including rights to payment), customer lists,
patents and other intellectual property, and all other tangible and intangible
assets, whether now owned or hereafter acquired, together with all substitutions
and replacements thereof, accessions and attachments thereto, and proceeds
thereof to secure their respective obligations to Schuster, Venture, Growth,
Growth Funding, Growth Holdings, or Adam hereunder subject only to the 1st
security interest of the Bank of Bloomfield Hills and National Bank of Detroit.
At any time and from time to time that Schuster, Venture, Growth, Growth
Funding, Growth Holdings, or Adam requests, Art Renaissance, Inc. and its
subsidiaries, shall execute, acknowledge and deliver all such further and other
assurances and documents, and will take such action consistent with the terms of
this Agreement, as may be reasonably requested to carry out the transactions
contemplated herein and to permit Schuster, Venture, Growth, Growth Funding,
Growth Holdings, and Adam to enjoy their rights and benefits hereunder,
including, without limitation, the execution of further security agreement
documents containing all terms customary therefor and financing statements
including but not limited to UCC1 filings. Art Renaissance, Inc. and its
subsidiaries agrees to reimburse Schuster, Venture, Growth, Growth Funding,
Growth Holdings, and Adam for all expenses incurred in connection with the
creation, perfection, defense and enforcement of their security interest granted
herein.
3. Notices. All notices and other communications provided for hereunder
shall be in writing and shall be (a) personally delivered, (b) sent by first
class United States mail or (c) sent by overnight courier of national
reputation, in each case addressed to the party to whom notice is being given at
such party's address as set forth below, or, as to each party, at such
6
<PAGE>
other address as may hereafter be designated by such party in a written notice
to the other parties complying as to delivery with the terms of this Section.
All such notices, request, demands and other communications shall be deemed to
have been given on (a) the date received if personally delivered, (b) when
deposited in the mail if delivered by mail, or (c) the date sent if sent by
overnight courier.
Address for Art Renaissance, Inc.:
156 William Street, 12th Floor
New York, NY 10038
Attn: John Addario
Address for Schuster, Venture, Growth, Growth Funding, Growth Holdings and
Adam Schuster:
Eugene I. Schuster
3011 W. Grand Blvd., Suite 321
Detroit, MI 48202
4. Amendments and Waivers. No amendment of any provisions of this
Agreement shall be effective unless the same shall be in writing and signed by
the parties hereto. Neither any failure nor any delay on the part of any party
hereto in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall the single or partial exercise thereof preclude any
other or further exercise or the exercise of any other right, power or
privilege. The remedies provided herein are cumulative and not exclusive or any
remedies available to any party.
5. Governing Law. This Agreement shall be governed by, and construed in
all respects according to, the laws of the State of Michigan.
6. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument. No single counterpart need contain
the signature all parties hereto, provided each party has executed at least one
counterpart hereof. This document may be executed by facsimile.
7
<PAGE>
THE PARTIES HAVE EXECUTED this Reimbursement Agreement as of the day and
year first above written, in the manner appropriate to each.
ART RENAISSANCE, INC.
By: /s/ John Addario
-------------------------------------
John Addario
Its: CFO
------------------------------------
VENTURE FUNDING, LTD.
By: /s/ Eugene I. Schuster
-------------------------------------
Eugene I. Schuster
Its: CEO
------------------------------------
GROWTH REALTY, INC.
By: /s/ Eugene I. Schuster
-------------------------------------
Eugene I. Schuster
Its: CEO
------------------------------------
GROWTH FUNDING, LTD.
By: /s/ Eugene I. Schuster
-------------------------------------
Eugene I. Schuster
Its: CEO
------------------------------------
GROWTH REALTY HOLDINGS LLC
By: /s/ Eugene I. Schuster
-------------------------------------
Eugene I. Schuster
Its: CEO
------------------------------------
EUGENE I. SCHUSTER
/s/ Eugene I. Schuster
----------------------------------------
Eugene I. Schuster
ADAM SCHUSTER
/s/ Adam Schuster
----------------------------------------
Adam Schuster
8
<PAGE>
Exhibit 10.19
PROMISSORY NOTE
$ 1,326,771.01 December 15, 1998
IN CONSIDERATION of the premises, and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ART RENAISSANCE, INC., 156 William Street, 12th Floor, New York, NY 10038, a
Delaware corporation, (the "Maker"), promises to pay to the order of ADAM
SCHUSTER, at Fisher Bldg. No. 321, 3011 W. Grand Blvd., Detroit, MI, 48202, (the
"Holder") or such other location designated by the Holder, the principal sum of
$1,326,771.01.
The principal sum shall bear interest at the rate of two percent (2%) above the
prime rate charged by the National Bank of Detroit, Detroit, Michigan for its
most preferred customers. Interest shall be paid monthly. Principal shall be
paid in full December 15, 2000.
1. In the event that Art Renaissance receives an equity funding of at
least $3 million, 30% of the outstanding loan would be paid from that funding
and the balance would be rolled into a new two-year note. In the event that Art
Renaissance does an equity funding of $5 million or more, 50% of the loan would
be paid at closing.
2. Security Interest in Favor of Schuster, Venture, Growth and Growth
Funding. Art Renaissance, Inc. and its subsidiaries hereby grants to Adam
Schuster, third security interest in all of its assets, including after-acquired
property, including, but not limited to, accounts receivable, inventory, goods,
equipment, tools, furniture and fixtures, supplies, materials, leasehold
improvements, contract rights (including rights to payment), customer lists,
patents and other intellectual property, and all other tangible and intangible
assets, whether now owned or hereafter acquired, together with all substitutions
and replacements thereof, accessions and attachments thereto, and proceeds
thereof to secure their respective obligations to Schuster, subject only to the
1st security interest of the Bank of Bloomfield Hills and National Bank of
Detroit, and the 2nd security granted to Eugene I. Schuster, an individual
resident of Florida ("Schuster"), Venture Funding, Ltd., a Michigan corporation
("Venture"), Growth Realty, Inc., Growth holding LLC, a Michigan corporation
("Growth"), and Growth Funding, Ltd., a Michigan corporation ("Growth Funding").
At any time and from time to time that Schuster, and the 3rd security interest
granted to, requests, Art Renaissance, Inc., and its subsidiaries, shall
execute, acknowledge and deliver all such further and other assurances and
documents, and will take such action consistent with the terms of this Promisory
note, as may be reasonably requested to carry out the transactions contemplated
herein and to permit Schuster to enjoy their rights and benefits hereunder,
including, without limitation, the execution of further security promisory note
documents containing all customary therefor and financing statements including,
but not limited to, UCC1 statements. Art Renaissance, Inc. and its subsidiaries
agrees to reimburse Schuster for all expenses incurred in connection with the
creation, perfection, defense and enforcement of their security interest granted
herein.
3. Notices. All notices and other communications provided for hereunder
shall be in writing and shall be (a) personally delivered, (b) sent by first
class United States mail or (c) sent by overnight courier of national
reputation, in each case addressed to the party to whom notice is being given at
such party's address as set forth below, or, as to each party in a written
notice to the other parties complying as to delivery with the terms of this
Section. All such notices, requests, demands and other communications shall be
deemed to have been given on (a) the date received if personally delivered, (b)
when deposited in the mail if delivered by mail, or (c) the date sent if sent by
overnight courier.
1
<PAGE>
Address for Art Renaissance, Inc.:
156 William Street, 12th Floor
New York, NY 10038
Attn: John Addario
Address for Schuster, Venture, Growth and Growth Funding:
Eugene I. Schuster
3011 W. Grand Blvd., Suite 321
Detroit, MI 48202
4. Amendments and Waivers. No amendment of any provisions of this
Promissory note shall be effective unless the same shall be in writing and
signed by the parties hereto. Neither any failure nor any delay on the part of
any party hereto in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall the single or partial exercise thereof
preclude any other or further exercise of any other right, power or privilege.
The remedies provided herein are cumulative and not exclusive or any remedies
available to any party.
5. Governing Law. This Promissory note shall be governed by, and construed
in all respects according to, the laws of the State of Michigan.
6. The Maker hereby waives presentment, dishonor, protest, demand for
payment, notice of protest and notice of nonpayment hereof.
7. The Maker shall pay all legal fees and expenses in connection with
collection of the note.
IN WITNESS HEREOF, the undersigned has caused this Note to be executed by its
duly authorized officer as of the day and year first above written.
ART RENAISSANCE, [NC.
/s/ John M. Addario
----------------------------------------
Title: CFO
ATTEST:
/s/ [ILLEGIBLE]
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Exhibit 10.20
AMENDMENT AND WAIVER AGREEMENT
The Bank of Bloomfield Hills ("BBH" or "Lender"), Art Renaissance, Inc.
("Art Ren" or "Borrower"), Eugene I. Schuster ("Schuster"), Venture Funding,
Ltd. ("Venture"), Venture Funding Holdings, Ltd. ("Venture Holdings"), Growth
Realty, Inc. ("Growth"), Growth Realty Holdings, L.L.C. ("Growth Holdings"), and
John E. McConnaughy, Jr. ("McConnaughy") enter into this Amendment and Waiver
Agreement dated July 30, 1999 (this "Agreement"). For convenience, (i) Schuster,
Venture, Venture Holdings, Growth, Growth Holdings, and McConnaughy in their
capacity as guarantors, are referred to collectively as the "Guarantors", and
individually as a "Guarantor", and (ii) Borrower and Guarantors are referred to
herein collectively as the "Parties", and individually as a "Party".
RECITALS
A. Lender, as lender and secured party, and Borrower, as borrower and
debtor, are parties to a $2,500,000 Loan Agreement dated October 30, 1997 (as
may be amended from time to time, and with all supplements thereto, the
"$2,500,000 Loan Agreement"). Under the $2,500,000 Loan Agreement, Lender made
available to Borrower a secured discretionary line of credit (subject to certain
limitations), up to a maximum principal amount of $2,500,000 in the aggregate at
any time outstanding evidenced by a $2,500,000 Note dated October 30, 1997 (the
"$2,500,000 Line of Credit"). This discretionary line of credit matured on
January 29, 1999. The outstanding principal balance on the $2,500,000 Line of
Credit on July 20, 1999 was $1,128,534.22.
B. Lender, as lender and secured party, and Borrower, as borrower and
debtor, are parties to a $500,000 Loan Agreement dated October 14, 1996 (as may
be amended from time to time, and with all supplements thereto, the "$500,000
Loan Agreement"). Under the $500,000 Loan Agreement, Lender made available to
Borrower a secured discretionary line of credit (subject to certain
limitations), up to a maximum principal amount of $500,000 in the aggregate at
any time outstanding evidenced by a $500,000 Note dated September 22, 1997 (the
"$500,000 Line of Credit"). This discretionary line of credit matured on March
1, 1999. The outstanding principal balance on the $500,000 Line of Credit on
July 20, 1999 was $500,000.
C. Lender, as lender and secured party, and Borrower, as borrower and
debtor, are parties to a $1,550,000 Loan Agreement dated March 29, 1996 (as may
be amended from time to time, and with all supplements thereto, the "$1,550,000
Loan Agreement"). Under the $1,550,000 Loan Agreement, Lender made available to
Borrower a term loan in the original principal amount of $1,550,000 evidenced by
a $1,550,000 Term Note dated March 29, 1996, (the "Term Loan") which matured on
April 1, 1999. The outstanding principal balance on the Term Loan on July 20,
1999 was $980,000.
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D. Borrower executed and delivered to Lender a Security Agreement dated
March 29, 1996 (the "Art Ren Security Agreement"), whereby Borrower granted
Lender a first priority security interest in all of Borrower's then existing and
thereafter acquired assets, including but not limited to, accounts, chattel
paper, general intangibles, instruments, inventory, equipment and fixtures to
secure the Obligations (defined below).
B. Schuster executed and delivered to Lender a Security Agreement dated
October 30, 1997 (the "Schuster Security Agreement"), whereby Schuster granted
to Lender a security interest in works of art owned by Schuster and stored in
the Fisher Building (the "Art Work") to secure all of Schuster's obligations to
Lender, including under the Schuster Guaranty (defined below) and Schuster's
guaranty of Cellex Biosciences, Inc.'s ("Cellex") obligations owing to Lender,
including the Cellex Obligations (defined below).
F. Venture executed and delivered to Lender, among other things: (1) a
Security Agreement (Pledge) dated October 30, 1997, whereby Venture pledged to
Lender warrants to purchase 858,071 shares of Cellex's common stock to secure
all of Venture's obligations to Lender, including under the Venture Guaranty
(defined below) and Venture's guaranty of Cellex's obligations owing to Lender,
including the Cellex Obligations, and (2) an Assignment of Registration Rights
Agreement dated August 20, 1993, (collectively, the "Venture Security
Agreements").
G. Venture Holdings executed and delivered to Lender a Security Agreement
(Pledge) dated October 30, 1997 (the "Venture Holdings Security Agreement"),
whereby Venture Holdings pledged to Lender warrants to purchase 500,000 shares
of Cellex' common stock to secure all of Venture Holdings' obligations to
Lender, including under the Venture Holdings Guaranty (defined below).
H. Growth executed and delivered to Lender, among other things: (1) a
Security Agreement (Pledge) dated October 30, 1997, whereby Growth pledged to
Lender 244,288 shares of Mego Mortgage Corporation ("Mego Mortgage") common
stock to secure all of Growth's obligations to Lender, including under the
Growth Guaranty (defined below) and Growth's guaranty of Cellex's obligations
owing to Lender, including the Cellex Obligations (the "Growth/Cellex
Guaranty"); (2) a Security Agreement (Pledge) dated February 6, 1997, whereby
Growth pledged to Lender 150,000 share of Mego Financial Corp. ("Mego
Financial") common stock to secure all of Growth's obligations to Lender,
including under the Growth Guaranty and the Growth/Cellex Guaranty; (3) a
Security Agreement (Pledge) dated March 29, 1996, whereby Growth, among other
things, pledged to Lender 153,000 shares of Mego Financial stock to secure all
of its obligations to Lender, including under the Growth Guaranty and the
Growth/Cellex Guaranty; and (4) an Assignment of Cash Balances dated March 29,
1996 securing the obligations of Borrower and Cellex to Lender. All of the
aforementioned security, pledge and assignment agreements listed in this
paragraph are referred to collectively as the "Growth Security Agreements".
I. Growth Holdings executed and delivered to Lender, among other things:
(1) a Security Agreement (Pledge) dated October 30, 1997, whereby Growth
Holdings pledged to
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Lender 235,000 shares of Mego Financial common stock and 111,860 shares of Mego
Mortgage common stock to secure all of Growth Holdings' obligations to Lender,
including under the Growth Holdings Guaranty (defined below), and (2) a Third
Party Pledge Agreement dated August 20, 1997, whereby Growth Holdings pledged to
Lender 250,000 shares of Mego Financial common stock to secure all of Borrower's
obligations to Lender, (collectively, the "Growth Holdings Security
Agreements").
J. McConnaughy executed and delivered to Bank One (defined below), among
other things: (1) a Third Party Pledge Agreement dated April 27, 1998, whereby
McConnaughy pledged to Bank One 29,000 shares of Mego Financial to secure all of
Borrower's and McConnaughy's obligations to Bank One; (2) a Third Party Pledge
Agreement dated October 14, 1996, whereby McConnaughy pledged to Lender 152,000
shares of Mego Financial common stock to secure the Borrower's obligations to
Lender as more fully described therein; and (3) a Third Party Pledge Agreement
and letter dated November 3, 1998, whereby McConnaughy pledged 273,000 shares of
Mego Financial common stock to secure the McConnaughy Guaranty (defined below),
(collectively, the "McConnaughv Security Agreements").
K. For convenience, all of the foregoing documents, agreements, mortgages,
assignments, and promissory notes set forth in paragraphs A through J, together
with any other documents, instruments, agreements or promissory notes executed
in connection with or in furtherance of any of the foregoing including the
Guarantor Loan Documents (defined below) and the Venture Subordination
Agreement, as amended from time to time, including as amended by this Agreement,
but exclusive of all present or future oral agreements between Lender and the
Borrower, are referred to collectively as the "Loan Documents".
L. All of the obligations of the Borrower, whether then existing or
thereafter created or arising, are guaranteed by (i) Schuster pursuant to, among
others, a Guaranty dated October 30, 1997 (the "Schuster Guaranty") (ii) Venture
pursuant to, among others, a Guaranty dated October 30, 1997, (the "Venture
Guaranty"); (iii) Venture Holdings pursuant to a Guaranty dated October 30, 1997
(the "Venture Holdings Guaranty"); (iv) Growth pursuant to, among others, a
Guaranty dated October 30, 1997, (the "Growth Guaranty"); (v) Growth Holdings
pursuant to a Guaranty dated October 30, 1997 (the "Growth Holdings Guaranty");
and (vi) McConnaughy pursuant to, among others, a Guaranty dated April 27, 1998
(the "McConnaughy Guaranty"). For convenience, these guaranties are referred to
collectively as the "Guaranties" and individually as the "Guaranty". The
Guaranties and all other documents and agreements executed by Schuster, Venture,
Venture Holdings, Growth, and Growth Holdings, in favor of Lender are referred
to collectively as the "Guarantor Loan Documents", and individually as a
"Guarantor Loan Document".
M. A Subordination Agreement dated March 29, 1996 was executed by Venture
in favor of BBH (the "Venture Subordination Agreement") pursuant to which
Venture (in such capacity, hereinafter referred to as the "Venture Subordinated
Creditor") subordinated the Borrower's obligations to it (the "Venture
Obligations") and the collateral security therefore to the Obligations. Borrower
acknowledges and agrees that based on the Existing Defaults (as defined below)
it does not have the right to, and shall not, make any payments to Venture with
respect to the Venture Obligations, and Venture agrees that it does not have the
right to, and shall
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not, receive any payments with respect to the Venture Obligations, other than
payments made in the ordinary course for reimbursement for reasonable business
expenses of Eugene I. Schuster not to exceed $20,000 and credit card expenses
resulting from the ordinary course of business (the "Ordinary Course Payments").
N. On July 20, 1999, there was $2,608,534 in principal owing by Borrower
to Lender under the Loan Documents as follows:
(1) $1,128,534 in principal owing under the $2,500,000 Line of
Credit;
(2) $500,000 in principal owing under the $500,000 Line of Credit;
and
(3) $980,000 in principal owing under the Term Loan;
plus accrued but unpaid interest, costs and expenses (including attorneys' fees)
called for by the Loan Documents (all such obligations together with all other
principal and interest due or becoming due to Lender), together with the payment
of all other sums, indebtedness and liabilities of any and every kind now or
hereafter owing and to become due from the Borrower to Lender, or any of its
affiliates however created, however incurred, evidenced, acquired or arising,
and whether direct or indirect, primary, secondary, fixed or contingent, matured
or unmatured, joint, several, or joint and several, and whether for principal,
interest, reimbursement obligations, indemnity obligations, obligations under
guaranty agreements, fees, costs, expenses, or otherwise, all of Borrower's
obligations under this Agreement, together with all other present and future
obligations of the Borrower to Lender, are referred to collectively as the
"Obligations".
O. On July 16, 1999, there was $648,219.85 in principal owing by Cellex to
Lender under the Cellex loan documents ("Cellex Loan Documents"), plus accrued
but unpaid interest, costs and expenses (including attorneys' fees) called for
by the Cellex Loan Documents (all such obligations together with all other
principal and interest due or becoming due to Lender), together with the payment
of all other sums, indebtedness and liabilities of any and every kind now or
hereafter owing and to become due from Cellex to Lender, or any of its
affiliates however created, however incurred, evidenced, acquired or arising,
and whether direct or indirect, primary, secondary, fixed or contingent, matured
or unmatured, joint, several, or joint and several, and whether for principal,
interest, reimbursement obligations, indemnity obligations, obligations under
guaranty agreements, fees, costs, expenses, or otherwise, together with all
other present and future obligations of the Cellex to Lender, are referred to
collectively as the "Cellex Obligations".
P. The Parties acknowledge and agree that:
(1) the Obligations, the Cellex Obligations, Guarantor's obligations
under the Guarantor Loan Documents, and all other obligations of any one
or more of the Parties to Lender are owing to Lender without setoff,
recoupment, defense or counterclaim, in law or in equity, of any nature or
kind;
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(2) the Obligations are secured by valid, perfected, indefeasible,
enforceable, first priority, liens and security interests in favor of
Lender in, among other things, all of Borrower's present and future
accounts, chattel paper, general intangibles, inventory, equipment,
fixtures, instruments, and all of the collateral granted to the Lender and
Bank One pursuant to the Schuster Security Agreement, the Venture Security
Agreements, the Venture Holdings Security Agreement, the Growth Security
Agreements, the Growth Holdings Security Agreements, and the McConnaughy
Security Agreements.
(3) the Cellex Obligations are secured by valid, perfected,
indefeasible, enforceable, first priority liens and security interests in
favor of Lender in, among other things, all of Cellex's present and future
accounts, chattel paper, general intangibles, inventory, equipment,
fixtures, instruments, and all of the collateral granted to the Lender
pursuant to the Schuster Security Agreement, the Venture Security
Agreements, and the Growth Security Agreements.
For convenience, all collateral referred to in sections (1) and (2) of this
paragraph, together with all other collateral described in the Loan Documents
and all collateral heretofore, simultaneously herewith or hereafter granted to
Lender by any one or more of the Parties to secure any of the Obligations or any
other obligations of the Borrower to Lender, is referred to collectively as the
"Collateral". For convenience, all collateral referred to in section (3) of this
paragraph, together with all other collateral described in the Cellex Loan
Documents and all collateral heretofore, simultaneously herewith or hereafter
granted to Lender by any one or more of the Parties to secure any of the Cellex
Obligations or any other obligations of Cellex to Lender, is referred to
collectively as the "Cellex Collateral".
Q. Each Party reaffirms, ratifies, confirms and approves their obligations
and duties under the Loan Documents, the Guarantor Loan Documents, and the
Venture Subordination Agreement all as modified by this Agreement. Without
limiting the generality of the immediately preceding sentence, the Borrower and
Guarantors, jointly and severally, hereby reaffirms, ratifies, confirms and
approves its/his/her obligations and duties under the Loan Documents, the
Guarantor Loan Documents, the Venture Subordination Agreement, and the
provisions herein, and acknowledges and agrees that the Guarantor Loan Documents
extend to and cover all of the Obligations, including the sums described in
Paragraph N above. Each Party, jointly and severally, reaffirms, ratifies and
confirms the liens, assignments and security interests granted to Lender in the
Collateral under the Loan Documents or otherwise.
R. Schuster, Venture and Growth each reaffirms, ratifies, confirms and
approves its/his obligations and duties under the Cellex Loan Documents and the
applicable Guarantor Loan Documents all as they relate to the Cellex
Obligations, and acknowledges and agrees that the applicable Guarantor Loan
Documents extend to and cover all of the Cellex Obligations, including the sums
described in Paragraph 0 above. Schuster, Venture and Growth, jointly and
severally, reaffirms, ratifies and confirms the liens, assignments and security
interests granted to Lender in the Cellex Collateral under the Cellex Loan
Documents or otherwise.
S. The Borrower and Venture reaffirm, ratify, confirm and approve their
obligations and duties under the Loan Documents and the Venture Subordination
Agreement, as modified by
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this Agreement.
T. Each Party acknowledges and agrees that through a Participation
Agreement dated October 30, 1997, a Participation Agreement dated September 1,
1997, and a Participation Agreement dated March 29, 1996 (collectively, the
"Participations"), Bank One, Michigan, formerly known as NBD Bank ("Bank One")
participated with Lender in the $2,500,000 Line of Credit, the $500,000 Line of
Credit, and the Term Loan.
U. For convenience, the following described defaults are referred to
collectively as the "Existing Defaults." Each Party represents and warrants,
after due inquiry and investigation, that it is not aware of any other Events of
Default, Events of Acceleration Defaults, Defaults, or defaults, or of any event
which, with the passage of time, notice, or both, would become an Event of
Default, Event of Acceleration, Default, or a default under the Loan Documents
or this Agreement. The Borrower is in default under the Loan Documents for the
following reasons:
1. the $2,500,000 Line of Credit, the $500,000 Line of Credit,
and the Term Loan have matured and have not been repaid, and
2. the Margin Requirement (as defined in the $2,500,000 Loan
Agreement) was exceeded.
V. By letter dated August 31, 1998, Lender and Bank One informed Borrower,
Schuster, Venture, Venture Holdings, Growth, and Growth Holdings (collectively,
the "Pledgors") that if a plan of action relating to the Borrower and Cellex was
not received by the September 11, 1998, Lender and Bank One would proceed to
liquidate the Mego Financial stock pledged by the Pledgors securing the
Obligations. Since a plan of action was not received by the September 11, 1998,
Lender has the right to liquidate the Mego Financial stock in accordance with
the Loan Documents.
W. Each Party also acknowledges that based on the Existing Defaults,
Lender has the right, without further notice, to enforce its rights under the
Loan Documents, the Guarantor Loan Documents, the Venture Subordination
Agreement and applicable law. Further, if Lender took such action, each Party
acknowledges that Lender's actions would be within Lender's rights under the
Loan Documents, the Guarantor Loan Documents, the Venture Subordination
Agreement, and applicable law, and would be reasonable and appropriate under the
circumstances.
X. Each Party acknowledges and agrees that (i) Lender has fully performed
all of its obligations under the Loan Documents, the Guarantor Loan Documents,
and the Venture Subordination Agreement; (ii) Lender has no obligation to
continue to lend to Borrower, or to waive its rights and remedies beyond the
Waiver Period (as hereinafter defined); (iii) any loans made after the date of
this Agreement will continue to be made in Lender's sole discretion; and (iv)
Lender has made no representations of any nature or kind that funding in any
amount will continue, or that the Waiver Period (as hereinafter defined) will be
extended beyond the expiration thereof.
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Y. Each Party further acknowledges and agrees that the actions taken by
Lender to date in furtherance of the Loan Documents, the Guarantor Loan
Documents, and the Venture Subordination are reasonable and appropriate under
the circumstances and are within Lender's rights under the Loan Documents, the
Guarantor Loan Documents, the Venture Subordination Agreement and applicable
law.
Z. Each Party represents and warrants to Lender that it received direct
and substantial economic benefit from all of the Obligations and that it will
continue to receive direct and substantial economic benefit from such loans, and
from any other loans made or which may be made in the future.
AA. The Parties have requested that Lender agree to waive its rights and
remedies under the Loan Documents and applicable law in connection with the
Existing Defaults until December 31, 1999 and agree to amend and/or amend and
restate certain terms and conditions of the Loan Documents.
AB. Subject to the terms and conditions of this Agreement, and in reliance
on the each Party's agreements, acknowledgments, representations, and warranties
in this Agreement, Lender has agreed to amend the Loan Documents, and waive its
rights and remedies on account of the Existing Defaults under the Loan Documents
as set forth below.
AGREEMENT
Based on the foregoing Recitals (which are incorporated herein as
agreements, representations, warranties, and covenants of Borrower, as the case
may be), and for other good and valuable consideration, the adequacy and receipt
of which is acknowledged by the Parties, Lender and the Parties agree as
follows:
1. Waiver. Subject to the following conditions and those set forth below,
Lender agrees to waive the Existing Defaults through December 31, 1999 (the
"Waiver Period"):
(a) Lender receives, on or before July 26, 1999, a fully executed
copy of this Agreement, acknowledged by counsel to each of the Parties as
provided below, together with fully executed copies of all Exhibits hereto that
require signature, and
(b) there are no further or additional Events of Default, Defaults,
defaults or Events of Acceleration under the Loan Documents (including a
worsening of the Existing Defaults), and each Party complies with all terms and
conditions of this Agreement and the Loan Documents.
2. Cross Collateralization. The Parties agree that all collateral granted
by any one or more of the Parties to Lender or any of its affiliates securing
any or all of the Obligations, including the Collateral, is collateral for all
of the Obligations.
3. Defaults. In addition to any other Events of Default, Defaults,
defaults or Events
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of Acceleration provided for in the Loan Documents, and without waiver of the
demand and discretionary provisions of the Loan Documents, the occurrence of any
of the following constitutes an Event of Default, a Default, a default, and an
Event of Acceleration under this Agreement (and each Loan Document):
(a) If any Party fails to comply with any term or condition in
this Agreement (or any agreement referred to or incorporated
herein) or the Loan Documents (other than the Existing
Defaults), or any other document or agreement between any
Party and Lender.
(b) If any material adverse change occurs in any Party's financial
condition or business prospects.
(c) If any lender, supplier, creditor, lessor, bond holder or
representative thereof (collectively, "Creditor") of any Party
shall (i) obtain a judgment against any Party in excess of
$100,000 in the aggregate (with the exception of the American
Monitor judgment against Schuster in an amount not exceeding
$300,000) or (ii) receive from Borrower any prepayments of
obligations.
(d) If any representation or warranty made by any Party in this
Agreement or in connection with the negotiation hereof is
materially untrue as of the date made or hereafter becomes
materially untrue.
(e) If any party attaches by way of seizure, levy, lien or
otherwise of any assets of any one or more of the Parties.
(f) If the filing of any notice of lien, levy or assessment by any
government, department or agency or the fact that any taxes or
debts are owing become a lien or encumbrance upon any assets
of any one or more of the Parties.
(g) If the Tax Liens listed on Exhibit A are not resolved
satisfactory to Lender in Lender's sole discretion by no later
than August 15, 1999.
(h) If Borrower is not in good standing in the state of Delaware
and shows Lender evidence to that fact, satisfactory to Lender
in Lender's sole discretion, by no later than August 15, 1999.
4. Waiver Fee: As consideration for Lender entering into this Agreement,
the Parties must pay Lender the sum of $10,000 payable as follows: $5,000 upon
execution of this
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Agreement and $5,000 on December 31, 1999 if the Obligations have not been
repaid by then. The Parties agree that this fee is fully earned by Lender upon
execution of this Agreement.
5. Pricing: Effective immediately, the pricing under the $2,500,000 Line
of Credit, the $500,000 Line of Credit, and the Term Loan (the "Notes") will be
increased to the following:
On the basis of a year of 360 days for the actual number of days
elapsed in each month, at a rate of 3.0 percentage points per annum more
than the Prime Rate of interest (the "Standard Rate"), and after maturity
(whether upon demand for payment, expiration of term, termination,
acceleration, or otherwise) or the occurrence of a default under the Loan
Documents, including under this Agreement, at a rate of 3 percentage
points per annum more than the Standard Rate until paid. In no event,
however, may the rate of interest be more than the highest rate permitted
by law. The "Prime Rate" is the rate of interest that Lender from time to
time announces to be its Prime Rate. The Prime Rate is set by Lender based
upon various factors, including its costs and desired return, general
economic conditions and other factors and is used as a reference point for
pricing some loans. Lender may make loans at, above or below the Prime
Rate. Any change in the Prime Rate immediately effects a change in the
rate of interest payable under the Notes.
6. No Further Waiver Implied. Each Party acknowledges that Lender has no
obligation to continue making loans or extend the term of the Waiver Period or
waive its rights and remedies after the Waiver Period, and nothing contained
herein or otherwise is intended to be or is a promise or agreement to continue
making loans, or extend the term of the Waiver Period beyond the expiration
thereof. Furthermore, no future agreement by Lender to continue making loans, or
to extend the term of the Waiver Period beyond the expiration thereof, or any
other agreement, is valid or enforceable unless it is contained in a written
agreement signed by Lender.
7. Additional Reporting. In addition to any reports or information
required by the Loan Documents (which must be provided timely), or that Lender
may hereafter request, each Party must provide Lender with:
(a) Within one day of receipt, copies of written notices of
default received from other creditors.
(b) Within one day of gaining knowledge thereof, any adverse
information regarding any Party.
8. Expenses, Fees and Costs; Indemnification.
(a) Each Party, jointly and severally, shall be responsible for the
payment of all reasonable fees and out-of-pocket disbursements incurred by
Lender, including fees of counsel and court costs, in any way arising from or in
connection with this Agreement, any
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Collateral, any Loan Document, any Obligations, or the business relationship
between Lender, on the one hand, and any one or more of the Parties, on the
other hand, including, without limitation: (1) Audit Fees (as defined below);
(2) all fees and expenses (including recording fees and insurance policy fees)
of Lender and counsel for Lender for the preparation, examination, approval,
negotiation, execution and delivery of, or the closing of any of the
transactions contemplated by, this Agreement or any of the Loan Documents; (3)
all fees and out-of-pocket disbursements incurred by Lender, including
attorneys' fees and consultants' fees (including the Consultant's fee), in any
way arising from or in connection with any action taken by Lender to monitor,
advise, administer, enforce or collect any of the Obligations (including under
this Agreement, the Guarantor Loan Documents, any other Loan Document, or
otherwise) or any other obligations of any one or more of the Parties, whether
joint, joint and several, or several, under this Agreement, any Loan Document,
any other existing or future document or agreement, or arising from or relating
to the business relationship between Lender, on the one hand, and any one or
more of the Parties, on the other hand, or otherwise securing any of the
Obligations, including any actions to lift the automatic stay or to otherwise in
any way monitor or participate in any bankruptcy, reorganization or insolvency
proceeding of any one or more of the Parties; (4) all expenses and fees
(including attorneys' fees) incurred in relation to, in connection with, in
defense of or in prosecution of any litigation instituted by any one or more of
the Parties, Lender, or any third party, against or involving Lender arising
from, relating to, or in connection with any of the Obligations, or any one or
more of the Parties' other obligations, this Agreement, any Collateral, any Loan
Document, or the business relationship between Lender, on the one hand, and any
one or more of the Parties, on the other hand, including any so-called "lender
liability" action, any claim and delivery or other action for possession of, or
foreclosure on, any of the Collateral, post-judgment enforcement of any rights
or remedies including enforcement of any judgments, and prosecution of any
appeals (whether discretionary or as of right and whether in connection with
prejudgment or post-judgment matters); (5) all costs, expenses, and fees
incurred by Lender or its agents in connection with appraisals and reappraisals
of all or any of the Collateral (and each Party must fully cooperate with such
appraisers and make their property available for appraisal in connection with as
many appraisals as Lender may request); and (6) all costs, expenses, and fees
incurred by Lender or its counsel in connection with consultants, expert
witnesses, or other professionals retained by Lender or its counsel, to assist,
advise, or give testimony with respect to any matter relating to the Collateral,
the Obligations, the Loan Documents, or the business relationship between
Lender, on the one hand, and any one or more of the Parties, on the other hand
(and each Party must fully cooperate with such consultant, expert witness or
other professional and shall make their premises, books and records, accounting
systems, computer systems and other media for the recordation of information
available to such persons). Each Party's agreement, jointly and severally, to be
responsible for Lender's attorneys' fees and costs applies regardless of whether
or not Lender prevails in whole or in part in any action, proceeding,
litigation, or otherwise, and regardless of the nature of any action or
litigation or the theories or bases of recovery or defense. Each Party, jointly
and severally, agrees to indemnify Lender for all Claims (as hereinafter
defined) which may be imposed on, incurred by, or asserted against Lender in
connection with this Agreement, any Loan Document, or the transactions
contemplated hereby or thereby, or the business relationship between Lender, on
the one hand, and any one or more of the Parties, on the other hand.
(b) All of the foregoing costs, expenses, reimbursement obligations,
and
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indemnification obligations are part of the Obligations and are secured by all
of the Collateral.
(c) "Claims" means any demand, claim, action or cause of action,
damage, liability, loss, cost, debt, expense, obligation, tax, assessment,
charge, lawsuit, contract, agreement, undertaking or deficiency, of any kind or
nature, whether known or unknown, fixed, actual, accrued or contingent,
liquidated or unliquidated (including interest, penalties, attorneys' fees and
other costs and expenses incident to proceedings or investigations relating to
any of the foregoing or the defense of any of the foregoing), whether or not
litigation has commenced.
9. Verification of Accounts/Audits. The Borrower agrees that Lender,
through its employees or authorized agents, is permitted to send a letter to and
otherwise contact the Borrower's account debtors to verify account receivable
balances. In addition, Lender shall be permitted full and complete access to the
Borrower's facilities, and books and records to conduct audits as often as
Lender reasonably desires. The cost of such audits is part of the Obligations,
is secured by all Collateral, and must be paid by the Borrower within 30 days of
receipt of an invoice therefor (the "Audit Fees"). The Audit Fees are in
addition to all other interest, fees, costs, and expenses provided for in the
Loan Documents or this Agreement.
10. Other Documents. Each Party must execute any documents reasonably
requested by Lender to carry out the intent of or to implement this Agreement,
the Guarantor Loan Documents or any other Loan Document.
11. Cross Default/Remedies. An Event of Default, Default, a default or
Event of Acceleration under this Agreement (or any agreement referred to or
incorporated herein) is an Event of Default, Default, a default, or an Event of
Acceleration under each document and agreement comprising the Loan Documents
(including the Guarantor Loan Documents), and an Event of Default, Default, a
default, or an Event of Acceleration under any document or agreement comprising
the Loan Documents is an Event of Default, Default, a default, or an Event of
Acceleration under the terms of this Agreement (and all agreements referred to
or incorporated herein). Immediately upon the occurrence of an Event of Default,
Default, a default, or an Event of Acceleration under this Agreement or any Loan
Document (or any document executed in connection herewith or referenced herein),
and without notice or an opportunity to cure such Event of Default, Default,
default, or an Event of Acceleration, Lender has the right to exercise any
remedies provided in this Agreement, the Loan Documents, and under applicable
law, and the Waiver Period will automatically expire at Lender's election,
without further notice and, at Lender's election but without notice, all of each
Party's obligations to Lender (including the Obligations and the Guarantor's
obligations under the Guarantor Loan Documents) will be immediately due and
payable, and Lender may cease making loans immediately. In any event, from and
after the earlier of expiration of the Waiver Period or the occurrence of an
Event of Default, Default, a default, or an Event of Acceleration under this
Agreement or any Loan Document, Lender may immediately take action to enforce
its rights and remedies under the Loan Documents (including enforcement action
on account of the Default), this Agreement, or applicable law, including
collecting the Obligations and foreclosing on the Collateral. Absent the prior
occurrence of an Event of Default, Default, default, or an Event of Acceleration
or prior demand for payment, all Obligations, and each Guarantor's obligations
under the Guarantor Loan Documents are due and payable in full at the expiration
of the Waiver
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<PAGE>
Period. Any references in cross default provisions under this Agreement or any
document or agreement executed in connection herewith or the Loan Documents to a
"default", "Default", or an "Event of Default" will include a default under this
Agreement.
12. Loan Documents and Guaranties Continue. Except as expressly modified
and amended by the terms of this Agreement, all other terms and conditions of
the Loan Documents (including the Guarantor Loan Documents) remain in full force
and effect and are hereby ratified, confirmed, and approved. If there is an
express conflict between the terms of this Agreement and the terms of the Loan
Documents, including the Loan Documents executed in connection herewith, the
terms of this Agreement govern and control.
13. Subordinated Creditors' Obligations. The Borrower acknowledges and
agrees that the Subordination Agreements remain in full force and effect and are
hereby ratified, confirmed and approved and agree that, except as otherwise
provided herein, they shall not make any payments with respect to the
subordinated debt until such time as the Obligations have been paid in full,
with the exception that Venture can receive the Ordinary Course Payments.
14. Reservation of Rights /No Waivers.
(a) This Agreement grants a limited waiver until the expiration of
the Waiver Period on the terms and conditions set forth in this Agreement.
Except for such waiver through the expiration of the Waiver Period, all of
Lender's rights and remedies against each Party and the Collateral are expressly
reserved, including all rights and remedies resulting from, or arising in
connection with, the Existing Defaults. Likewise, nothing herein is a waiver of
any Existing Defaults existing as of the date hereof, an agreement to consent to
further worsening of such Existing Defaults, or new Events of Default, Defaults,
defaults, or Events of Acceleration or in any way prejudices Lender's rights and
remedies under the Loan Documents (including the Guarantor Loan Documents) or
applicable law. Further, Lender has the right to waive any terms, provisions, or
conditions in this Agreement or the Loan Documents, in its sole discretion, and
any such waiver does not prejudice, waive, or reduce any other right or remedy
which Lender may have against any one or more of the Parties. No waiver of
rights or any condition of this Agreement, the Loan Documents, or any other
agreement by Lender is effective unless the same is contained in a writing
signed by an authorized agent of Lender.
(b) ANYTHING CONTAINED IN THIS AGREEMENT OR IN ANY OTHER AGREEMENT
TO THE CONTRARY NOTWITHSTANDING, NOTHING CONTAINED IN THIS AGREEMENT OR IN ANY
OTHER AGREEMENT RESTRICTS OR PROHIBITS LENDER'S RIGHT TO BLOCK, STOP OR PROHIBIT
PAYMENTS TO ANY SUBORDINATED CREDITOR(S) ON ACCOUNT OF THE EXISTING DEFAULTS OR
OTHERWISE.
15. Credit Inquiries. In the event customers, buyers, investors, potential
alternative financing sources, or other parties ask Lender about the current
lending relationship among Lender and any one or more of the Parties, each Party
agrees that Lender may refer such inquiries to the appropriate Party.
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<PAGE>
16. Entire Agreement, Etc.
(a) This Agreement and the Exhibits hereto constitute the Parties'
and Lender's entire understanding with respect to the subject mater hereof.
Modifications or amendments to this Agreement must be in writing and signed by
the party to be charged in order to be effective. This Agreement is governed by
the internal laws of the State of Michigan (without regard to conflicts of law
principles). This Agreement is binding on each Party and their respective
successors, assigns, heirs, and personal representatives and shall inure to
Lender's benefit and the benefit of its successors and assigns. If any provision
of this Agreement conflicts with any applicable statute or law, or is otherwise
unenforceable, such offending provision is null and void only to the extent of
such conflict or unenforceability, and is deemed separate from and does not
invalidate any other provision of this Agreement.
(b) This Agreement is being entered into among competent persons,
who are experienced in business and represented by counsel (or who have had the
opportunity to be represented by counsel), and has been reviewed by the Parties
and their counsel, if any. Therefore, any ambiguous language in this Agreement
will not necessarily be construed against any particular party as the drafter of
such language.
(c) This Agreement may be executed in any number of counterparts
with the same effect as if all signatories had signed the same document. All
counterparts must be construed together to constitute one instrument. Facsimile
copies of signatures are to be treated as original signatures for all purposes.
(d) References in the Loan Documents and all other documents
executed in connection with the Loan Documents (as each of the foregoing is
amended hereby) to the Loan Documents mean the Loan Documents as amended by this
Agreement.
(e) The term "including" means including, without limitation, and
the term "includes" means includes, without limitation.
(f) All headings are inserted for convenience only and do not affect
the construction or interpretation of this Agreement.
17. Additional Representations. Each Party represents and warrants to
Lender that:
(a) (i) Borrower's execution, delivery, and performance of this
Agreement and all agreements and documents delivered in connection herewith by
Borrower have been duly authorized by all necessary corporate action and does
not and will not require any consent or approval of its stockholders, violate
any provision of any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award presently in effect having applicability to it or
of its articles of incorporation or bylaws, or result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other agreement, lease or instrument to which Borrower is a party or by which it
or their properties may be bound or affected; (ii) no authorization, consent,
approval, license, exemption of or filing a registration with any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or
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<PAGE>
foreign, is or will be necessary to the valid execution, delivery or performance
by Borrower of this Agreement and all agreements and documents delivered in
connection with this Agreement; and (iii) this Agreement and all agreements and
documents delivered pursuant hereto by any one or more of the Parties are the
legal, valid and binding obligations of each such Party enforceable against each
such Party in accordance with the terms thereof.
(b) After giving effect to the amendments contained herein and
effected pursuant hereto, all representations and warranties contained in the
Loan Documents are true and correct on and as of the date hereof with the same
force and effect as if made on and as of the date hereof.
(c) Except for the Existing Defaults, each Party has duly and
properly performed, complied with and observed each of its covenants,
agreements, and obligations contained in the Loan Documents.
(d) Borrower's financial statements, for the fiscal years ended 1997
and 1998, copies of which have been furnished to Lender, fairly present
Borrower's financial condition at such dates and the results of Borrower's
operations for the periods indicated, all substantially in accordance with
generally accepted accounting principles applied on a consistent basis.
(e) No Party or any one or more of them has assigned any claim, set
off or defense to any individual or entity.
(f) This Agreement and all of the Exhibits and other written
material delivered by any one or more of the Parties to Lender in connection
with the transactions contemplated hereby do not contain any statement that is
false or misleading with respect to any material fact and do not omit to state a
material fact necessary in order to make the statements therein not false or
misleading. There is no additional fact of which any Party is aware that has not
been disclosed in writing to Lender that materially affects adversely or, so far
as each Party can reasonably foresee, will materially affect adversely any
Party's financial condition or business prospects.
(g) All Parties executing this Agreement in a representative
capacity warrant that they have authority to execute this Agreement and legally
bind the entity they represent.
18. Survival; Reliance. All agreements, representations and warranties
made in this Agreement (and all agreements referred to or incorporated herein)
survive the execution of this Agreement (and all documents and agreements
referred to or incorporated herein). Notwithstanding anything in this Agreement
(or any documents or agreements referred to or incorporated herein) to the
contrary, no investigation or inquiry by Lender (including by its agents) with
respect to any matter which is the subject of any representation, warranty,
covenant or other agreement set forth herein or therein is intended, nor shall
it be interpreted, to limit, diminish or otherwise affect the full scope and
effect of any such representation, warranty, covenant or other agreement. All
terms, covenants, agreements, representations and warranties of each Party made
herein (or in any documents or agreements referred to or incorporated herein),
or in any certificate or other document delivered or to be delivered pursuant
hereto, are
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<PAGE>
deemed to be material and to have been relied upon by Lender, notwithstanding
any investigation heretofore or hereafter made by Lender or its agents.
19. Notices. Any notice or other communication required or permitted to be
given under this Agreement or any of the Loan Documents must be in writing and
delivered personally, telegraphed, telecopied or telexed, or mailed (by
certified or registered mail or by recognized overnight courier), postage
prepaid, and is deemed given when so delivered personally, telegraphed or
telexed, or if mailed, two days after the date of mailing, addressed as follows
(or to any another address as to which any party so advises the other parties in
writing):
(a) If to Borrower: Art Renaissance, Inc.
321 Fisher Building
Detroit, MI 48202
Attn: Eugene I. Schuster
Telecopy: (___) _________
With a copy to: _________________________
_________________________
_________________________
Attn: ___________________
Telecopy: (___) _________
(b) If to Lender: The Bank of Bloomfield Hills
505 N. Woodward Avenue
Suite 1300
Bloomfield Hills, MI 48304-2965
Attn: Robert M. Burch
Vice Chairman
Telecopy: (248) 644-7107
With a copy to: Honigman Miller Schwartz and Cohn
2290 First National Building
Detroit, MI 48226
Attn: Steven G. Howell, Esq.
Telecopy: (313) 465-7417
20. Discretionary Loans; Demand Obligations. Notwithstanding any
provisions of this Agreement, it is understood and agreed that Lender is at no
time obligated to make any loan, despite compliance with any express conditions
precedent thereto, and Lender may at any time make demand for payment of the
Obligations, notwithstanding that there may then exist no Event of Default,
Default, default or Event of Acceleration.
21. Impairment of Collateral. The execution and delivery of this Agreement
(and all agreements and documents referred to herein) does not impair or affect
any other security (by endorsement or otherwise) for the Obligations, or any one
or more of the Parties' other
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<PAGE>
obligations to Lender. No security taken before or after as security for the
Obligations impairs or affects this Agreement (or any agreement or document
referred to herein). All present and future additional security is to be
considered as cumulative security.
22. Time Is of the Essence. Each Party acknowledges and agrees that time
is of the essence as to each and every term and provision of this Agreement and
each Loan Document.
23. Adverse Events. Promptly upon gaining knowledge thereof or at such
time as any Party should have known thereof, each Party must inform Lender of
the occurrence of any Event of Default, Default, default, or Event of
Acceleration, or any event which with the lapse of time or service of notice or
both would constitute an Event of Default, Default, default, or Event of
Acceleration under this Agreement or any of the Loan Documents, or of any other
occurrence which has or could reasonably be expected to have a materially
adverse effect on any Party's business, properties, or financial condition or
upon any Party's ability to comply with its obligations under this Agreement or
the Loan Documents (including the Guarantor Loan Documents).
24. Non-Waiver. No failure or delay on the part of Lender in the exercise
of any power or right, and no course of dealing between any one or more of the
Parties and Lender, operates as a waiver of such power or right, nor shall any
single or partial exercise of any power or right preclude other or further
exercise thereof or the exercise of any other power or right. The remedies
provided for herein are cumulative and not exclusive of any remedies which may
be available to Lender at law or in equity. No notice to or demand on any Party
not required hereunder or under the Loan Documents entitles any such Party to
any other or further notice or demand in similar or other circumstances, or
waives Lender's right to any other or further action in any circumstances
without notice or demand. Any waiver of any provision of this Agreement or the
Loan Documents and any consent to any departure by any one or more of the
Parties from the terms of any provision of this Agreement or the Loan Documents,
is effective only if in writing signed by an authorized officer of Lender, and
only in the specific instance and for the specific purpose for which given.
25. No Other Promises or Inducements. There are no promises or inducements
which have been made to any signatory hereto to cause such signatory to enter
into this Agreement other than those which are set forth in this Agreement.
26. Additional Agreements. Prior to or simultaneously with the execution
and delivery of this Agreement, the Parties shall cause to be executed and
delivered to the following:
a. Amended and Restated Continuing Security Agreement executed by
Borrower in the form of Exhibit B attached hereto and made a part hereof;
b. the UCC Financing Statements in the forms of Exhibit C attached
hereto and made a part hereof; and
such other financing statements, resolutions, searches and other documents and
agreements reasonably required by Lender, to effectuate the transactions
contemplated by this Agreement.
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<PAGE>
27. Payments to Shareholders. Effective immediately, all dividends,
distributions and other payments to shareholders, present or future, whether by
way of stock redemption or deferred compensation, principal or interest, shall
cease in their entirety with the exception of the Ordinary Course Payments to
Schuster.
28. STATUTE OF FRAUDS. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. ALL PRIOR AND
CONTEMPORANEOUS ORAL AGREEMENTS, IF ANY, BETWEEN LENDER OR BANK ONE, ON THE ONE
HAND, AND ANY ONE OR MORE OF THE PARTIES, ON THE OTHER HAND, ARE MERGED INTO
THIS AGREEMENT AND DO NOT SURVIVE THE EXECUTION OF THIS AGREEMENT.
29. RELEASE. AS OF THE DATE HEREOF EACH PARTY REPRESENTS AND WARRANTS THAT
THEY ARE AWARE OF, AND POSSESS, NO CLAIMS OR CAUSES OF ACTION AGAINST LENDER OR
BANK ONE. NOTWITHSTANDING THIS REPRESENTATION AND AS FURTHER CONSIDERATION FOR
THE AGREEMENTS AND UNDERSTANDINGS HEREIN, EACH PARTY INDIVIDUALLY, JOINTLY,
SEVERALLY, AND JOINTLY AND SEVERALLY, IN EVERY CAPACITY, INCLUDING BUT NOT
LIMITED TO, AS SHAREHOLDERS, OFFICERS, PARTNERS, DIRECTORS, INVESTORS, OR
CREDITORS OF ANY ONE OR MORE OF THE PARTIES, EACH OF ITS EMPLOYEES, AGENTS,
EXECUTORS, SUCCESSORS AND ASSIGNS, HEREBY RELEASES LENDER AND BANK ONE, EACH OF
ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS, AFFILIATES, SUBSIDIARIES,
SUCCESSORS AND ASSIGNS FROM ANY LIABILITY, CLAIM, RIGHT OR CAUSE OF ACTION WHICH
NOW EXISTS, OR HEREAFTER ARISES, WHETHER KNOWN OR UNKNOWN, ARISING FROM OR IN
ANY WAY RELATED TO FACTS IN EXISTENCE AS OF THE DATE HEREOF. BY WAY OF EXAMPLE
AND NOT LIMITATION, THE FORGOING INCLUDES ANY CLAIMS IN ANY WAY RELATED TO
ACTIONS TAKEN OR OMITTED TO BE TAKEN BY LENDER OR BANK ONE UNDER THE LOAN
DOCUMENTS, THE GUARANTOR LOAN DOCUMENTS, THE BUSINESS RELATIONSHIP WITH LENDER
OR BANK ONE AND ALL OTHER OBLIGATIONS OF ANY NATURE OR KIND OF ANY ONE OR MORE
OF THE PARTIES, ANY ORAL AGREEMENTS OR UNDERSTANDINGS (ACTUAL OR ALLEGED), ANY
BANKING RELATIONSHIPS THAT ANY ONE OR MORE OF THE PARTIES HAS OR MAY HAVE HAD
WITH LENDER OR BANK ONE AT ANY TIME AND FOR ANY REASON INCLUDING, BUT NOT
LIMITED TO, DEMAND DEPOSIT ACCOUNTS, OR OTHERWISE.
30. WAIVER OF JURY TRIAL AND BOND; SUBMISSION TO JURISDICTION; AND
ACKNOWLEDGMENT.
(a) ANY JUDICIAL PROCEEDING AGAINST ANY ONE OR MORE OF THE PARTIES
BROUGHT BY LENDER OR BANK ONE WITH RESPECT TO
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ANY TERM OR CONDITION OF THIS AGREEMENT, THE LOAN DOCUMENTS, THE GUARANTOR LOAN
DOCUMENTS, OR ANY OTHER PAST, PRESENT OR FUTURE AGREEMENT BETWEEN ANY ONE OR
MORE OF THE PARTIES AND LENDER OR BANK ONE MAY BE BROUGHT BY LENDER OR BANK ONE
IN A COURT OF COMPETENT JURISDICTION IN THE STATE OF MICHIGAN, UNITED STATES OF
AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY, LENDER
AND BANK ONE ACCEPT FOR THEMSELVES AND IN CONNECTION WITH THEIR RESPECTIVE
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT
RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, THE LOAN DOCUMENTS, THE
GUARANTOR LOAN DOCUMENTS, OR ANY OTHER PRESENT AND FUTURE AGREEMENT BETWEEN ANY
ONE OR MORE OF THE PARTIES, LENDER, AND BANK ONE EACH PARTY WAIVES PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON THEM, AND CONSENTS THAT ALL SUCH SERVICE OF
PROCESS MAY BE MADE BY MAIL OR MESSENGER DIRECTED TO IT AT ITS ADDRESS SET FORTH
IN THIS AGREEMENT. EACH PARTY WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH
BOND OR SURETY WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF LENDER. NOTHING
CONTAINED IN THIS SECTION AFFECTS LENDER'S OR BANK ONE'S RIGHT TO SERVE LEGAL
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECTS LENDER'S OR BANK ONE'S
RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST ANY ONE OR MORE OF THE PARTIES
OR ANY ONE OR MORE OF THEIR PROPERTIES IN THE COURTS OF ANY OTHER JURISDICTION.
ANY JUDICIAL PROCEEDING BY ANY PARTY AGAINST LENDER OR BANK ONE INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED
TO OR CONNECTED WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY PAST, PRESENT OR
FUTURE AGREEMENT BETWEEN ANY ONE OR MORE OF THE PARTIES AND LENDER OR BANK ONE,
MUST BE BROUGHT ONLY IN A COURT LOCATED IN THE STATE OF MICHIGAN. EACH PARTY
WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED
HEREUNDER OR IN CONNECTION HEREWITH AND MAY NOT ASSERT ANY DEFENSE BASED ON LACK
OF JURISDICTION OR VENUE OR BASED UPON FORUM NONCONVENIENS.
(b) EACH PARTY ACKNOWLEDGES THAT (1) IT HAS FULLY READ ALL OF THIS
AGREEMENT AND HAS BEEN GIVEN THE OPPORTUNITY TO CONSULT WITH COUNSEL AND OTHER
ADVISORS OF ITS CHOICE, AND AFTER CONSULTING WITH SUCH COUNSEL OR ADVISORS,
KNOWINGLY, VOLUNTARILY AND WITHOUT DURESS, COERCION, UNLAWFUL RESTRAINT,
INTIMIDATION OR COMPULSION, ENTER INTO THIS AGREEMENT, BASED UPON SUCH ADVICE
AND COUNSEL AND IN THE EXERCISE OF ITS BUSINESS JUDGMENT, (2) THIS AGREEMENT HAS
BEEN ENTERED INTO IN EXCHANGE FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF
WHICH THE PARTY HERETO ACKNOWLEDGES, (3) IT HAS CAREFULLY AND COMPLETELY
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<PAGE>
READ ALL OF THE TERMS AND PROVISIONS OF THIS AGREEMENT AND IS NOT RELYING ON THE
OPINIONS OR ADVICE OF LENDER OR BANK ONE OR ITS AGENTS OR REPRESENTATIVES IN
ENTERING INTO THIS AGREEMENT.
(c) THE PARTIES HERETO ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY
IS A CONSTITUTIONAL RIGHT, BUT THAT THIS RIGHT MAY BE WAIVED. LENDER, BANK ONE,
AND EACH PARTY EACH HEREBY KNOWINGLY, VOLUNTARILY AND WITHOUT COERCION, WAIVE
ALL RIGHTS TO A TRIAL BY JURY OF ALL DISPUTES ARISING OUT OF OR IN RELATION TO
THIS AGREEMENT, THE LOAN DOCUMENTS, THE GUARANTOR LOAN DOCUMENTS, OR ANY OTHER
AGREEMENTS BETWEEN ANY OF THE PARTIES. NO PARTY WILL BE DEEMED TO HAVE
RELINQUISHED THE BENEFIT OF THIS WAIVER OF JURY TRIAL UNLESS SUCH RELINQUISHMENT
IS IN A WRITTEN INSTRUMENT SIGNED BY THE PARTY TO WHICH SUCH RELINQUISHMENT WILL
BE CHARGED. EACH PARTY, BANK ONE AND LENDER AGREE THAT ANY OF THEM MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF ITS CONSENT TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY AND THE
OTHER AGREEMENTS SET FORTH IN THIS AGREEMENT.
THE BANK OF BLOOMFIELD HILLS
By: /s/ Robert M. Burch
----------------------------------
Robert M. Burch, Vice Chairman
ACKNOWLEDGED AND AGREED:
WITNESS ART RENAISSANCE, INC.
By: /s/ Eugene I. Schuster
- ---------------------- ----------------------------------
Eugene I. Schuster, President
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
[Signatures continued on following page]
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<PAGE>
[Signatures continued from preceding page]
WITNESS
/s/ Eugene I. Schuster
- ---------------------- ----------------------------------
EUGENE I. SCHUSTER
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
WITNESS VENTURE FUNDING, LTD.
By: /s/ Eugene I. Schuster
- ---------------------- ----------------------------------
Eugene I. Schuster, President
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
[Signatures continued on following page]
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<PAGE>
[Signatures continued from preceding page]
WITNESS VENTURE FUNDING HOLDINGS, L.L.C.
By: /s/ Eugene I. Schuster
- ---------------------- ----------------------------------
Eugene I. Schuster, Manager
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
WITNESS GROWTH REALTY, INC.
By: /s/ Eugene I. Schuster
- ---------------------- ----------------------------------
Eugene I. Schuster, President
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
[Signatures continued on following page]
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<PAGE>
[Signatures continued from preceding page]
WITNESS GROWTH REALTY HOLDINGS, L.L.C.
By: /s/ Eugene I. Schuster
- ---------------------- ----------------------------------
Eugene I. Schuster, Manager
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
WITNESS
/s/ [ILLEGIBLE] /s/ John E. McConnaughy, Jr.
- ---------------------- ----------------------------------
JOHN E. MCCONNAUGHY, JR.
- ----------------------
Subscribed and sworn to before me this 3rd day of August, 1999.
/s/ Florence Stevens
Notary Public, F. Stevens
County, Fairfield
My Commission Expires: 6/30/2002
[Signatures continued on following page]
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REAFFIRMATION OF AGREEMENTS
Each of the undersigned, a party to this Amendment and Waiver Agreement
(the "Agreement"), is also a party to various other guaranties, subordination
agreements, security agreements, mortgages, assignments, documents, instruments,
and agreements with or in favor of BBH, including but not limited to the
Subordination Agreement in favor of BBH subordinating Schuster's, Venture's and
Growth's obligations from Cellex to the obligations of Cellex to BBH (each, a
"Related Agreement" and collectively, the "Related Agreements"). In order to
induce BBH to enter into the Agreement set forth above, each of the undersigned
(1) acknowledges and agrees that all of its respective Related Agreements remain
in full force and effect and are hereby ratified, confirmed, approved and,
extend to and cover all of the obligations described in the Agreement; (2)
consents to all of the terms and conditions of the Agreement; (3) if it has
executed a guaranty in BBH's favor, it acknowledges and agrees that its guaranty
(and the collateral security therefor) extends to and covers all of Borrower's
obligations and Cellex's obligations to BBH, including those arising under, in
connection with, or described in the Agreement; (4) if it has executed a
subordination agreement in BBH's favor, it acknowledges and agrees that its
subordination agreement extends to and covers all of Borrower's obligations and
Cellex's obligations to BBH, including those arising under, in connection with,
or described in the Agreement; and (5) it acknowledges and agrees that the fact
that BBH has sought this reaffirmation does not create any obligation, right, or
expectation that BBH will seek its consent to or reaffirmation with respect to
any other or further amendments or modifications to the relationship between it
and Borrower or any other party.
WITNESS
/s/ Eugene I. Schuster
- ---------------------- ----------------------------------
EUGENE I. SCHUSTER
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
[Signatures continued on following page]
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[Signatures continued from preceding page]
WITNESS VENTURE FUNDING, LTD.
By: /s/ Eugene I. Schuster
- ---------------------- ----------------------------------
Eugene I. Schuster, President
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
WITNESS VENTURE FUNDING HOLDINGS, L.L.C.
By: /s/ Eugene I. Schuster
- ---------------------- ----------------------------------
Eugene I. Schuster, Manager
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
[Signatures continued on following page]
-24-
<PAGE>
[Signatures continued from preceding page]
WITNESS GROWTH REALTY, INC.
By: /s/ Eugene I. Schuster
- ---------------------- ----------------------------------
Eugene I. Schuster, President
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
WITNESS GROWTH REALTY HOLDINGS, L.L.C.
By: /s/ Eugene I. Schuster
- ---------------------- ----------------------------------
Eugene I. Schuster, Manager
- ----------------------
Subscribed and sworn to before me this ___ day of ___________, 1999.
_______________________________________
Notary Public, ___________ County, ____
My Commission Expires: ________________
WITNESS
/s/ [ILLEGIBLE] /s/ John E. McConnaughy, Jr.
- ---------------------- ----------------------------------
JOHN E. MCCONNAUGHY, JR.
- ----------------------
Subscribed and sworn to before me this 3rd day of August, 1999.
/s/ Florence Stevens
Notary Public, F. Stevens
County, Fairfield
My Commission Expires: 6/30/2002
-25-
<PAGE>
Exhibit 23.1
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
Art Renaissance, Inc.
New York, NY
We hereby consent to the inclusion in this Prospectus constituting a part of
this Registration Statement on Form S-1 of our report dated September 24,
1999 (which contains an explanatory paragraph regarding Art Renaissance, Inc.
and Subsidiaries' ability to continue as a going concern), relating to the
consolidated financial statements of Art Renaissance, Inc. and Subsidiaries
as of January 31, 1998 and 1999 and for the three years ended January 31,
1999.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
/s/ BDO Seidman, LLP
New York, New York
October 1, 1999
<PAGE>
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
Art Renaissance, Inc.
New York, NY
We hereby consent to the inclusion in this Prospectus constituting a part of
this Registration Statement on Form S-1 of our report dated April 4, 1997,
except for Note 9, which is as of May 31, 1997 (which contains an explanatory
paragraph regarding MCM Limited Partnership's ability to continue as a going
concern), relating to the consolidated financial statements of MCM Limited
Partnership as of and for the years ended January 31, 1996 and 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
/s/ BDO Seidman, LLP
Chicago, Illinois
October 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ART RENAISSANCE, INC. FOR THE YEAR ENDED
JANUARY 31, 1999 AND THE SIX MONTHS ENDED JULY 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001095851
<NAME> ART RENAISSANCE, INC
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-1999 JUL-31-1999
<PERIOD-START> FEB-01-1998 FEB-01-1999
<PERIOD-END> JAN-31-1999 JUL-31-1999
<EXCHANGE-RATE> 1 1
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
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<INVENTORY> 6470 7092
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<PP&E> 3351 3381
<DEPRECIATION> 2064 2442
<TOTAL-ASSETS> 9505 10082
<CURRENT-LIABILITIES> 17818 15767
<BONDS> 0 0
0 0
0 0
<COMMON> 26 48
<OTHER-SE> (11472) (7542)
<TOTAL-LIABILITY-AND-EQUITY> 9505 10082
<SALES> 23128 10800
<TOTAL-REVENUES> 23128 10800
<CGS> 10274 4498
<TOTAL-COSTS> 15203 6880
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1286 655
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3636) (1733)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3636) (1733)
<EPS-BASIC> (1.40) (0.45)
<EPS-DILUTED> (1.40) (0.45)
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