<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1998.
REGISTRATION NO. 333-51027
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
RESTORATION HARDWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF INCORPORATION)
DELAWARE 5719 68-0140361
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
15 KOCH ROAD, SUITE J
CORTE MADERA, CA 94925
(415) 924-1005
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEPHEN GORDON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
RESTORATION HARDWARE, INC.
15 KOCH ROAD, SUITE J
CORTE MADERA, CA 94925
(415) 924-1005
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
THERESE MROZEK, ESQ. PAUL C. PRINGLE, ESQ.
CURTIS L. MO, ESQ. GLENN F. BAITY, ESQ.
ANDREW R. HULL, ESQ. BROWN & WOOD LLP
BROBECK, PHLEGER & HARRISON LLP 555 CALIFORNIA STREET
TWO EMBARCADERO PLACE SUITE 5000
2200 GENG ROAD SAN FRANCISCO, CA 94104
PALO ALTO, CALIFORNIA 94303-0913 (415) 772-1200
(650) 424-0160
---------------
APPROXIMATE DATE OF COMMENCEMENT 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, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================
PROPOSED
MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.0001 par value.................. $69,000,000(2) $20,355(3)
================================================================================
</TABLE>
(1) Includes shares of Common Stock that the Underwriters have the option to
purchase solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3) Such amount was previously paid as a filing fee in connection with the
initial filing of this Registration Statement on April 24, 1998.
---------------
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 THAT 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 SUCH SECTION
8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 2, 1998
3,330,000 SHARES
[LOGO OF RESTORATION HARDWARE]
COMMON STOCK
($.0001 PAR VALUE)
----------
Of the 3,330,000 shares of Common Stock offered, 2,777,775 shares are being
sold by Restoration Hardware, Inc. ("Restoration Hardware" or the "Company")
and 552,225 shares are being sold by the Selling Stockholders. See "Principal
and Selling Stockholders". The Company will not receive any of the proceeds
from the sale of shares being sold by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is estimated that the initial public offering price per
share will be between $16.00 and $18.00. For factors to be considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "RSTO".
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) Before deducting estimated expenses of $1,300,000 payable by the Company.
(3) Certain stockholders of the Company have granted the Underwriters an option
for 30 days to purchase up to an additional 499,500 shares at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to
Selling Stockholders will be $ , $ and $ , respectively. See
"Underwriting".
----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
shares will be ready for delivery in New York, New York, on or about , 1998
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
----------
The date of this Prospectus is , 1998.
<PAGE>
[PHOTOGRAPH OF INTERIOR OF STORE]
[PHOTOGRAPH OF EXTERIOR OF STORE]
[PHOTOGRAPHS OF SAMPLE PRODUCTS WITH PRODUCT DESCRIPTIONS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. As used in
this Prospectus, unless the context otherwise requires, the terms "Restoration
Hardware" and the "Company" include Restoration Hardware, Inc. and its
consolidated subsidiaries (Restoration Hardware of Blackhawk, Incorporated and,
after March 20, 1998, The Michaels Furniture Company, Inc.) and their
respective operations.
Except as otherwise noted, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option, (ii) assumes the
conversion of all outstanding shares of the Company's Preferred Stock, par
value $.0001 per share (the "Preferred Stock"), into shares of the Company's
Common Stock, par value $.0001 per share (the "Common Stock"), to be effected
upon the completion of the Offering and (iii) gives retroactive effect to a 7-
for-1-split of the Common Stock effected in May 1998. See "Description of
Capital Stock--Common Stock". The Company has a 52- or 53-week fiscal year,
which ends on the Saturday closest to the end of January. Unless otherwise
indicated, references herein to years refer to the Company's fiscal years. For
example, references to 1997 shall mean the fiscal year ended January 31, 1998.
THE COMPANY
Restoration Hardware is a rapidly growing specialty retailer of home
furnishings, functional and decorative hardware and related merchandise that
reflect the Company's classic and authentic American point of view. Restoration
Hardware's merchandising strategy and its stores' architectural style create a
unique and attractive selling environment designed to appeal to an affluent,
well educated 35 to 55 year old customer. In 1997, the Company recorded net
sales of $97.9 million and operating income of $3.2 million, representing
compound annual growth rates since 1995 of 171.9% and 163.3%, respectively.
This growth has been driven primarily by the opening of five, ten and 21 stores
in 1995, 1996 and 1997, respectively, and by strong comparable store sales
growth of 12.9%, 24.5% and 11.1%, respectively, during each of these same
periods. The Company plans to continue its store expansion program and expects
to open approximately 25 new stores in 1998 and approximately 30 new stores in
1999. The Company operated 47 stores in 22 states at June 1, 1998.
Restoration Hardware commenced business more than 18 years ago as a purveyor
of fittings and fixtures for older homes. Since then, the Company has evolved
into a unique home furnishings retailer offering consumers an array of
distinctive, high-quality and often hard-to-find merchandise. The Company
displays its broad assortment of merchandise in an architecturally inviting
setting, which the Company believes appeal to both men and women. The Company
creates an attractive and entertaining environment in its stores by virtue of
its eclectic product mix, which combines classic, high-quality furniture,
lighting, home furnishings and functional and decorative hardware with unusual
"discovery" items such as the Original Russian Forever Flashlight and the Bite
The Man dog toy. This environment features surprising combinations and
assortments of merchandise. Customers encounter everything from nickel plated
towel bars and four-function tape measures to velvet sofas and a solid cherry
sleigh bed. Integral to the shopping experience, most product displays are
complemented by the Company's unique and often whimsical in-store signage
program. This signage, created and written by the Company's founder and CEO,
Stephen Gordon, provides historical, anecdotal and sometimes nostalgic
descriptions of products. The Company believes its signage program
significantly enhances the store's ability to connect with the customer. The
Company's focus on intriguing combinations of authentic, high-quality and
functional products provides its customers a unique shopping experience that
substantially differentiates the Company from its competitors and encourages
repeat business.
3
<PAGE>
A typical Restoration Hardware store features approximately 7,000 square feet
of selling space designed with a residential look and feel that the Company
believes customers will want to recreate in their own homes. Each store carries
approximately 4,500 stock keeping units ("SKUs"), many of which are frequently
turned over to refresh the store offerings and encourage customers to
rediscover the store. In 1997, the Company increased its SKU count by
approximately 750 items, adding approximately 1,250 new SKUs and discontinuing
approximately 500 SKUs. Products are displayed in an open and airy residential
setting which encourages the customers to wander from room to room, passing
through a foyer, adjacent hardware rooms, library, living room, bedroom and
bath and garden areas.
The following summarizes certain key operating characteristics of a
Restoration Hardware store and is based upon the 20 stores operated by the
Company for the full year ended January 31, 1998.
<TABLE>
<S> <C>
Average 1997 net sales per selling square foot..................... $ 588
Average 1997 store-level operating income.......................... $468,910
Average 1997 store-level operating margin.......................... 15.5%
</TABLE>
The Company has over time increased the size of its stores to accommodate the
space requirements of its furniture products and to provide customers an
enjoyable and comfortable shopping environment. As a result of the larger store
size, occupancy costs are expected to increase as a percentage of net sales and
net sales per selling square foot are expected to decline. In addition, the
Company expects comparable store sales to decrease in the future as its store
base matures.
BUSINESS STRATEGY
The Company's goals are to establish Restoration Hardware as a leading
lifestyle-oriented consumer brand and to realize substantial profitable growth.
The Company's strategy for achieving these goals includes the following key
elements:
EXPANSION STRATEGY. Restoration Hardware believes that its retail concept has
broad national appeal and that, as a result, it has significant new store
expansion opportunities over the next several years. Accordingly, the Company
plans to open approximately 25 new stores in 1998 and approximately 30 new
stores in 1999. In preparation for this expected expansion, management has
dedicated substantial resources to building the infrastructure and management
information systems necessary to support a large national chain. The Company
plans to continue to open stores in top tier malls, specialty centers and
select street locations in affluent urban and suburban areas. The Company is
opportunistic in selecting the best locations available that satisfy its
demographic, financial and other criteria and does not necessarily cluster its
store locations.
Additionally, and in response to strong customer demand, the Company intends
to introduce a catalog in September 1998. The Company believes its catalog
operation will generate incremental sales in markets without stores, create
additional store traffic in the Company's current markets and increase consumer
awareness and loyalty.
DIFFERENTIATED MERCHANDISING STRATEGY. The Company's merchandising strategy
is to offer distinctive, high-quality, hard-to-find merchandise for the home.
The Company offers a collection of merchandise not traditionally found in a
single store environment, including classic American styled furniture,
lighting, home furnishings, functional and decorative hardware, and discovery
items. The merchandise selection is carefully edited to provide a consistent
point of view throughout the store, emphasizing tasteful design, quality,
value, functionality and a timeless, classic feel. The Company
4
<PAGE>
focuses on products that have a sense of history or authenticity to which
customers can relate, believing that consumers have a strong desire to return
to traditions from their past or create traditions where none previously
existed. The Company's Teddy Chair, for instance, is a replica of a tailored,
comfortable leather chair used by Theodore Roosevelt on his train travels from
the Eastern United States to the West. Product selection also reflects a
penchant for the playful, including the Atomic Robot Man, Moon Pies, the Acme
Dog Biscuit Mix (complete with a bone-shaped cutter), as well as The Book of
Campfire Songs and the Gonzo Wonder Sponge. In addition, unlike many other
retailers, the Company focuses on purchasing products one item at a time rather
than focusing only on product categories. No product is selected to simply
round out a product category. Each item must stand on its own and is evaluated
on its own merits. The Company does not have prescribed price points and finds
it equally justifiable, from a merchandising point of view, to offer a vintage,
Austrian, wind-proof lighter at $5 and a solid, red oak Mule Chest at $1,990.
The Company's merchandise mix includes proprietary products and hard-to-find
products selected from non-traditional distribution channels that appear unique
to Restoration Hardware's customers.
INNOVATIVE STORE ENVIRONMENT. The environment in a Restoration Hardware store
is carefully designed to complement and highlight the unique merchandise mix
and to create an attractive and fun shopping environment for the customer. The
store design is based on residential interiors with a strong architectural
presence that has a look and feel which the Company believes customers seek to
recreate in their homes. The merchandise is displayed in a manner designed to
enhance its visual appeal and maximize customer impulse buying. To further
enhance the shopping experience, products are cross-merchandised creating
surprises for the customer throughout the store. Products are often highlighted
by personalized signage providing informative and sometimes amusing, anecdotal
descriptions that seek to intrigue the customer with the story behind the
merchandise selections. This signage, written by the founder and CEO Stephen
Gordon, is informative and whimsical, and is designed to enhance the customer's
connection to the product, thereby providing a powerful incentive to purchase.
FOCUS ON HIGHLY DESIRABLE TARGET CUSTOMER. The Company focuses on attracting
an affluent customer base of both men and women who typically are in their mid-
30s to mid-50s, well educated, generally own their home and report an average
household income in excess of $75,000. The Company believes that its growth
during recent years partially reflects growing interest among its customers in
decorating and outfitting their homes. By focusing on its target customer, the
Company believes it can successfully penetrate new markets throughout the
United States, while building a loyal customer base for repeat business.
EXCEPTIONAL CUSTOMER SERVICE. Restoration Hardware is committed to providing
the highest level of customer service. Key elements of such service include: a
high degree of product availability, excellent follow-through on requests and
questions, useful product information, a hassle-free return policy and high-
quality merchandise. To provide this service, the Company focuses on hiring
mature, professional and quality-conscious staff. The Company conducts training
in a number of areas, including product knowledge, and has a culture that
empowers its staff to go to great lengths to satisfy its customers' needs.
Finally, each store stocks the full array of products so customers may, in most
cases, leave the store with their purchases.
BUILDING THE BRAND AND OPERATING INITIATIVES. An integral part of the
Company's strategy is to strengthen the Restoration Hardware brand. The Company
believes that the opening of new stores, its daily interaction with customers
and all other aspects of its business play a role in building its brand
identity. To this end, the products, the architecture of the store, the
signage, the in-store music program and the Company's culture all reflect
Restoration Hardware's consistent and differentiated point of view.
5
<PAGE>
The Company continues to focus on several initiatives designed to both
enhance the performance of the stores and strengthen the Company's emerging
brand identity. These include: (1) continuing to expand proprietary offerings,
(2) increasing the number of imported SKUs, (3) strengthening relationships
with key vendors, (4) building the Company's catalog business and (5) refining
the Company's web site.
EXPERIENCED AND MOTIVATED MANAGEMENT TEAM. Over the past several years,
Restoration Hardware has devoted significant resources to recruit and build its
existing management team. The Company's executive officers and key managers
have extensive experience in various retail environments. In addition, upon
consummation of the Offering, executive officers and key managers will
beneficially own approximately 30% of the Company's outstanding Common Stock.
RECENT DEVELOPMENTS
In March 1998, the Company acquired all of the outstanding capital stock of
The Michaels Furniture Company, Inc. ("Michaels"), formerly known as Michael's
Concepts In Wood, Inc., for an aggregate purchase price of approximately $5.0
million plus contingent future payments and stock incentives based on the
performance of the acquired operations. Michaels had previously been an
independent supplier of furniture to the Company accounting for approximately
7.3% of its merchandise purchases in 1997. The Company believes that the
acquisition of Michaels will give Restoration Hardware a secure supply of a
popular furniture line for its stores and catalog.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Common Stock.
----------------
The Company was incorporated in California in 1987 and reincorporated in
Delaware in 1998. The Company's executive offices are located at 15 Koch Road,
Suite J, Corte Madera, California 94925, its telephone number is (415) 924-1005
and its web site address is www.restorationhardware.com.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm.
"Restoration Hardware" is a registered trademark of the Company. All rights
are fully reserved. All other trademarks, service marks or trade names referred
to in this Prospectus are the property of their respective owners.
6
<PAGE>
THE OFFERING(1)
<TABLE>
<S> <C>
Shares of Common Stock Offered:
Company.............................. 2,777,775 shares
Selling Stockholders................. 552,225 shares
Total Common Stock Offered........... 3,330,000 shares
Common Stock to be Outstanding After
the Offering.......................... 16,103,381 shares(2)
Use of Proceeds........................ To repay approximately $28 million of
outstanding indebtedness, to fund new
store openings and for working capital
and other general corporate purposes.
See "Use of Proceeds".
Proposed Nasdaq National Market sym-
bol................................... RSTO
</TABLE>
- --------
(1) Excludes up to 499,500 shares that are subject to the over-allotment option
granted to the Underwriters by certain stockholders of the Company. See
"Underwriting".
(2) Includes 763 shares to be issued upon exercise of a warrant upon completion
of the Offering. Excludes 3,287,662 shares reserved for issuance under the
Company's 1995 Stock Option Plan and the Company's 1998 Stock Incentive
Plan (the "Stock Incentive Plan"), of which options to purchase 1,639,806
shares were outstanding at May 2, 1998 at a weighted average exercise price
of $3.81 per share and of which options to purchase 547,300 shares will be
granted concurrently with the Offering at the initial public offering
price. Also excludes 154,007 shares of Common Stock reserved for issuance
upon exercise of outstanding warrants. See "Capitalization", "Management--
Benefit Plans", and Note 6 of Notes to Consolidated Financial Statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements, including statements
concerning planned expansion and financial resources, in "Summary" under the
captions "The Company" and "Business Strategy", in "Risk Factors" under the
captions "Implementation and Management of Aggressive Growth Strategy",
"Dependence on Imports and Vulnerability to Import Restrictions" and
"Uncertainties Regarding Distribution of Merchandise", in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the captions "Overview" and "Liquidity and Capital Resources" and in "Business"
under the captions "The Company", "Company History", "Business Strategy",
"Merchandising Mix", "Product Selection, Purchasing and Sourcing", "Advertising
and Marketing", "Store Operations and Distribution" and "Management Information
Systems". These forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties related to the Company's
operations, some of which are beyond the Company's control. Certain factors
that could cause results to differ materially from those projected in the
forward-looking statements are described in "Risk Factors", including, but not
limited to, competition, new product offerings by competitors and price
pressures; seasonality, fluctuations in operating results and economic
cyclicality; effects of weather; changes in consumer preferences; the Company's
ability to implement its growth strategy, including management of growth and
expansion of its distribution facility; dependence on key personnel,
independent manufacturers and key suppliers; international sources of
merchandise. Risks and uncertainties that could have a material adverse effect
on the Company are also described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the captions "Quarterly
Results of Operations and Seasonality" and "Liquidity and Capital Resources",
and in "Business" under the captions "Business Strategy", "Competition" and
"Government Regulation". Any of these risks or uncertainties may cause actual
results or future circumstances to differ materially from any future results or
circumstances expressed or implied by the forward-looking statements contained
in this Prospectus.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE
SEVEN MONTHS
MONTHS ENDED
ENDED 1997 ----------------
JANUARY 28, PRO FORMA MAY 3, MAY 2,
1995(1) 1995 1996(2) 1997 COMBINED(3) 1997 1998
----------- -------- -------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF CONSOLIDATED
OPERATIONS DATA:
Net sales.............. $ 4,666 $ 13,238 $ 39,672 $97,872 $114,045 $11,907 $32,647
Gross profit........... 1,842 4,698 14,373 32,144 37,130 3,155 9,013
Selling, general and
administrative
expenses.............. 1,300 4,075 12,213 27,080 31,188 3,733 9,553
Preopening store
expenses.............. -- 162 681 1,869 1,869 256 298
Income from
operations............ 542 461 1,479 3,195 4,073 (834) (838)
Net income............. 328 236 796 1,748 1,846 (542) (746)
Redeemable stock
repurchases in excess
of carrying value..... -- -- -- 4,778 4,778 -- --
Income (loss) available
to common
stockholders.......... 328 236 796 (3,030) (3,030) (542) (746)
Earnings per
share(4)(5)...........
Basic ............... .07 .05 .16 (.69) (.67) (.11) (.18)
Diluted ............. .04 .03 .07 (.69) (.67) (.11) (.18)
Weighted average shares
outstanding(4)(6).....
Basic................ 4,911 4,915 4,926 4,386 4,386 4,926 4,173
Diluted.............. 7,545 7,593 10,903 4,386 4,386 4,926 4,173
OPERATING DATA:
Number of stores open
at end of period...... 5 10 20 41 41 21 44
Average net sales per
selling square
foot(7)............... $ 349 $ 636 $ 651 $ 583 $ 583 N/A N/A
Comparable store net
sales increase(8)..... N/A 12.9% 24.5% 11.1% 11.1% 20.5% 18.0%
Average selling square
footage per store(9).. 2,674 3,865 4,805 6,113 6,113 5,119 6,161
Total selling square
footage at period
end................... 13,369 38,650 100,897 250,622 250,622 102,380 271,095
</TABLE>
<TABLE>
<CAPTION>
MAY 2, 1998
------------------------
ACTUAL AS ADJUSTED(10)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $190 $42,807
Total assets.......................................... 110,308 125,136
Total debt, including capital lease obligations....... 33,388 --
Redeemable preferred stock............................ 40,610 5,600
Stockholders' equity (deficit)........................ (10,068) 73,159
</TABLE>
- --------
(1) Although the Company commenced operations in 1980, there are no financial
statements of the Company available for any period prior to the seven
months ended January 28, 1995 and, therefore, no financial information
related to any such prior period is presented above.
(2) 1996 was a 53-week fiscal year. For purposes of comparable store net sales
increase and average net sales per selling square foot, 1996 results were
calculated to correspond with 52-week years.
(3) Reflects the acquisition of The Michaels Furniture Company, Inc. See Pro
Forma Combined Condensed Financial Information.
(4) Gives retroactive effect to a 7-for-1-split of the Common Stock effected
in May 1998. See "Description of Capital Stock--Common Stock". Computed
based on income available to common stockholders which represents net
income less a cash premium over carrying cost of $4.78 million paid in
connection with the redemption of certain Preferred Stock. The impact of
such redemption decreased 1997 and 1997 Pro Forma Combined basic and
diluted earnings per share by $1.09 per share. The remaining Preferred
Stock will convert into Common Stock upon the completion of the Offering.
(5) For 1997, 1997 Pro Forma Combined and the three months ended May 3, 1997
and May 2, 1998, diluted earnings per share excludes the effect of
Preferred Stock since their conversion would be antidilutive.
(6) See Note 1 of Notes to Consolidated Financial Statements.
(7) Average net sales per selling square foot is calculated by dividing total
net sales by the weighted average selling square footage of stores open
during the period indicated.
(8) A store becomes comparable at the beginning of the 14th month of
operation. The comparable store percentage in 1997 includes two stores
which were renovated in 1997. The Company had four, five, ten, 18, ten and
20 comparable stores at the end of 1994, 1995, 1996, 1997, the first
quarter of 1997 and the first quarter of 1998, respectively.
(9) Average selling square footage per store is calculated by dividing total
selling square footage by the number of stores open at the end of the
period indicated.
(10) Adjusted to reflect the sale of the 2,777,775 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $17.00 per share and the application of the estimated net proceeds
therefrom after deducting the estimated underwriting discount and
estimated expenses of the Offering. See "Use of Proceeds". Also gives
effect to the conversion of all outstanding Preferred Stock into Common
Stock upon completion of the Offering.
8
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be carefully considered in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus.
IMPLEMENTATION AND MANAGEMENT OF AGGRESSIVE GROWTH STRATEGY
The Company's net sales and net income have grown significantly during the
past several years, primarily as a result of the opening of new stores. The
Company intends to continue to pursue an aggressive growth strategy for the
foreseeable future, and its future operating results will depend largely upon
its ability to open and operate stores and manage a larger business
successfully. The Company intends to open approximately 25 new stores in 1998
(of which six stores have been opened as of June 1, 1998) and approximately 30
new stores in 1999. The Company's ability to open stores on a timely basis and
the performance of such stores will depend upon many factors, including, among
others, the Company's ability to identify and enter new markets, locate
suitable store sites, negotiate acceptable lease terms, hire and train store
managers and sales associates and obtain adequate capital resources on
acceptable terms. Any restrictions on the Company's ability to expand would
have a material adverse effect on the Company's business, results of
operations and financial condition. As a result, there can be no assurance
that Restoration Hardware will be able to achieve its targets for opening new
stores. Moreover, there can be no assurance that the Company's new stores will
be successful or achieve operating results comparable to the Company's
existing stores.
In 1995, all of the Company's stores were located in the Western United
States. In 1996, the Company expanded into new markets by opening stores in
Illinois, Michigan, Missouri, Colorado, Texas, Kansas and Virginia. In 1997,
the Company expanded into new markets by opening stores in Connecticut,
Florida, Georgia, Louisiana, Minnesota, New Jersey, New York, North Carolina,
Pennsylvania and Washington. The Company plans to continue to enter new
markets in various regions of the United States in 1998 and 1999. It has
already opened new stores in Alabama and Tennessee and has signed leases in
Utah, Massachusetts and Washington D.C. Operation of a greater number of new
stores and expansion into new markets may present competitive, distribution
and merchandising challenges that are different from those currently
encountered by the Company in its existing stores and markets. In addition,
there can be no assurance that the Company's expansion within its existing
markets will not adversely affect the individual financial performance of the
Company's existing stores or its overall results of operations.
The Company will need to continually evaluate the adequacy of its store
management and management information and distribution systems to manage its
planned expansion. In particular, the Company anticipates the need for an
additional distribution center in the Eastern United States during 1998. There
can be no assurance that the Company will anticipate all of the changing
demands that its expanding operations will impose on such systems, and the
failure to adapt its systems and procedures to such changing demands could
have a material adverse effect on the Company's business, results of
operations and financial condition. There can be no assurance that the Company
will successfully achieve its expansion targets or, if achieved, that planned
expansion will not have an adverse impact on results of operations.
From time to time, the Company evaluates potential strategies for improving
its gross margins and increasing net sales. There can be no assurance that the
implementation of any such strategies will be successful or will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Historically, cash flow from operations has been insufficient to finance the
Company's growth and the Company has relied upon a line of credit and proceeds
from private equity financings to finance working capital requirements. There
can be no assurance that the Company's operations will generate sufficient
cash flow or that adequate financings will be available to finance continued
growth.
9
<PAGE>
SMALL STORE BASE
The Company operated 47 stores at June 1, 1998. Ten of the Company's stores
were opened in 1996, 21 of the Company's stores were opened in 1997 and six
stores have been opened in 1998. Consequently, the Company has a limited
history of opening and operating stores. The results achieved to date by the
Company's relatively small store base may not be indicative of the results
that may be achieved from a larger number of stores. In addition, should any
new store be unprofitable or should any existing store experience a decline in
profitability, the effect on the Company's results of operations could be more
significant than would be the case if the Company had a larger store base.
FLUCTUATIONS IN COMPARABLE STORE SALES
A variety of factors affect the Company's comparable store sales including,
among others, the general retail sales environment, the Company's ability to
efficiently source and distribute products, changes in the Company's
merchandise mix, the impact of competition and the Company's ability to
execute its business strategy efficiently. The Company's comparable store
sales results have fluctuated significantly in the past and the Company
believes that such fluctuations may continue. The Company's comparable store
net sales increases for 1995, 1996, 1997 and the first quarter of 1998 were
12.9%, 24.5%, 11.1% and 18.0%, respectively. Past comparable store sales
results are no indication of future results, and the Company expects that its
comparable store sales results will decrease in the future.
QUARTERLY RESULTS AND SEASONALITY
The Company has experienced, and expects to continue to experience,
substantial seasonal fluctuations in its sales and operating results, which is
typical of many retailers. Historically, a disproportionate amount of the
Company's retail sales, approximately half of its annual net sales, and all of
its profits have been realized during its fourth fiscal quarter. The Company
expects this pattern to continue during the current fiscal year and
anticipates that in subsequent years the fourth quarter will continue to
contribute disproportionately to its operating results, particularly during
November and December. In anticipation of increased sales activity during the
fourth quarter, the Company incurs significant additional expenses, including
significantly higher inventory costs and the hiring of a substantial number of
temporary employees to supplement its permanent store staff. If, for any
reason, the Company's sales were to fall below its expectations during
November and December, the Company's business, financial condition and annual
operating results would be materially adversely affected. The Company's
quarterly results of operations may also fluctuate significantly as a result
of a variety of other factors, including, among other things, the timing of
new store openings, net sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in the
timing of holidays, changes in the Company's merchandise mix, the timing of
new catalog releases and net catalog sales. Primarily as a result of the
increasing number of recently opened stores and increased distribution and
administrative costs, the Company anticipates a larger aggregate net loss for
its first two quarters of 1998 as compared to 1997.
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends largely on the efforts and abilities of
senior management, particularly Stephen Gordon, the Company's President, Chief
Executive Officer and founder, Thomas Christopher, the Company's Chief
Operating Officer, and Thomas Low, the Company's Chief Financial Officer. The
loss of Mr. Gordon's services or the services of other members of the
management team could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company's performance will depend upon its ability to attract and retain
qualified management, merchandising and sales personnel. There can be no
assurance that Mr. Gordon and the Company's existing management team will be
able to manage the Company or its growth or that the Company will be able to
attract and retain additional qualified personnel as needed in the future.
10
<PAGE>
DEPENDENCE ON KEY VENDORS
The Company's performance depends on its ability to purchase its merchandise
in sufficient quantities at competitive prices. Although the Company has many
sources of merchandise, three of its vendors (Mitchell Gold, a manufacturer of
upholstered furniture, Robert Abbey Inc., a manufacturer of table and floor
lamps, and The Michaels Furniture Company, Inc. ("Michaels"), a manufacturer
of furniture) accounted for approximately 25% of the Company's aggregate
merchandise purchases in 1997. Michaels, a furniture manufacturer which the
Company acquired in 1998, accounted for approximately 7.3% of the Company's
aggregate merchandise purchases in 1997. Mitchell Gold and Robert Abbey Inc.
accounted for approximately 9.7% and 8.1%, respectively, of the Company's
aggregate merchandise purchases in 1997. In addition, the Company's smaller
vendors generally have limited resources, production capacities and operating
histories, and some of the Company's vendors, including Michaels, have limited
the distribution of their merchandise in the past. The Company has no long-
term purchase contracts or other contractual assurances of continued supply,
pricing or access to new products and any vendor or distributor could
discontinue selling to the Company at any time. There can be no assurance that
the Company will be able to acquire desired merchandise in sufficient
quantities on terms acceptable to the Company in the future, or be able to
develop relationships with new vendors or that any inability to acquire
suitable merchandise or the loss of one or more key vendors will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
In addition, a single vendor supports the Company's information systems, and
the Company has generally employed a single general contractor to oversee the
construction of its stores. A failure by such vendor to support these systems
or by such contractor to continue such services adequately would have a
material adverse effect on the Company.
DEPENDENCE ON IMPORTS AND VULNERABILITY TO IMPORT RESTRICTIONS
The Company estimates that in 1997 it purchased approximately 10% of its
merchandise directly from vendors located abroad, primarily in India, and
expects that such purchases will increase to approximately 20% of its
merchandise in 1998. These arrangements are subject to the risks of relying on
products manufactured abroad, including import duties and quotas, loss of
"most favored nation" trading status, currency fluctuations, work stoppages,
economic uncertainties including inflation, foreign government regulations,
political unrest and trade restrictions, including United States retaliation
against foreign trade practices. While the Company believes that it could find
alternative sources of supply, an interruption or delay in supply from India
or the Company's other foreign sources, or the imposition of additional
duties, taxes or other charges on these imports, could have a material adverse
effect on the Company's business, financial condition and results of
operations unless and until alternative supply arrangements are secured.
Moreover, products from alternative sources may be of lesser quality and/or
more expensive than those currently purchased by the Company.
UNCERTAINTIES REGARDING DISTRIBUTION OF MERCHANDISE
The Company anticipates that it will need to expand its current distribution
network to accommodate its planned expansion in 1998 and thereafter. There can
be no assurance that such expansion will not cause disruptions that could
materially adversely affect the Company's business, results of operations and
financial condition. Further, the Company relies upon third party carriers for
its product shipments, including shipments to and from all of its stores, and
accordingly is subject to the risks, including employee strikes and inclement
weather, associated with such carriers' ability to provide delivery services
to meet the Company's shipping needs. The Company is also dependent upon
temporary employees to adequately staff its distribution facility,
particularly during busy periods such as the Christmas season and while stores
are opening. There can be no assurance that the Company will continue to
receive adequate assistance from its temporary employees, or that there will
continue to be sufficient sources of temporary employees.
11
<PAGE>
INTEGRATION OF NEW OPERATION
In March 1998, the Company acquired all of the outstanding capital stock of
Michaels. The Company has not operated a manufacturing operation in the past,
and may be faced with the difficulty of integrating geographically separated
organizations having personnel with disparate business backgrounds and work
environments. There can be no assurance that the Company will be able to
integrate the operations of Michaels effectively or in a timely manner.
COMPETITION
The Company competes with a wide variety of national, regional, and local
retailers. However, due to the fragmented nature of the home furnishings
industry in the United States and the fact that the Company's merchandise cuts
across multiple categories, the competitive landscape is likely to vary
substantially based on each individual market. Competition exists from
businesses utilizing a similar retail store strategy, as well as traditional
furniture stores and department stores. Competitors that are utilizing a
similar retail store strategy include Pottery Barn (a division of Williams-
Sonoma), Crate & Barrel, Z Gallerie and Pier 1 Imports. The Company also
competes to a lesser extent with the catalog operations of companies such as
Smith & Hawken and Williams-Sonoma. Many of the Company's competitors are
larger and have substantially greater financial, marketing and other resources
than the Company.
CHANGES IN CONSUMER TRENDS
The success of the Company depends on its ability to anticipate and respond
to changing merchandise trends and consumer demands in a timely manner. The
Company believes it is benefitting from a lifestyle trend toward increased
interest in home renovation, gardening and interior decorating. Any change in
such trend could adversely affect consumer interest in the Company's major
product lines. Moreover, the Company's products must appeal to a broad range
of consumers whose preferences cannot always be predicted with certainty and
may change between sales seasons. If the Company misjudges either the market
for its merchandise or its customers' purchasing habits, it may experience a
material decline in sales or be required to sell inventory at reduced margins.
The Company could also suffer a loss of customer goodwill if its stores or
newly acquired furniture making operations do not adhere to its quality
control or service procedures or otherwise fail to ensure satisfactory quality
of the Company's products. These outcomes may have a material adverse effect
on the Company's business, operating results and financial condition.
GENERAL ECONOMIC CONDITIONS
Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including, among others, general business
conditions, interest rates, taxation and consumer confidence in future
economic conditions. Adverse economic conditions and any related decrease in
consumer demand for discretionary items such as those offered by the Company
could have a material adverse effect on the Company's business, results of
operations and financial condition.
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, the Company's current stockholders and
management will continue to own beneficially shares of the Company's capital
stock constituting approximately 79% and 41%, respectively, of the voting
power of the outstanding capital stock. As a result, the Company's current
stockholders and management will be able to control the election of directors
and, in general, to determine the outcome of any matter submitted to a vote of
the Company's stockholders for approval. See also "Certain Transactions" and
"Principal and Selling Stockholders".
12
<PAGE>
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock. There is no assurance that an active trading market will develop
or be sustained after completion of the Offering or that the market price of
the Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined through
negotiations between the Company and the Underwriters. See "Underwriting". The
Company believes quarterly fluctuations in its financial results and factors
not directly related to the Company's operating performance, such as product
or financial results announcements by competitors, could contribute to the
volatility of the price of its Common Stock, causing it to fluctuate
significantly. These factors, as well as general economic conditions, such as
recessions or high interest rates, may adversely affect the market price of
the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Common Stock in the public
market following the Offering, or the prospect of such sales, could adversely
affect the market price of the Common Stock and the Company's ability to raise
capital in the future in the equity markets. Upon completion of the Offering,
there will be 16,103,381 shares of Common Stock outstanding. Of these shares,
the 3,330,000 shares to be sold in the Offering will be eligible for immediate
resale without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by an "affiliate", of the Company, as that
term is defined in Rule 144 under the Securities Act. Upon expiration of lock-
up agreements with the Underwriters, 180 days after the date of this
Prospectus (or earlier with the consent of the Underwriters), 12,773,381
shares will be eligible for immediate resale subject to the limitations of
Rule 144. As of May 2, 1998, options to purchase 1,639,806 shares of Common
Stock had been granted under the Company's 1995 Stock Option Plan.
Simultaneously with the completion of the Offering, options to purchase
547,300 shares of Common Stock will be granted under the Company's 1998 Stock
Incentive Plan. The Company intends to file as soon as practicable following
completion of the Offering a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Stock Incentive Plan. This registration statement is expected to become
effective immediately upon filing, whereupon, subject to the satisfaction of
applicable exercisability periods, Rule 144 volume limitations applicable to
affiliates and, in certain cases, the agreements with the Underwriters
referred to above, shares of Common Stock issued upon exercise of outstanding
options granted pursuant to the Stock Incentive Plan will be available for
immediate resale in the open market.
ANTI-TAKEOVER MATTERS
The Company's Certificate of Incorporation and Bylaws contain provisions
that may have the effect of delaying, deterring or preventing a takeover of
the Company that stockholders purchasing in the Offering may consider to be in
their best interests. The Certificate of Incorporation and Bylaws include,
among other things, provisions establishing a Board of Directors with
staggered, three-year terms, requiring supermajority voting to effect certain
amendments to the Certificate of Incorporation and Bylaws and to approve any
merger, consolidation or similar business combination involving the Company or
sale of all or substantially all of the assets of the Company, limiting the
persons who may call special meetings of stockholders, prohibiting stockholder
action by written consent and establishing advance notice requirements for
nominations for election to the Board of Directors or for proposing matters
that can be acted upon at stockholders' meetings. Additionally, the Company is
authorized to issue up to 5,000,000 shares of "blank check" Preferred Stock,
and the Board of Directors may fix the preferences, limitations and relative
rights of those shares without any vote or action by the stockholders. The
potential issuance of Preferred Stock and the concentrated ownership of the
Company could make it more difficult for a party to gain control of the
Company. See "Description of Capital Stock".
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,777,775 shares of
Common Stock by the Company in the Offering (assuming an initial public
offering price of $17.00 per share and after deducting an assumed underwriting
discount and estimated offering expenses) are estimated to be $42.6 million.
The Company intends to use the net proceeds (i) to repay approximately $28.0
million of outstanding indebtedness incurred under its credit agreement (which
is described in "Management's Discussion and Analysis of Financial Condition--
Liquidity and Capital Resources" and Note 4 of Notes to Consolidated Financial
Statements) and (ii) for working capital and other general corporate purposes,
including the funding of new store openings. Pending such uses, the net
proceeds of the Offering will be invested in short-term, interest-bearing
securities. See "Business--Business Strategy".
The Company will not receive any proceeds from the sale of the 552,225
shares of Common Stock offered by the Selling Stockholders. See "Principal and
Selling Stockholders".
DIVIDEND POLICY
The Company expects to retain any earnings to finance the expansion and
development of its business, has not paid dividends historically and has no
plans to pay cash dividends for the foreseeable future. The payment of
dividends is within the discretion of the Company's Board of Directors and
will depend on the earnings, capital requirements and operating and financial
condition of the Company, among other factors. The Company's credit agreement
prohibits the payment of dividends. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources".
14
<PAGE>
DILUTION
As of May 2, 1998, the Company had a net tangible book value of
approximately $26.5 million or $1.99 per share. Net tangible book value per
share is equal to total tangible assets (total assets less intangible assets)
less total liabilities of the Company, divided by the number of shares of
Common Stock and Redeemable Preferred Stock then outstanding. Without taking
into account any adjustment in net tangible book value attributable to
operations after May 2, 1998, after giving effect to the sale by the Company
of 2,777,775 shares in the Offering at an assumed initial public offering
price of $17.00, the pro forma net tangible book value of the Company as of
May 2, 1998 (after deduction of an assumed underwriting discount and estimated
offering expenses and the application of the net proceeds as described under
"Use of Proceeds") would have been approximately $69.1 million or $4.29 per
share. This represents an immediate increase in net tangible book value of
$2.30 per share to existing stockholders and an immediate dilution of $12.71
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $17.00
Net tangible book value per share as of May 2, 1998............... $1.99
Increase per share attributable to new investors.................. 2.30
-----
Pro forma net tangible book value per share after the Offering.... $ 4.29
------
Dilution per share to new investors............................... $12.71
======
</TABLE>
The following table summarizes on a pro forma basis as of May 2, 1998 the
relative investments of all existing stockholders and new investors, giving
effect to the sale by the Company of shares in the Offering at an assumed
initial public offering price of $17.00 per share (without giving effect to
underwriting discounts and offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)...... 13,325,606 82.8% $41,154,328 46.6% $3.09
New investors................. 2,777,775 17.2 47,222,175 53.4 17.00
---------- ----- ----------- -----
Total....................... 16,103,381 100.0% $88,376,503 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Includes 8,068,494 shares purchased and $21,352,381 of consideration for
officers, directors and affiliated persons. Additionally, officers,
directors and affiliated persons have rights to acquire an additional
963,515 shares of Common Stock through outstanding options and warrants.
The above information assumes no exercise of any outstanding options or
warrants after May 2, 1998 other than exercise of a warrant to purchase 763
shares upon the completion of the Offering. As of May 2, 1998, there were
outstanding options and warrants to purchase an aggregate of 1,793,813 shares
of Common Stock at exercise prices ranging from $.66 to $17.14 per share.
Purchasers of shares of Common Stock offered in the Offering will incur
additional dilution to the extent outstanding stock options and warrants are
exercised. See "Management--Benefit Plans" and Notes 6 and 10 of Notes to
Consolidated Financial Statements.
15
<PAGE>
CAPITALIZATION
The following table sets forth the short-term obligations and capitalization
of the Company as of May 2, 1998 and as adjusted to give effect to the
conversion of all outstanding Preferred Stock into Common Stock, the sale of
the Common Stock offered hereby and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds". This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 2, 1998
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term obligations, including current portion
of long-term
obligations(1).................................... $ 29,226 $ 1,437
----------- -----------
Long-term obligations, net of current portion(1)... 4,163 4,163
----------- -----------
Redeemable preferred stock, 9,179,121 shares autho-
rized, actual; 9,151,282 shares issued and out-
standing, actual; no shares authorized, as adjust-
ed; no shares, issued and outstanding, as adjust-
ed................................................ 40,610 --
----------- -----------
Stockholders' equity:
Preferred stock, no shares authorized, actual; no
shares issued and outstanding, actual; 5,000,000
shares authorized, as adjusted; no shares issued
and outstanding, as adjusted..................... -- --
Common stock, 19,000,000 shares authorized,
actual; 4,173,561 shares issued and outstanding,
actual; 40,000,000 shares authorized, as
adjusted; 16,103,381 shares issued and
outstanding, as adjusted(2)...................... 544 2
Additional paid-in capital........................ -- 83,769
Retained earnings................................. (10,612) (10,612)
----------- -----------
Total stockholders' equity........................ (10,068) 73,159
----------- -----------
Total capitalization............................. $ 63,931 $78,759
=========== ===========
</TABLE>
- --------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Note 4 of
Notes to Consolidated Financial Statements. The Company also leases
certain property consisting of retail stores, corporate offices and
distribution centers and equipment. See Note 3 of Notes to Consolidated
Financial Statements and Note 3 of Notes to Financial Statements of
Michaels for more information regarding rental payments under leases in
effect at May 2, 1998.
(2) Includes 763 shares issued upon exercise of a warrant upon completion of
the Offering. Excludes (i) 154,007 shares reserved for issuance upon
exercise of outstanding warrants at May 2, 1998, and (ii) 3,287,662 shares
reserved for issuance under the 1995 Stock Option Plan and 1998 Stock
Incentive Plan, of which 1,639,806 shares were subject to outstanding
options at May 2, 1998 at a weighted average exercise price of $3.81 per
share and 547,300 shares will be issuable upon exercise of options to be
granted concurrently with the Offering. See "Management--Benefit Plans"
and Note 6 of Notes to Consolidated Financial Statements.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT OPERATIONS AND PER SHARE DATA)
The Statements of Consolidated Operations Data and Balance Sheet Data
presented below as of and for the seven months ended January 28, 1995 and as
of and for each of the fiscal years in the three-year period ended January 31,
1998 have been derived from the audited financial statements of the Company.
Although the Company commenced operations in 1980, there are no financial
statements of the Company available for any period prior to the seven months
ended January 28, 1995 and, therefore, no financial information related to any
such prior period is presented below. The Statements of Consolidated
Operations Data and Balance Sheet Data presented below as of and for the three
months ended May 3, 1997 and May 2, 1998, have been derived from the unaudited
consolidated financial statements of the Company. The selected financial data
for the three months ended May 3, 1997 and May 2, 1998 are not necessarily
indicative of the results to be expected for the 1998 fiscal year or any other
future period. The financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED THREE
JANUARY 28, MONTHS
1995(1) 1995 1996(2) 1997 ENDED
----------- ------- ------- ------- ----------------
MAY 3, MAY 2,
1997 1998
------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
CONSOLIDATED OPERATIONS
DATA:
Net sales.............. $4,666 $13,238 $39,672 $97,872 $11,907 $32,647
Cost of sales and
occupancy............. 2,824 8,540 25,299 65,728 8,752 23,634
------ ------- ------- ------- ------- -------
Gross profit........... 1,842 4,698 14,373 32,144 3,155 9,013
Selling, general and
administrative
expenses.............. 1,300 4,075 12,213 27,080 3,733 9,553
Preopening store
expenses.............. -- 162 681 1,869 256 298
------ ------- ------- ------- ------- -------
Income from
operations............ 542 461 1,479 3,195 (834) (838)
------ ------- ------- ------- ------- -------
Net interest income
(expense)............. 6 (48) (113) (139) (79) (426)
------ ------- ------- ------- ------- -------
Provision for income
taxes................. 220 177 570 1,308 (371) (518)
------ ------- ------- ------- ------- -------
Net income............. $ 328 $ 236 $ 796 $ 1,748 $ (542) $ (746)
====== ======= ======= ======= ======= =======
Redeemable preferred
stock repurchases in
excess of carrying
value................. -- -- -- 4,778 -- --
------ ------- ------- ------- ------- -------
Income (loss) available
to common
stockholders.......... 328 236 796 (3,030) (542) (746)
------ ------- ------- ------- ------- -------
Earnings per share(3)
Basic................. $ .07 $ .05 $ .16 $ (.69) $ (.11) $ (.18)
Diluted............... .04 .03 .07 (.69) (.11) (.18)
Weighted average shares
outstanding (3)(4)
Basic................. 4,911 4,915 4,926 4,386 4,926 4,173
Diluted............... 7,545 7,593 10,903 4,386 4,926 4,173
OPERATING DATA:
Number of stores open
at end of period...... 5 10 20 41 21 44
Average net sales per
selling square
foot(5)............... $ 349 $ 636 $ 651 $ 583 N/A N/A
Comparable store net
sales increase(6)..... N/A 12.9% 24.5% 11.1% 20.5% 18.0%
Average selling square
footage per store(7).. 2,674 3,865 4,805 6,113 5,119 6,161
Total selling square
footage at period
end................... 13,369 38,650 100,897 250,622 102,380 271,095
</TABLE>
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 27, FEBRUARY 1, JANUARY 31, MAY 2,
1995 1996 1997 1998 1998
----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $2,093 $ 5,260 $ 6,501 $ 8,188 $ 190
Total assets........... 3,280 16,330 32,230 87,233 110,308
Total debt, including
capital lease
obligations........... 199 1,710 1,580 10,678 33,388
Redeemable preferred
stock................. 1,665 7,737 13,688 40,610 40,610
Stockholders' equity
(deficit)............. 2,296 8,614 15,361 (9,325) (10,068)
</TABLE>
- -------
(1) Although the Company commenced operations in 1980, there are no financial
statements of the Company available for any period prior to the seven
months ended January 28, 1995 and, therefore, no financial information
related to any such prior period is presented above.
(2) 1996 was a 53-week fiscal year. For purposes of comparable store net sales
increase and average net sales per selling square foot, 1996 results were
calculated to correspond with 52-week years.
(3) Gives retroactive effect to (i) the conversion of all outstanding shares
of the Preferred Stock into shares of Common Stock to be effected upon
completion of the Offering and (ii) a 7-for-1-split of the Common Stock
effected by the Company in May 1998. See "Description of Capital Stock--
Common Stock". Computed based on income available to common stockholders
which represents net income less a cash premium over carrying cost of
$4.78 million paid in connection with the redemption of certain Preferred
Stock. The impact of such redemption decreased 1997 basic and diluted
earnings per share by $1.09 per share.
(4) See Note 1 of Notes to Consolidated Financial Statements.
(5) Average net sales per selling square foot is calculated by dividing total
net sales by the weighted average selling square footage of stores open
during the period indicated.
(6) A store becomes comparable at the beginning of the 14th month of
operation. The comparable store percentage in 1997 includes two stores
which were renovated in 1997. The Company had four, five, ten, 18, ten and
20 comparable stores at the end of 1994, 1995, 1996, 1997, the first
quarter of 1997 and the first quarter of 1998, respectively.
(7) Average selling square footage per store is calculated by dividing total
selling square footage by the number of stores open at the end of the
period indicated.
17
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
The Company's acquisition of Michaels will be accounted for under the
"purchase" method of accounting which requires the purchase price to be
allocated to the acquired assets and liabilities of Michaels on the basis of
their estimated fair values as of the date of acquisition. The following pro
forma combined condensed statements of income give effect to the acquisition
of Michaels as if it occurred on February 2, 1997, and include adjustments
directly attributable to the acquisition of Michaels and expected to have a
continuing impact on the combined company (collectively, the "Pro Forma
Financial Information"). As the Pro Forma Financial Information has been
prepared based on estimated fair values, amounts actually recorded may change
upon determination of the total purchase price (which may change based on
future performance) and additional analysis of individual assets and
liabilities assumed.
The Pro Forma Financial Information and related notes are provided for
informational purposes only and are not necessarily indicative of the results
of operations of the Company as they may be in the future or as they might
have been had the acquisition been effected on the assumed dates. The Pro
Forma Financial Information should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes thereto and the Financial
Statements of Michaels, and the related Notes thereto, included elsewhere in
this Prospectus.
18
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
COMPANY MICHAELS ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales.................... $ 97,872 $21,529 $(5,356)(1) $ 114,045
Cost of goods sold and occu-
pancy....................... 65,728 16,113 (4,926)(1) 76,915
---------- ------- ------- ----------
Gross profit................. 32,144 5,416 (430) 37,130
Selling, general and adminis-
trative expenses............ 27,080 4,439 (331)(2) 31,188
Preopening and interest ex-
pense-net................... 2,008 232 540 (3) 2,780
---------- ------- ------- ----------
Income before income taxes... 3,056 745 (639) 3,162
Provision for income taxes... 1,308 264 (256)(4) 1,316
---------- ------- ------- ----------
Net income................... $ 1,748 $ 481 $ (383) $ 1,846
========== ======= ======= ==========
Redeemable preferred stock
repurchases in excess of
carrying value.............. 4,778 4,778
---------- ----------
Income (loss) available to
common stockholders......... (3,030) (2,932)
---------- ----------
Net income (loss) per common
share(5)(6):
Basic...................... $ (.69) $ (.67)
Diluted.................... $ (.69) $ (.67)
Weighted average shares out-
standing(5)(6):
Basic...................... 4,386,207 4,386,207
Diluted.................... 4,386,207 4,386,207
Unaudited pro forma financial
information:
Pro forma net income (loss)
per common share(5)(7):
Basic...................... $ (0.23) $ (0.23)
Diluted.................... $ (0.23) $ (0.23)
Pro forma weighted average
shares outstanding (5)(7):
Basic...................... 12,905,399 12,905,399
Diluted.................... 12,905,399 12,905,399
</TABLE>
- -------
(1) Eliminates the sales and cost of goods sold on inventory purchased from
Michaels.
(2) Reflects the amortization of goodwill related to the acquisition of
Michaels on a straight line basis over 25 years and adjusts salary expense
to reflect compensation specified in an employment agreement entered into
in connection with the acquisition.
(3) Represents interest expense on borrowings under the Company's line of
credit incurred in conjunction with the acquisition of Michaels. Interest
expense was computed at 10.0% (based on the prime rate plus 1.5% per
annum).
(4) Adjusts the historical provision for income taxes to give effect to the
pro forma adjustments discussed in (1), (2) and (3) above at the
historical income tax rate.
(5) Gives retroactive effect to a 7-for-1-split of the Common Stock which was
effected by the Company in May 1998. See "Description of Capital Stock--
Common Stock". Computed based on income available to common stockholders
which represents net income less a $4.78 million cash premium paid over
carrying cost in connection with the redemption of certain Preferred
Stock. The impact of such redemption decreased actual basic and diluted
net income (loss) per share by $1.09 per share and decreased pro forma
basic and diluted net income (loss) per share by $.37 per share. The
remaining Preferred Stock will convert into Common Stock upon the
completion of the Offering. See Note 1 of Notes to Consolidated Financial
Statements.
(6) Excludes the effect of Preferred Stock since their conversion would be
antidilutive.
(7) The pro forma net income (loss) per common share and the pro forma
weighted average shares outstanding have been adjusted to reflect pro
forma effects of the conversion of the Preferred Stock into Common Stock
which will occur automatically upon the completion of the Offering.
19
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 2, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
MICHAELS
----------------
HISTORICAL FEB. 1- MAR. 21- PRO FORMA PRO FORMA
COMPANY MAR. 20 MAY 2 ADJUSTMENTS COMBINED
---------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............... $ 30,086 $3,406 $3,931 $(2,740)(1) $ 34,683
Cost of goods sold and
occupancy.............. 21,903 2,759 3,145 (2,528)(1) 25,279
---------- ------ ------ ------- ----------
Gross profit............ 8,183 647 786 (212) 9,404
Selling, general and
administrative
expenses............... 9,053 588 456 21 (2) 10,118
Preopening and interest
expense-net............ 701 27 24 73 (3) 825
---------- ------ ------ ------- ----------
Income before income
taxes.................. (1,571) 32 306 (306) (1,539)
Provision for income
taxes.................. (644) 22 125 (122)(4) (619)
---------- ------ ------ ------- ----------
Net income.............. $ (927) $ 10 $ 181 $ (184) $ (920)
========== ====== ====== ======= ==========
Net income (loss) per
common share(5)(6):
Basic................. $ (0.22) $ (0.22)
========== ==========
Diluted............... $ (0.22) $ (0.22)
========== ==========
Weighted average shares
outstanding(5)(6):
Basic................. 4,172,996 4,172,996
========== ==========
Diluted............... 4,172,996 4,172,996
========== ==========
Unaudited pro forma fi-
nancial information(7)
Pro forma net income
(loss) per common
share(5)(7):
Basic................. $ (0.07) $ (0.07)
Diluted............... $ (0.07) $ (0.07)
Pro forma weighted aver-
age shares outstand-
ing(5)(7):
Basic................. 13,322,505 13,322,505
Diluted............... 13,322,505 13,322,505
</TABLE>
- --------
(1) Eliminates the sales and cost of goods sold on inventory purchased from
Michaels.
(2) Reflects the amortization of goodwill related to the acquisition of
Michaels on a straight line basis over 25 years and adjusts salary expense
to reflect compensation specified in an employment agreement entered into
in connection with the acquisition.
(3) Represents interest expense on borrowings under the Company's line of
credit incurred in conjunction with the acquisition of Michaels. Interest
expense was computed at 10.0% (based on the prime rate plus 1.5% per
annum).
(4) Adjusts the historical provision for income taxes to give effect to the
pro forma adjustments discussed in (1), (2) and (3) above at the
historical income tax rate.
(5) Gives retroactive effect to a 7-for-1-split of the Common Stock which was
effected by the Company in May 1998. See "Description of Capital Stock--
Common Stock".
(6) Excludes the effect of Preferred Stock since their conversion would be
antidilutive.
(7) The pro forma net income (loss) per common share and the pro forma
weighted average shares outstanding have been adjusted to reflect pro
forma effects of the conversion of the Preferred Stock into Common Stock
which will occur automatically upon the completion of the Offering.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and the related Notes thereto which are included
elsewhere in this Prospectus.
OVERVIEW
Restoration Hardware is a rapidly growing specialty retailer of home
furnishings, hardware and related merchandise, with 47 stores operating in 22
states as of June 1, 1998. From 1995 to 1997, the Company's net sales and
operating income grew at compound annual growth rates of 171.9% and 163.3%,
respectively, principally due to the opening of new stores and strong
comparable store sales growth. Restoration Hardware achieved comparable store
net sales growth of 12.9%, 24.5%, 11.1% and 18.0% in 1995, 1996, 1997 and the
first quarter of 1998, respectively. The Company expects comparable store
sales to decrease in the future as its store base matures.
The Company opened its first store in 1980 and embarked on an aggressive
store opening strategy in 1994. The Company increased its store base from five
stores at the end of 1994 to ten stores at the end of 1995, to 20 stores at
the end of 1996 and to 41 stores at the end of 1997. The Company currently
plans to open approximately 25 new stores in 1998 and approximately 30 new
stores in 1999. There can be no assurance that the Company will be able to
achieve its planned expansion on a timely or profitable basis.
The Company has over time increased the size of its stores to accommodate
the space requirements of its furniture products and to provide customers an
enjoyable and comfortable shopping environment. As a result of the larger
store size, occupancy costs are expected to increase as a percentage of net
sales and net sales per selling square foot are expected to decline. There can
be no assurance that the additional expenses associated with the larger store
size will be offset by higher net sales.
Because of the seasonality of its business, the Company has historically
experienced net losses in the first three quarters of each year. Primarily as
a result of the increasing number of recently opened stores and increased
distribution and administrative costs, the Company anticipates a larger
aggregate net loss for the first two quarters of 1998 as compared to 1997.
In March 1998, the Company acquired all of the outstanding capital stock of
Michaels. The Company has not operated a manufacturing operation in the past,
and may be faced with the difficulty of integrating geographically separated
organizations having personnel with disparate business backgrounds and work
environments. There can be no assurance that the Company will be able to
integrate the operations of Michaels effectively or in a timely manner.
The Company's 52 or 53 week fiscal year ends on the Saturday closest to the
end of January. The fiscal year ended February 1, 1997 included 53 weeks.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of net sales and certain operating data for the Company for the
periods indicated.
<TABLE>
<CAPTION>
SEVEN MONTHS THREE MONTHS ENDED
ENDED ----------------------
JANUARY 28, 1995 1995 1996 1997 MAY 3 1997 MAY 2, 1998
---------------- ----- ----- ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF CONSOLI-
DATED
OPERATIONS DATA:
Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales and occu-
pancy................. 60.5 64.5 63.8 67.2 73.5 72.4
Gross profit........... 39.5 35.5 36.2 32.8 26.5 27.6
Selling, general and
administrative ex-
penses................ 27.9 30.8 30.8 27.7 31.4 29.3
Preopening store ex-
penses................ -- 1.2 1.7 1.9 2.2 0.9
Income from opera-
tions................. 11.6 3.5 3.7 3.3 (7.0) (2.6)
Interest income (ex-
pense)--net........... 0.1 (0.4) (0.3) (0.1) (0.7) (1.3)
Income before income
taxes................. 11.7 3.1 3.4 3.1 (7.7) (3.9)
Comparable store net
sales
increase.............. N/A 12.9% 24.5% 11.1% 20.5% 18.0%
Total number of stores
at end of
period................ 5 10 20 41 21 44
</TABLE>
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
NET SALES. Net sales increased $20.7 million, or 174.2%, to $32.6 million in
the first quarter of 1998 from $11.9 million in the first quarter of 1997.
Comparable store net sales increased 18.0% over the first quarter of 1997 and
contributed $2.1 million of the increase in net sales. Sales for the three
stores opened in the first quarter of 1998 contributed $1.0 million of the
increase in net sales. Stores open prior to May 2, 1998 but not qualifying as
comparable stores contributed $15.0 million of the increase in net sales.
Michaels contributed $2.6 million of the increase in net sales. The increase
in net sales was primarily attributable to increased unit sales.
GROSS PROFIT. Gross profit increased $5.8 million, or 185.7%, to $9.0
million in the first quarter of 1998 from $5.8 million in the first quarter of
1997. As a percentage of net sales, gross profit was 27.6% in the first
quarter of 1998 compared to 26.5% in the first quarter of 1997. The increase
in gross profit was primarily attributable to higher net sales offset by
higher distribution and merchandise expenses associated with the procurement
and distribution of merchandise and higher occupancy expenses related to the
stores opened in 1997 and in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.8 million, or 155.9%, to $9.6 million in
the first quarter of 1998 from $3.7 million in the first quarter of 1997. The
dollar increase in such expense was primarily attributable to store payroll
and non-occupancy costs associated with the opening of 23 stores and
administrative expenses attributable to the expansion of the Company's
headquarters and distribution facilities. As a percentage of net sales,
selling, general and administrative expenses decreased to 29.3% of net sales
in the first quarter of 1998 from 31.4% of net sales in the first quarter of
1997.
INTEREST INCOME (EXPENSE)--NET. Interest expense, primarily attributable to
the Company's credit facility, increased $347,000, or 439.2%, to $426,000 in
the first quarter of 1998 from $79,000 in 1997. This increase is attributable
to the increase in borrowings related to higher merchandise levels for the
larger store base and increased capital expenditures related to new stores
opened or scheduled to open in the first half of 1998.
22
<PAGE>
1997 COMPARED TO 1996
NET SALES. Net sales increased $58.2 million, or 146.7%, to $97.9 million in
1997 from $39.7 million in 1996. Sales for the 21 stores opened in 1997
contributed $37.2 million of the increase in net sales. Comparable store net
sales increased 11.1% over the prior year and contributed $2.9 million of the
increase in net sales. The growth in comparable store sales was due in large
part to expanded merchandise categories, additional SKUs, improved customer
service and increased awareness of the Company's stores in the market. Stores
open prior to 1997, but not qualifying as comparable stores, contributed $18.1
million of the increase in net sales. The increase in net sales was primarily
attributable to increased unit sales.
GROSS PROFIT. Gross profit increased 123.6% to $32.1 million in 1997 from
$14.4 million in 1996. As a percentage of net sales, gross profit was 32.8% in
1997 compared to 36.2% in 1996. The lower gross profit experienced in 1997 was
attributable to higher store occupancy and distribution costs associated with
the Company's strategy to open stores in higher-quality sites, including a
higher percentage of enclosed mall stores, which generally have higher
occupancy costs. The higher store occupancy costs were partially offset by
improved buying and enhanced merchandising and inventory controls.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 121.7% to $27.1 million in 1997 from $12.2
million in 1996. The dollar increase in such expenses was primarily
attributable to store payroll and other non-occupancy costs associated with
the opening of 21 stores and increased administrative expenses associated with
the expansion of the Company's headquarters in 1997. As a percentage of net
sales, selling, general and administrative expenses decreased to 27.7% of net
sales in 1997 from 30.8% of net sales in 1996. This decrease was primarily due
to lower store and corporate expenses as a percentage of sales as the Company
was able to better leverage its expanding store base.
INTEREST INCOME (EXPENSE)--NET. Interest expense, principally attributable
to the Company's credit facility, increased 23.0% to $0.1 million in 1997 from
1996. The expense was offset in part by investment income from the proceeds of
a private equity financing in 1997.
1996 COMPARED TO 1995
NET SALES. Net sales increased $26.5 million, or 199.7%, to $39.7 million in
1996 from $13.2 million in 1995. Sales for the ten stores opened in 1996
contributed $13.9 million of the increase in net sales. Comparable store net
sales increased 24.5% in 1996 and contributed $2.3 million of the increase in
net sales. The Company believes the increase in comparable store sales in 1996
was the result of the introduction of a broader assortment of furniture and
lighting and higher in-stock positions. Stores open prior to 1996, but not
qualifying as comparable stores, contributed $9.4 million of the increase in
net sales. The year ended February 1, 1997 included a fifty-third week which
contributed $0.9 million of the increase in net sales. The increase in net
sales was primarily attributable to increased unit sales.
GROSS PROFIT. Gross profit increased 205.9% to $14.4 million in 1996 from
$4.7 million in 1995. As a percentage of net sales, gross profit was 36.2% in
1996 compared to 35.5% in 1995. The increased gross profit experienced in 1996
was primarily due to efficiencies achieved in purchasing, as well as improved
management of the margins at the store level, offset by higher occupancy
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 199.7% to $12.2 million in 1996 from $4.1
million in 1995. The dollar increase in such expenses was primarily
attributable to store payroll and other non-occupancy costs associated with
the opening of ten stores in 1996. As a percentage of net sales, selling,
general and administrative expenses remained the same at 30.8% for 1996 and
1995.
23
<PAGE>
INTEREST INCOME (EXPENSE)--NET. Interest expense, principally attributable
to the Company's credit facility, increased 135.4% to $0.1 million in 1996
from 1995. The expense was offset in part by investment income from the
proceeds of private equity financings in 1996 and 1995.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------ ------------------------------------- -------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF CONSOLI-
DATED
OPERATIONS DATA:
Net Sales............... $4,578 $5,870 $8,849 $20,375 $11,907 $15,462 $23,544 $46,959 $32,647
As a % of full year..... 11.5% 14.8% 22.3% 51.4% 12.2% 15.8% 24.0% 48.0% N/A
Gross profit............ $1,492 $2,034 $3,120 $ 7,727 $ 3,155 $ 4,626 $ 7,050 $17,313 $ 9,013
As a % of full year..... 10.4% 14.2% 21.7% 53.7% 9.8% 14.4% 21.9% 53.9% N/A
As a % of net sales..... 32.6% 34.7% 35.3% 37.9% 26.5% 29.9% 29.9% 36.9% 27.6%
Income (loss) from oper-
ations................. $ (231) $ (59) $ 301 $ 1,468 $ (834) $(1,222) $ (153) $ 5,404 $ (838)
As a % of full year..... (15.6)% (4.0)% 20.4% 99.2% (26.1)% (38.2)% (4.8)% 169.1% N/A
As a % of net sales..... (5.0)% (1.0)% 3.4% 7.2% (7.0)% (7.9)% (0.6)% 11.5% (2.6)%
Comparable store net
sales increase......... 24.0% 19.0% 26.1% 25.6% 20.5% 8.5% 16.6% 6.9% 18.0%
</TABLE>
The Company has experienced, and expects to continue to experience,
substantial seasonal fluctuations in its sales and operating results, which is
typical of many retailers. Historically, a disproportionate amount of the
Company's retail sales, approximately one half of its annual net sales, and
substantially all of its profits have been realized during its fourth fiscal
quarter. The Company expects this pattern to continue during the current
fiscal year and anticipates that in subsequent years the fourth quarter will
continue to contribute disproportionately to its operating results,
particularly during November and December. In anticipation of increased sales
activity during the fourth quarter, the Company incurs significant additional
expenses, including the hiring of a substantial number of temporary employees
to supplement its permanent store and distribution center staff. If, for any
reason, the Company's sales were to fall below its expectations during
November and December, the Company's business, financial condition and annual
operating results would be materially adversely affected. The Company's
quarterly results of operations may also fluctuate significantly as a result
of a variety of other factors, including, among other things, the timing of
new store openings, net sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in the
timing of holidays and changes in the Company's merchandise mix. Primarily as
a result of the increasing number of recently opened stores and increased
distribution and administrative costs, the Company anticipates a larger
aggregate net loss for the first two quarters of 1998 as compared to the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of liquidity and capital have been cash flows
from operations, borrowings under its credit facilities and proceeds from
equity financings. The Company's primary capital requirements have been for
new store development, working capital and general corporate needs.
Net cash provided by (used in) operations for the first quarter of 1998 and
for 1997 and 1996 was $(7.7) million, $4.1 million and $(1.2) million,
respectively. Net cash used in investing activities for the first quarter of
1998 and for 1997 and 1996 was $13.2 million, $26.8 million and $10.6 million,
respectively, primarily for the opening of new stores. Financing activities
consist primarily of issuance of stock and net changes in short term
borrowings. Financing activities for the first quarter of 1998 included $5.5
million for the acquisition of Michaels. Net cash provided by financing
activities for the
24
<PAGE>
first quarter of 1998 and for 1997 and 1996 was $21.3 million, $23.3 million
and $5.8 million, respectively. The increase in cash provided by financing
activities in 1997 was due to the issuance of a Series D Preferred Stock in
May 1997 which generated $14.2 million net proceeds to the Company. In
connection with the Series D Preferred Stock financing, the Company also
repurchased 1,325,541 shares of Common Stock. The repurchase was effected to
provide partial liquidity to certain shareholders who had participated in
early Company financings. The Company sold additional shares of Series D
Preferred Stock to fund the repurchase. The consent of the Company's
commercial lender was required and obtained in connection with the repurchase.
Net borrowings under the Company's credit facilities totalled $32.5 million at
May 2, 1998 and $9.8 million at the end of 1997.
The Company currently has an outstanding Loan and Security Agreement (the
"Loan Agreement") with a commercial lender. The Loan Agreement provides for a
total availability of $58.0 million, consisting of a $50.0 million facility
for the Company and an $8.0 million facility for its subsidiary, Michaels
(collectively with the Company, the "Borrowers"). The Company's facility under
the Loan Agreement provides for revolving credit loans in an aggregate
outstanding principal amount of up to $40.0 million (including up to $1.5
million in the form of letters of credit). Availability under the Company's
revolving credit facility is based on the calculation of 65% of the Company's
eligible inventory (valued under the weighted average cost method), less any
letters of credit outstanding. Interest on outstanding indebtedness under the
revolving credit facility accrues at the lender's prime commercial lending
rate (the "Base Rate") or, if the Company elects, at an annual rate of LIBOR
plus 2.0%, subject to reduction at the completion of the Offering by 0.5%. The
Borrowers' obligations under the Loan Agreement are secured by security
interests in substantially all of the personal property of the Borrowers,
including, without limitation, accounts receivable, inventory, equipment,
machinery, contract rights and chattels. The Loan Agreement matures on
December 22, 1999.
The Company's facility under the Loan Agreement also includes a seasonal
facility (the "Seasonal Facility") to fund the opening of new stores of the
Company during the period from February 1 to December 31 of each year. The
aggregate principal amount available under the Seasonal Facility may not
exceed $10.0 million at any time. The amount available for each store opening
under the Seasonal Facility is equal to the lesser of (i) $500,000 and (ii)
100% of actual store opening costs, net of tenant improvement allowances
provided by certain landlords. Advances under the Seasonal Facility take the
form of term loans repayable in full on January 1 of each year with the first
such repayment due on January 1, 1999. Interest is payable monthly in arrears
and at maturity. Interest under the Seasonal Facility accrues at the Base Rate
plus 0.75%.
The Michaels facility under the Loan Agreement provides for revolving credit
loans in an aggregate principal amount of up to $3.0 million. Availability
under the Michaels revolving credit facility is based on the calculation of
85% of the net amount of eligible accounts receivable outstanding, plus 25% of
the value of Michaels eligible inventory measured on a first-in, first-out
basis, at the lower of cost or market, not to exceed $500,000. Interest on the
Michaels revolving credit loans accrues at the same rate as for revolving
credit loans to the Company, except that Michaels will only benefit from the
0.5% reduction following an initial public offering if the term loan to
Michaels is repaid with the proceeds thereof. The Michaels facility under the
Loan Agreement also provides for a term loan to Michaels of $5.0 Million. The
term loan amortizes over five years commencing on the first anniversary of the
advance of the term loan. Interest on the term loan accrues at the Base Rate
plus 1.25%.
The Loan Agreement contains customary covenants restricting the activity of
the Borrowers, including, without limitation, financial covenants based on the
Company's EBITDA, inventory turnover ratio, and Michaels' cash flow and fixed
charge coverage ratio and other covenants restricting the Borrower's ability
to merge, consolidate, or acquire non-subsidiary entities, make loans, incur
debts or liens, make capital expenditures, pay cash dividends, open new stores
or engage in substantial asset sales. As of January 31, 1998, the Company was
not in compliance with its maximum indebtedness to
25
<PAGE>
net worth ratio covenant of 1.70:1.0, posting 1.90:1.0. For the year ended
January 31, 1998, the Company was not in compliance with its maximum capital
expenditure covenant of $26,000,000, posting $26,700,000, and minimum
inventory turnover ratio covenant of 2.2, posting a turnover ratio of 2.14.
For the quarter ended May 2, 1998, the Company was not in compliance with its
maximum capital expenditure covenant of $7,400,000, posting $8,100,000. The
Company has received waivers from its bank for each covenant with which it was
in non-compliance as of and for the year ended January 31, 1998 and as of and
for the quarter ended May 2, 1998.
The Company estimates that net capital expenditures for 1998 will be
approximately $24 million. This amount will be primarily for new store
development and to a lesser extent for purchase of distribution equipment and
the enhancement of management information systems.
In connection with its acquisition of Michaels, the Company is required to
pay the former owner contingent cash consideration equal to 35% of Michaels'
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the period from March 20, 1998 to January 30, 1999 and 25% of Michaels' EBITDA
for fiscal years ending January 29, 2000 and January 27, 2001. In addition,
the Company is required to transfer shares of Michaels to the former owner of
Michaels equal to (i) 3.3% of the outstanding shares of Michaels if Michaels'
EBITDA for the period commencing on March 20, 1998 and ending on January 30,
1999 equals or exceeds $2.605 million, (ii) an additional 3.3% of such shares
of Michaels if Michaels' EBITDA for the fiscal year ending January 29, 2000
equals or exceeds $3.6 million and (iii) an additional 3.4% of such shares of
Michaels if Michaels' EBITDA for the fiscal year ending January 27, 2001
equals or exceeds $4.0 million. Michaels' EBITDA for the period from March 20,
1998 to May 2, 1998 was $364,000.
The Company believes cash flow from operations, funds available under its
credit facilities and the net proceeds, if any, from the Offering will be
sufficient to satisfy the Company's capital requirements for the next 12
months.
26
<PAGE>
BUSINESS
THE COMPANY
Restoration Hardware is a rapidly growing specialty retailer of home
furnishings, functional and decorative hardware and related merchandise that
reflects the Company's classic and authentic American point of view.
Restoration Hardware's merchandising strategy and its stores' architectural
style create a unique and attractive selling environment designed to appeal to
an affluent, well educated 35 to 55 year old customer. In 1997, the Company
recorded net sales of $97.9 million and operating income of $3.2 million,
representing compound annual growth rates since 1995 of 171.9% and 163.3%,
respectively. This growth has been driven primarily by the opening of five,
ten and 21 stores in 1995, 1996 and 1997, respectively, and by strong
comparable store sales growth of 12.9%, 24.5% and 11.1%, respectively, during
each of these same periods. The Company plans to continue its store expansion
program and expects to open approximately 25 new stores in 1998 and
approximately 30 new stores in 1999. The Company operated 47 stores in 22
states at June 1, 1998.
Restoration Hardware commenced business more than 18 years ago as a purveyor
of fittings and fixtures for older homes. Since then, the Company has evolved
into a unique home furnishings retailer offering consumers an array of
distinctive, high-quality and often hard-to-find merchandise. The Company
displays its broad assortment of merchandise in an architecturally inviting
setting, which the Company believes appeal to both men and women. The Company
creates an attractive and entertaining environment in its stores by virtue of
its eclectic product mix, which combines classic, high-quality furniture,
lighting, home furnishings and functional and decorative hardware with unusual
discovery items such as the Original Russian Forever Flashlight and the Bite
The Man dog toy. This environment features surprising combinations and
assortments of merchandise. Customers encounter everything from nickel plated
towel bars and four-function tape measures to velvet sofas and a solid cherry
sleigh bed. Integral to the shopping experience, most product displays are
complemented by the Company's unique and often whimsical in-store signage
program. This signage, created and written by the Company's founder and CEO,
Stephen Gordon, provides historical, anecdotal and sometimes nostalgic
descriptions of products. The Company believes its signage program
significantly enhances the store's ability to connect with the customer. The
Company's focus on intriguing combinations of authentic, high-quality and
functional products provides its customers a unique shopping experience that
substantially differentiates the Company from its competitors and encourages
repeat business.
A typical Restoration Hardware store features approximately 7,000 square
feet of selling space designed with a residential look and feel that the
Company believes customers will want to recreate in their own homes. Each
store carries approximately 4,500 SKUs, many of which are frequently turned
over to refresh the store offerings and encourage customers to rediscover the
store. In 1997, the Company increased its SKU count by approximately 750
items, adding approximately 1,250 new SKUs and discontinuing approximately 500
SKUs. Products are displayed in an open and airy residential setting which
encourages the customers to wander from room to room, passing through a foyer,
adjacent hardware rooms, library, living room, bedroom and bath and garden
areas.
The following summarizes certain key operating characteristics of a
Restoration Hardware store and is based upon the 20 stores operated by the
Company for the full year ended January 31, 1998.
<TABLE>
<S> <C>
Average 1997 net sales per selling square foot..................... $ 588
Average 1997 store-level operating income.......................... $468,910
Average 1997 store-level operating margin.......................... 15.5%
</TABLE>
27
<PAGE>
COMPANY HISTORY
The Company's founder, Stephen Gordon, developed the concept for Restoration
Hardware based upon his passion for fine craftsmanship and design. After
purchasing and remodeling a neglected Queen Anne Victorian home in Eureka,
California, Mr. Gordon recognized the need for a retail concept which carried
high-quality hardware, fixtures and related items. In 1980, Restoration
Hardware opened its first store in Old Town Eureka. The Eureka store consisted
of approximately 1,500 square feet of selling space and focused primarily on
providing hard-to-find, high-quality hardware and Victorian fixtures.
Following its first external equity financing in 1994, the Company
accelerated its expansion, professionalized its management team and upgraded
its financial and information systems. The Company also refined its
merchandising strategy in response to customer demand for a broader assortment
of merchandise: furniture and home furnishings were introduced to the
merchandise selection and hardware items became more decorative in nature. To
accommodate the space requirements for these new products, the Company
increased the size of its store model. The Company believes that its typical
store size of approximately 7,000 square feet of selling space provides
customers an enjoyable, comfortable shopping environment and an effective
display for Restoration Hardware's selection of merchandise. After over 18
years of developing the Restoration Hardware retail concept, management
believes it has a unique and clearly differentiated store concept and
merchandising mix which management can continue to successfully roll out on a
nationwide basis.
BUSINESS STRATEGY
The Company's goals are to establish Restoration Hardware as a leading
lifestyle-oriented consumer brand and to realize substantial profitable
growth. The Company's strategy for achieving these goals includes the
following key elements:
EXPANSION STRATEGY. Restoration Hardware believes that its retail concept
has broad national appeal and that, as a result, it has significant new store
expansion opportunities over the next several years. Accordingly, the Company
plans to open approximately 25 new stores in 1998 and approximately 30 new
stores in 1999. The Company intends to open new stores in markets it does not
already serve and open more stores in its current markets. In preparation for
this expected expansion, management has dedicated substantial resources to
building the infrastructure and management information systems necessary to
support a large national chain.
The Company plans to continue to open stores in top tier malls, specialty
centers and select street locations in affluent urban and suburban areas. The
Company is opportunistic in selecting the best locations available that
satisfy its demographic, financial and other criteria and does not necessarily
cluster its store locations. All potential sites are subject to extensive
analysis, including demographic and psychographic factors, the look and feel
of the site and the terms of the lease. The Company utilizes the services of
outside firms to provide market and demographic data and to assist in locating
and securing potential locations.
Additionally, and in response to strong customer demand, Restoration
Hardware intends to introduce a catalog in September 1998. The Company
believes its catalog operation will generate incremental sales in markets
without stores, create additional store traffic in the Company's current
markets and increase consumer awareness and loyalty.
DIFFERENTIATED MERCHANDISING STRATEGY. The Company's merchandising strategy
is to offer distinctive, high-quality, hard-to-find merchandise for the home.
The Company offers a collection of merchandise not traditionally found in a
single store environment, including classic American styled furniture,
lighting, home furnishings, functional and decorative hardware, and discovery
items. The merchandise selection is carefully edited to provide a consistent
point of view throughout the store,
28
<PAGE>
emphasizing tasteful design, quality, value, functionality and a timeless,
classic feel. The Company focuses on products that have a sense of history or
authenticity to which customers can relate, believing that consumers have a
strong desire to return to traditions from their past or create traditions
where none previously existed. The Company's Teddy Chair, for instance, is a
replica of a tailored, comfortable leather chair used by Theodore Roosevelt on
his train travels from the Eastern United States to the West. Product
selection also reflects a penchant for the playful, including the Atomic Robot
Man, Moon Pies, the Acme Dog Biscuit Mix (complete with a bone-shaped cutter),
as well as The Book of Campfire Songs and the Gonzo Wonder Sponge. In
addition, unlike many other retailers, the Company focuses on purchasing
products one item at a time rather than focusing only on product categories.
No product is selected to simply round out a product category. Each item must
stand on its own and is evaluated on its own merits. The Company does not have
prescribed price points and finds it equally justifiable, from a merchanding
point of view, to offer a vintage, Austrian, windproof lighter at $5 and a
solid, red oak Mule Chest at $1,990. The Company's merchandise mix includes
proprietary products and hard-to-find products selected from non-traditional
distribution channels that appear unique to Restoration Hardware's customers.
INNOVATIVE STORE ENVIRONMENT. The environment in a Restoration Hardware
store is carefully designed to complement and highlight the unique merchandise
mix and to create an attractive and fun shopping environment for the customer.
Key elements of this unique store environment include:
ARCHITECTURALLY DRIVEN STORE DESIGN. The design of a Restoration Hardware
store is based on residential interiors with a strong architectural
presence that has a look and feel which the Company believes customers seek
to recreate in their homes. Restoration Hardware stores feature classic
wood columns, finely detailed casework and natural wood floors. Colors are
subdued, utilizing the Company's signature sage green, complemented by a
palette of white and natural wood tones. Essential to the design are high
ceilings, distinctive lighting and spacious, separate rooms for different
product categories and seasonal presentations. The ambiance enhances the
perceived value of the Company's merchandise and provides customers with a
model for interior design that influences and validates their purchasing
decisions. The design of the store also draws customers from room to room
where they are encouraged to pick up, touch and explore different products.
The Company believes this lengthens the stay of an individual within the
store and increases the likelihood of multiple purchases.
INTRIGUING IN-STORE PRODUCT PRESENTATION. The merchandise is displayed in
a manner designed to enhance its visual appeal and maximize customer
impulse buying. Each store features open area rooms, such as the library,
the living room and the bedroom, for display of the core product
categories. Distinctive discovery items are cross-merchandised within the
rooms creating surprising combinations of merchandise. At Restoration
Hardware, functional goods are often treated as decorative accessories. For
example, hammers may be merchandised in a glass vase on a coffee table,
flashlights and stainless steel dustpans may grace a solid cherry dresser,
or a display of waiter's crumbers and carpentry guides may be symmetrically
poised on a vintage nightstand.
Another important dimension to the Company's merchandising strategy is
the utilization of the store space itself. Under the direction of the
Company's visual merchants, the stores are continually revising product
placement. Visual design packages reflecting both floor and window changes
are routinely developed and implemented by a multi-store visual team. Home
furnishings displays are updated to have seasonal impact and the discovery
items are rotated throughout the store environment to maintain freshness.
The changing layout of the merchandise also contributes to the sense of
discovery shoppers experience and helps to maintain the interest level of
repeat customers. Restoration Hardware regularly updates its product
offerings. However, items are not discontinued merely to make the store
look new and fresh, and the Company adheres to the philosophy of keeping
some constancy in its product offerings.
29
<PAGE>
CREATIVE AND ENTERTAINING IN-STORE SIGNAGE. In order to highlight the
distinctive merchandise, products are frequently accompanied by customized
signage which appears handcrafted. The signage is informative, occasionally
whimsical and often reinforces the Company's focus on the value of quality and
traditions in our lives. The signage is designed to provide enjoyment and a
powerful incentive to purchase. The prose focuses the customer on a sense of
tradition and history, is often anecdotal, and sometimes humorous. "Customers
may not need a set of authentic doctor's office canisters", the signage
suggests, "but you yearn for them. For all the boys and girls who promised Mom
they'd grow up to be physicians and didn't". At Restoration Hardware the
Company's signage program heightens the sense of retail theatre. The products
are the actors, each with their own lines "spoken through" the signage.
FOCUS ON HIGHLY DESIRABLE TARGET CUSTOMER. The Company focuses on attracting
an affluent customer base of both men and women who typically are in their
mid-30s to mid-50s, well educated, generally own their home and report an
average household income in excess of $75,000. The Company believes that its
growth during recent years partially reflects growing interest among its
consumers in decorating and outfitting their homes. For this customer, the
Company's merchandise selection, residential ambience and signage program
provide a distinctive and enjoyable shopping experience. By focusing on its
target customer, the Company believes it can successfully penetrate new
markets in a variety of locations throughout the United States, while building
a loyal customer base for repeat business.
EXCEPTIONAL CUSTOMER SERVICE. Restoration Hardware is committed to providing
the highest level of customer service. Key elements of such service include: a
high degree of product availability, excellent follow-through on requests and
questions, useful product information, a hassle-free return policy and high-
quality merchandise. To provide this service, the Company focuses on hiring
mature, professional and quality-conscious staff. The Company conducts
training in a number of areas, including product knowledge, and has a culture
that empowers its staff to go to great lengths to satisfy its customers'
needs. Another extremely important factor for customers is the ability to
receive their merchandise, especially furniture, in a timely manner. Each
store maintains a stock room and receives inventory that encompasses the
complete range of merchandise exhibited on the sales floor. Customers can in
most cases leave the store with their purchases, including stocked furniture
items. The Company's strong customer service emphasis supports its unique
shopping experience and has been critical to the Company's ability to market
higher price point items such as furniture.
BUILDING THE BRAND AND OPERATING INITIATIVES. An integral part of the
Company's strategy is to strengthen the Restoration Hardware brand. The
Company believes that the opening of new stores, its daily interaction with
customers and all other aspects of its business play a role in building its
brand identity. To this end, the products, the architecture of the store, the
signage, the in-store music program and the Company's culture all reflect
Restoration Hardware's consistent and differentiated point of view.
The Company continues to focus on several initiatives designed to both
enhance the performance of the stores and strengthen the Company's emerging
brand identity. These include: (1) continuing to expand proprietary offerings,
(2) increasing the number of imported SKUs, (3) strengthening relationships
with key vendors, (4) building the Company's catalog business and (5) refining
the Company's web site.
MERCHANDISING MIX
Restoration Hardware offers a broad but carefully edited selection of
merchandise that provides a consistent point of view throughout the stores.
The Company offers a collection of merchandise not traditionally found in a
single store environment, including classic American styled furniture, home
30
<PAGE>
furnishings, lighting, functional and decorative hardware and discovery items.
Each store carries approximately 4,500 SKUs, many of which are frequently
turned over to refresh the store offerings and encourage customers to
rediscover the store. In 1997, the Company increased its SKU count by
approximately 750 items, adding approximately 1,250 new SKUs and discontinuing
approximately 500 SKUs. A key element within Restoration Hardware's
merchandise mix are the discovery items, consisting of unusual, hard-to-find,
sometimes whimsical and intriguing product offerings. The merchandise mix also
includes proprietary products and hard-to-find products selected from non-
traditional distribution channels that appear unique to Restoration Hardware's
customers.
Although the Company seeks to have a broad assortment of merchandise within
each of its product categories, the Company's selection process is more item-
driven than category driven. Each product needs to stand on its own
distinctive merits. No product is selected to simply round out a product
category. The following table sets forth the Company's product categories by
percentage of sales for 1997:
<TABLE>
<CAPTION>
PRODUCT CATEGORY % OF SALES
---------------- ----------
<S> <C>
Furniture and Lighting............................................ 42%
Discovery Items, Accessories and Books............................ 23
Hardware and Housewares........................................... 17
Bath and Bedroom.................................................. 9
Garden and Other.................................................. 9
---
100%
===
</TABLE>
STORE LAYOUT
The layout of a Restoration Hardware store features distinct rooms,
typically the foyer, the living room, the library, the bedroom and the bath
and garden areas, within which core product categories are grouped. Discovery
items and other products are cross-merchandised within these core groupings to
allow for surprising product combinations and to increase impulse buying. This
room design reinforces the residential ambience of a Restoration Hardware
store and provides customers with a model for interior design that validates
their purchasing decisions.
FOYER AND HARDWARE ROOMS. Customers enter Restoration Hardware through the
store's foyer, where the Company uses an open design and changing product
presentation to draw customers into the store. Merchandise assortments are
frequently rotated in this area, maintaining freshness and inviting customers
to discover and explore the store. To the right and left of the foyer, the
Company displays hardware. Hardware is both the genesis of the Company's
business and an increasingly important point of differentiation for its
stores. Even as Restoration Hardware increases assortments in furniture and
furnishings, the Company remains committed to increasing product in hardware
and fittings. The first hardware room includes the Company's broad assortment
of cabinet hardware, comprised of over 600 knobs and pulls in a wide variety
of finishes. The second hardware room features classic items such as house
plaques and numbers, mailboxes, knockers and numerous fittings, all designed
for easy installation by the customer. In addition, since most of the hardware
is wall-mounted, the Company is able to devote valuable floor space in the
hardware rooms to merchandise such as furniture and lighting.
LIVING ROOM. Restoration Hardware's living room serves as the main display
room. A typical living room is designed with high ceilings, bronze chandeliers
and a mix of merchandise that is frequently changed. The Company utilizes the
living room to highlight its furniture and lighting items such as the Kathleen
Sofa and Roses Table Lamp. The Company often stocks select book titles in this
area, such as Graces, and home furnishings to further enhance the residential
nature of this space. In addition, to take advantage of the high traffic in
the living room, the Company cross- merchandises many of its impulse oriented
discovery items here.
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<PAGE>
LIBRARY. Comfortable upholstered and rich leather chairs welcome customers
into the library, where they are invited to browse through the wide assortment
of books. Libraries often feature a fireplace with a richly detailed mantel to
enhance the ambience. The Company carries how-to books on gardening,
woodworking, interior decorating and home renovation as well as reference and
"coffee table" books on architecture, design and a variety of other subjects.
Books are displayed as sources of information and entertainment as well as
decorative accessories. Carefully selected titles such as Pocket Ref (Almost a
Nerd in Your Pocket) and The Book of American Traditions are also featured
throughout the store, further emphasizing the Restoration Hardware point of
view.
BEDROOM AND BATH AREA. The bedroom features furniture, an assortment of
proprietary linens and duvets and a broad collection of drapery rods and
panels. The bath area features a clawfoot bath tub, towel bars, hooks, mirrors
and other items designed to allow customers to easily embellish the bath.
These items include soap dishes and canisters in glass, stainless, aluminum,
pewter and ceramic as well as shower curtains, rings and hooks.
GARDEN AREA. The garden room features limestone floors, skylights, a fully
functioning fountain and greenery to present an ambience suitable for display
of the Company's gardening merchandise. Products typically include outdoor
furniture, fountains, statuary, silk flowers, planters, tools and accessories.
During the spring and summer months, the mix of merchandise within the garden
is broadened.
PRODUCT SELECTION, PURCHASING AND SOURCING
A typical Restoration Hardware store stocks approximately 4,500 different
SKUs which the Company currently purchases from approximately 400 vendors.
These vendors include major domestic manufacturers, specialty niche
manufacturers and importers. Important to the Company's strategy is its
ability to maintain the freshness of its merchandise selection by continually
adding new products. These new items complement the core product assortment,
give a fresh look to the stores and sustain the interest of the repeat
customer. Stephen Gordon and the Company's merchandise team are responsible
for new product. This team, comprised of buyers, assistants and an in-house
product development director, regularly attends product shows in the United
States and travels overseas in search of new product development and sourcing
opportunities.
The Company has recently begun focusing on increasing its selection of
imported merchandise. The Company maintains agents in China, India, England,
France, Portugal and Eastern Europe and its merchandising team travels to Asia
and Europe in search of new products. By sourcing products offshore, the
Company seeks to achieve increased buying effectiveness and ensure exclusivity
for a portion of its product line. In many instances, the Company also works
closely with its vendors to develop products which are unique to Restoration
Hardware.
In March 1998, the Company acquired all of the outstanding capital stock of
Michaels for an aggregate purchase price of approximately $5.0 million plus
contingent future payments and stock incentives based on the performance of
the acquired operations. Michaels had previously been an independent supplier
of furniture to the Company accounting for approximately 7.3% of its
merchandise purchases in 1997. The Company believes that the acquisition of
Michaels will give Restoration Hardware a secure supply of a popular furniture
line for its stores and catalog.
ADVERTISING AND MARKETING
The Company has traditionally focused its advertising efforts and
expenditures in the third and fourth quarters. Print campaigns are conducted
in October, November and December featuring full page advertisements in major
market and regional newspapers. Print advertising is focused on line drawings
of specific products, accompanied by the Company's distinctive product
descriptions. The Company runs both a "Famous Fall Lighting Sale" campaign and
a "Holiday Wit & Wisdom" campaign. In connection with the latter campaign, the
Company also direct mails a holiday gift guide with holiday gift suggestions
and a response card designed to increase store traffic.
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The Company also maintains a public relations effort designed to ensure
national and regional press to support its brand awareness as well as to
support new store openings in both existing and new markets. In addition, the
Company maintains a website, www.restorationhardware.com, designed to promote
consumer awareness of Restoration Hardware and generate store traffic.
Additionally, and in response to strong customer demand, Restoration
Hardware intends to introduce a catalog in September 1998. The Company
believes its catalog operation will generate incremental sales in markets
without stores, create additional store traffic in the Company's current
markets and increase consumer awareness and loyalty. The Company intends to
outsource the telemarketing, fulfillment and information system functions
associated with the catalog operations.
STORE OPERATIONS AND DISTRIBUTION
The Company's store operations and distribution are critical components in
Restoration Hardware's ability to satisfy its customers and build the brand
awareness and loyalty the Company strives for. The Company strongly emphasizes
customer service.
Store operations are managed through several operating districts. Each
district manager is responsible for approximately eight stores. To ensure
delivery of excellent customer service, each store is staffed by a store
manager, an assistant store manager and anywhere from five to 20 store
associates depending on expected customer traffic. Store associates are
assigned to one or more of the rooms within the store to ensure that customer
needs are addressed in each part of the store. In order to retain and motivate
qualified employees, the Company compensates its store managers with base
salaries plus both monthly and yearly bonuses based on sales and profit
performance. All other store associates receive bonuses for team efforts in
comparable sales performance and performance to budget. The Company conducts
training in a number of areas, including product knowledge, and has a culture
that empowers staff to go to great lengths to satisfy their customers.
Another important element of customer service is the customer's ability to
receive their merchandise, especially furniture, in a timely manner.
Accordingly, each store maintains a stock room and in many instances a third
party warehouse close to the store and receives inventory that encompasses the
complete range of merchandise exhibited on the sales floor. Customers can in
most cases leave the store with their purchases, including stock furniture
items.
Although most of the Company's merchandise is drop shipped directly to its
stores, the Company added a 160,000 square foot distribution facility in 1997
and is in the process of adding additional distribution facilities to
implement its 1998 and 1999 store expansion plans. In addition, the Company
has engaged an independent distribution and logistics consultant to assist in
evaluating and implementing its long-term distribution strategy.
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<PAGE>
STORE SELECTION AND STORE LOCATIONS
The Company is opportunistic in selecting the best locations available that
satisfy its demographic, financial and other criteria and does not necessarily
cluster its store locations. All potential sites are subject to extensive
analysis, including demographic and psychographic factors, the look and feel
of the site and the terms of the lease. The Company utilizes the services of
outside firms to provide market and demographic data and to assist in locating
and securing potential locations.
As of June 1, 1998, the Company operated 47 stores in 22 states throughout
the United States. The following table provides certain additional information
regarding the Company's existing stores.
<TABLE>
<CAPTION>
TYPE OF SELLING SQUARE
STORE LOCATION LOCATION FOOTAGE
-------------- ---------------- --------------
<S> <C> <C>
PRE-1995 STORES
Eureka, California Street 2,500
Danville, California Specialty Center 5,146
Corte Madera, California Mall 2,790
Berkeley, California Street 5,632
Newport Beach, California Mall 4,282
1995 STORES
Portland, Oregon Street 4,743
San Mateo, California Mall 4,412
Palo Alto, California Street 6,126
Pasadena, California Street 4,027
Phoenix, Arizona Mall 5,973
1996 STORES
Skokie, Illinois Mall 6,387
Woodland Hills, California Mall 5,905
Troy, Michigan Mall 5,708
Houston, Texas Specialty Center 6,107
Richmond Heights, Missouri Mall 6,116
Littleton, Colorado Mall 7,021
Leawood, Kansas Specialty Center 6,412
Dallas, Texas Street 6,369
Houston, Texas Specialty Center 6,045
Alexandria, Virginia Street 6,177
1997 STORES
Schaumburg, Illinois Mall 7,015
Seattle, Washington Specialty Center 8,101
King of Prussia, Pennsylvania Mall 7,748
Atlanta, Georgia Specialty Center 7,314
McLean, Virginia Mall 6,693
Sherman Oaks, California Mall 6,763
Garden City, New York Mall 6,828
Paramus, New Jersey Mall 6,215
Farmington, Connecticut Mall 6,894
Charlotte, North Carolina Specialty Center 6,980
Century City, California Mall 7,400
San Antonio, Texas Specialty Center 7,015
Pittsburgh, Pennsylvania Specialty Center 5,700
San Diego, California Mall 7,047
Tampa, Florida Street 6,137
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
TYPE OF SELLING SQUARE
STORE LOCATION LOCATION FOOTAGE
-------------- ---------------- --------------
<S> <C> <C>
Santa Monica, California Street 6,787
Los Angeles, California Mall 7,022
St. Paul, Minnesota Street 7,408
Raleigh, North Carolina Mall 6,528
Atlanta, Georgia Mall 5,935
Metairie, Louisiana Mall 7,544
1998 STORES (TO DATE)
Miami, Florida Mall 6,164
Birmingham, Alabama Specialty Center 6,422
Wichita, Kansas Specialty Center 5,557
Germantown, Tennessee Specialty Center 6,021
Short Hills, New Jersey Mall 6,542
West Nyack, New York Mall 6,426
</TABLE>
MANAGEMENT INFORMATION SYSTEMS
Restoration Hardware's management information systems ("MIS") include fully
integrated store, merchandising, distribution and financial systems. In 1995,
the Company completed the implementation of a state-of-the-art MIS system from
STS Systems, an MIS system utilized by many leading retailers. This system
includes point-of-sale ("POS") data collection and integrates purchase order
management, sales reporting, merchandise analysis and stock replenishment as
well as accounting functions. The Company expects this system to provide
productivity benefits, enhanced merchandise information and improved inventory
control during 1998 and beyond.
These systems utilize a Unix-based minicomputer to run third-party software,
and the Company currently relies on a STS Systems for both its hardware and
software support of its systems. Sales information is updated daily in the
sales audit and merchandise reporting systems by polling transaction data from
each store's POS terminals. The Company's POS system consists of registers
providing price look-up, scanning of bar-coded tickets and capture of credit
information and payroll hours. The POS system also tracks inventory receipts
and transfers, which are uploaded to the host system, and price changes, which
are downloaded into the POS devices. Information obtained from nightly polling
also results in automated merchandise replenishment in response to the
specific SKU requirements of each store. The Company evaluates information
obtained through such reporting to implement decisions regarding merchandising
assortment, allocation and markdowns. In addition, this information allows the
Company to forecast purchasing requirements based on the combination of recent
sales trends and historical purchase patterns. The Company believes that its
management information systems are an important factor in allowing the Company
to efficiently support its rapid growth and maintain a competitive industry
position. See "Risk Factors--Dependence on Key Vendors".
Many currently installed computer systems and software products are coded to
accept only two- digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. The Company
has assessed its accounting and management information systems and does not
currently expect that any significant modifications will be required for such
systems. Moreover, the Company does not believe that the total cost of any
potential modifications will be material. There can be no assurance, however,
that the Company or its vendors will be able to modify timely and successfully
their respective systems to comply with Year 2000 requirements. Any failure to
become Year 2000 compliant on the part of the Company or its vendors or the
incurrence of any costs associated with related litigation could have a
material adverse effect on the Company's business, financial condition and
results of operations.
35
<PAGE>
COMPETITION
The Company competes with a wide variety of national, regional and local
retailers. However, due to the fragmented nature of the home furnishings
industry in the United States and the fact that the Company's merchandise cuts
across multiple categories, the competitive landscape is likely to vary
substantially based on each individual market. Competition exists from
businesses utilizing a similar retail store strategy, as well as traditional
furniture stores and department stores. Competitors that are utilizing a
similar retail store strategy include Pottery Barn (a division of Williams-
Sonoma), Crate & Barrel, Z Gallerie and Pier 1 Imports. The Company also
competes to a lesser extent with the catalog operations of companies such as
Smith & Hawken and Williams-Sonoma. Many of the Company's competitors are
larger and have substantially greater financial, marketing and other resources
than Restoration Hardware.
The Company believes that the ability to compete successfully is determined
by several factors, including breadth and quality of product selection,
effective merchandise presentation, customer service, pricing and store
location. The Company believes that it competes favorably on the basis of
these factors.
TRADEMARKS
The Company has registered its trademark "Restoration Hardware" in the
United States and Mexico, and has applied for registration of such trademark
in Canada. Such application in Canada is pending and there can be no assurance
that such application will be granted.
EMPLOYEES
At May 2, 1998, the Company had 903 full-time employees and 414 part-time
employees. The Company believes it maintains good employee relations.
GOVERNMENT REGULATION
Many of the Company's imports are subject to existing or potential duties,
tariffs or quotas that may limit the quantity of certain types of goods which
may be imported into the United States and other countries. In addition, the
Company is subject to currency fluctuations, work stoppages, economic
uncertainties including inflation, foreign government regulations, political
unrest and trade restrictions, including United States retaliation against
foreign practices.
PROPERTIES
The Company currently leases two properties located in Corte Madera,
California which are used as its headquarters. One property consists of
approximately 3,600 square feet of office space and approximately 11,000
square feet of warehouse space. The lease expires on November 30, 1999, with
an option to extend the lease for one additional three year term. The second
property consists of approximately 11,000 square feet of office space. The
Company has exercised an option for approximately an additional 4,000 square
feet of office space in this facility beginning September 1998. The lease
expires on May 15, 2002. The Company leases approximately 160,000 square feet
of warehouse space in Hayward, California for use as its distribution center.
The lease expires on July 31, 2004, with an option to extend the lease for one
additional five year term. The Company also leases an approximately 50,000
square foot distribution center in Oakland, California which is subleased for
the duration of the lease.
As of June 1, 1998, the Company leased approximately 510,000 gross square
feet for its stores. Most of the existing stores are leased by the Company
with lease terms ranging from 10 to 15 years. Most leases for the Company's
stores provide for a minimum rent plus a percentage rent based upon sales
after certain minimum thresholds are achieved. The leases generally require
the Company to pay insurance, utilities, real estate taxes and repair and
maintenance expenses.
36
<PAGE>
LEGAL PROCEEDINGS
From time to time, the Company may be involved in legal proceedings and
litigation incidental to the normal conduct of its business. The Company is
not currently involved in any material legal proceedings or litigation.
37
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the executive officers, directors and certain
key employees and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen Gordon........... 47 Chairman of the Board, President, Chief Executive
Officer and Founder
Thomas Christopher....... 50 Executive Vice President, Chief Operating Officer
and Director (3)
Thomas Low............... 39 Senior Vice President, Chief Financial Officer and
Secretary
Bill Ashton.............. 47 Director of Distribution
Marta Benson............. 35 Director of Catalog
Dale Dombrowski.......... 47 Director of Visual Merchandising
Nina Johnson............. 35 General Merchandise Manager
Kellie Krug.............. 37 Director of Marketing
David Loretta............ 30 Director of Planning and Analysis
Mary Ness................ 43 Director of Inventory Management
Gerilyn Rapmund.......... 32 Controller
Randy Reimer............. 51 Director of Human Resources and Training
Ed Robinson.............. 33 Director of Product Development
Anne Wilson.............. 36 Director of Management Information Systems
Damon Ball............... 40 Director (1)(3)
Robert Camp.............. 55 Director (2)(3)
David Ferguson........... 43 Director (1)
Raymond Hemmig........... 48 Director (2)(3)
Michael Lazarus.......... 42 Director (1)
Marshall Payne........... 41 Director (2)
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Real Estate Committee.
STEPHEN GORDON founded the Company in 1981 and has served as President,
Chief Executive Officer and a Director since that time. Mr. Gordon has
successfully led the Company through a long period of comparable store net
sales growth and consistent profitability at the store level. Until the
recruitment of a professional management team in 1994 and 1995, Mr. Gordon
actively managed all aspects of the business. He obtained his B.A. at Drew
University and his M.A. in Psychology from Humboldt State University.
THOMAS CHRISTOPHER joined the Company as Executive Vice President, Chief
Operating Officer and a Director in June 1994. Prior to joining Restoration
Hardware, Mr. Christopher was with Barnes & Noble, Inc. for five years where
he served in various capacities, including Chief Executive Officer of Bookstop
Inc. and President of Barnes & Noble Superstores. Previously, Mr. Christopher
worked for 19 years at Pier 1 Imports, a national chain of home furnishing
retail stores, where he served in a variety of roles, including Executive Vice
President of Operations. He obtained his B.B.A. in Economics from Kent State
University.
THOMAS LOW joined the Company as Chief Financial Officer in April 1995. From
July 1986 to March 1995, Mr. Low served in various capacities with Home
Express, Inc., a retailer of home furnishings, including Controller from June
1990 to March 1995. Home Express, Inc. filed Chapter 11
38
<PAGE>
bankruptcy proceedings in January 1990 and again in February 1996. Prior to
joining Home Express, Inc., Mr. Low served as a financial analyst with W.R.
Grace & Co. in its restaurant division. He obtained his B.S. in Resource
Science from the University of California, Davis and his M.B.A. with a Finance
Concentration from the University of California, Irvine.
BILL ASHTON joined the Company as Director of Distribution in August 1997.
Mr. Ashton served as Director of Distribution for Polo/Ralph Lauren from April
1984 until July 1997. From January 1979 until March 1984, he served as Manager
of Auditing for Federated Department Stores. Prior to that, Mr. Ashton served
six years as Logistics Officer and Aviator in the United States Marine Corps.
He received his B.S. from Muskingum College.
MARTA BENSON joined the Company as a Merchandise Manager in August 1996 and
was promoted to Director of Catalog in January 1998. Prior to that, she was
associated with Smith & Hawken, a specialty retailer focusing on garden
merchandise for eight years. At Smith & Hawken she served most recently as
Manager, Catalog Merchandise from May 1993 until joining the Company and as
Senior Buyer, Catalog Captain from February 1991 to April 1993. Ms. Benson
received her B.A. from Wesleyan University.
DALE DOMBROWSKI joined the Company as Director of Visual Merchandising in
July 1993. From September 1992 until joining the Company, Mr. Dombrowski
served as Design Director of Filamento, a single specialty retail store. Prior
to that, he was associated with Pottery Barn for 13 years, most recently from
1986 to 1992 as Manager of Visual Merchandising. Mr. Dombrowski received his
A.A.S. from the Fashion Institute of Technology.
NINA JOHNSON joined the Company as a Merchandise Manager in March 1995. She
was promoted to General Merchandise Manager of the Company in December 1996.
Ms. Johnson served as Senior Buyer, Decorative Home at Mervyn's, a department
store chain, from April 1993 until December 1994 and as Retail Marketing and
Merchandising Manager at Ghirardelli Chocolate Co. from April 1992 until April
1993. From July 1991 until April 1992, Ms. Johnson served as Buyer, Tabletop
for the Pottery Barn division of Williams Sonoma, Inc., a specialty retail
chain. Previously, Ms. Johnson served in various capacities at Bloomingdale's,
a department store chain, from 1984 until 1991, including Buyer, Food Division
Housewares from 1989 until 1991. Ms. Johnson received her B.A. in Economics
from William Smith College.
KELLIE KRUG joined the Company as Director of Marketing in March 1998. Ms.
Krug served as Marketing Director at Gymboree Corporation from March 1997 to
February 1998 and at Imaginarium Toy Stores from March 1990 to June 1994. She
also served in various marketing positions at Ross Stores, Inc. from April
1986 to June 1988. Ms. Krug received her B.A. from San Jose State University.
DAVID LORETTA joined the Company as Senior Financial Analyst and Accounts
Payable Supervisor in March 1996. Mr. Loretta was promoted to the position of
Manager of Financial Planning and Analysis in February 1997, and currently
serves as Director of Planning and Analysis. From March 1994 to March 1996, he
served in various accounting and finance capacities at Home Express, Inc., a
retailer of home furnishings. Previously, Mr. Loretta served as an Assistant
Bank Examiner for the Federal Deposit Insurance Corporation in Southern
California. He received his B.A. in Economics from the University of
California, Riverside and his M.B.A. in International Business/Entrepreneurial
Studies from San Diego State University.
MARY NESS joined the Company as Director of Inventory Management in April
1995. From October 1993 to April 1995, Ms. Ness served as Merchant, Gifts at
Gump's, a department store chain. Ms. Ness served as Buyer, Baskets,
Christmas, Paper/Party for Cost Plus, Inc., a specialty retail chain from
October 1991 until October 1993. From August 1986 until October 1991, she
served as Director, Inventory Management for the Pottery Barn and Hold
Everything divisions of Williams Sonoma, Inc., a
39
<PAGE>
specialty retail chain. Previously, Ms. Ness served as an Associate Buyer and
Production Manager with The Gap, a clothing retail chain, from 1982 until 1986
and as a Buyer with Livingston's, a clothing retailer, from 1979 until 1982.
She received her B.A. in Economics from the University of California, Santa
Barbara and her M.B.A. in Marketing from San Francisco State University.
GERILYN RAPMUND has served as Controller of the Company since March 1997.
From January 1994 to March 1997 she was Controller and Accounting Manager of
ViewStar Corporation, a software company. From September 1990 to January 1994,
Ms. Rapmund served as Financial Reporting and Accounting Manager at The Good
Guys!, a consumer electronics retailer. From September 1988 to September 1990,
Ms. Rapmund served as an auditor for Deloitte & Touche LLP. Ms. Rapmund
received her B.A. in Accounting from California Polytechnic State University
at San Luis Obispo.
RANDY REIMER joined the Company as its Director of Human Resources in June
1997, after having provided independent human resource consulting assistance
to the Company for the two previous years. Mr. Reimer has 25 years of
diversified experience in human resources, including 8 years with Federated
Department Stores where he was Vice-President of Employee Relations for one of
Federated's midwest divisions and later, as Senior Vice President of Human
Resources for I. Magnin. He received his B.A. in Liberal Arts from California
State University--Hayward and has completed partial coursework toward a M.S.
in Human Resources Management at Golden Gate University.
ED ROBINSON joined the Company as Director of Product Development in January
1997. Mr. Robinson served as Director of Product Development for Pilgrim Home
and Hearth, a retail design consultant, from February 1995 until September
1996. From August 1993 until February 1995, he was a Partner and Designer at
Sand Lake Design, a designer consultant whose clients included Williams-
Sonoma, Banana Republic and Pottery Barn. Previously, Mr. Robinson served as a
Designer for Architractor Design Group, an architectural designer of
commercial and residential projects, from August 1992 until August 1993, as
Designer of Housewares for George Schmidt Design, a design consultant, from
June 1990 until August 1992, and as Designer-Concept, Prototyping and
Illustration for Child Growth and Development, a designer of learning toys,
from May 1988 until May 1990. He received his B.A. in Industrial Design from
the Pratt Institute of Art and Design.
ANNE WILSON joined the Company as Director of Management Information Systems
in April 1997. From May 1995 to April 1997, Ms. Wilson served as the Systems
and Applications Development Manager at Home Express, Inc., a retailer of home
furnishings. Previously, she served in various capacities with I. Magnin, a
specialty retail chain, including MIS Manager, Accounts Payable Manager and
Senior Assistant Buyer, from 1987 until 1995. She started her retail career
with Livingston's, a clothing retailer, as a manager trainee in 1983, and left
there as a buyer in 1987. Ms. Wilson received her B.A. in Organizational
Studies and Psychology from Pitzer College.
DAMON BALL has been a director of the Company since May 1997. Mr. Ball has
been a Senior Vice President of Desai Capital Management Incorporated ("DCMI")
since December 1993 and, for more than five years prior thereto, served as a
Vice President of DCMI. DCMI is a specialized equity investment management
firm which manages the assets of various institutional clients, including
Private Equity Investors III, L.P. and Equity-Linked Investors II. Mr. Ball
received his B.A. in Economics and Political Science from the University of
Pennsylvania and his M.B.A. degree from the Harvard Business School.
ROBERT CAMP joined the Board of Directors in June 1994. He is the former CEO
of Pier 1, Inc. and was associated with that firm from 1967 to 1985. In 1971,
Mr. Camp co-founded Import Bazaar Ltd., a Canadian based import business,
which was subsequently sold to Pier 1. In 1986, he founded Simpson and Fisher
Companies, Inc., a specialty retail holding company. He owns and operates
Hero's Welcome Inc., a general store and mail order operation, which he and
his wife founded in 1993. He is a graduate of the University of Washington.
40
<PAGE>
DAVID FERGUSON has been a general partner of Chase Capital Partners, the
sole general partner of Chase Ventures and an affiliate of Chase Securities,
for the last five years. He has been a director of the Company since May 1997.
Prior to joining Chase Capital, Mr. Ferguson was a member of the mergers and
acquisitions groups of Bankers Trust New York Corporation and Prudential
Securities, Inc. Mr. Ferguson currently serves as a director of Guitar Center,
Inc., a music specialty retailer, Wild Oats Markets, Inc., a natural foods
retailer, and various privately held companies. Mr. Ferguson received his B.A.
from Loyola College in Baltimore, Maryland and his M.B.A. from The Wharton
School of the University of Pennsylvania. Mr. Ferguson is a C.P.A .
RAYMOND HEMMIG joined the Board of Directors in June 1994. He has served as
Chairman of the Board of Ace Cash Express, Inc., a chain of retail financial
services stores, since 1988 and Chairman, Chief Executive Officer and General
Partner of Retail & Restaurant Growth Capital, L.P., a private investment
partnership since 1995. Mr. Hemmig served as Chief Executive Officer of ACE
from 1988 to 1994. Previously, Mr. Hemmig was a foodservice, retail and
franchise industries consultant from 1985 to 1988. He served as Executive Vice
President of Grandy's Inc., a subsidiary of Saga Corp., from 1983 to 1985, and
was Vice President and Chief Operating Officer of Grandy's Country Cookin',
the predecessor restaurant company, from 1980 to 1983. He also worked with
Hickory Farms of Ohio, Inc. from 1973 to 1980 in various operational and
executive positions. He is a director of Party City, a publicly held discount
party supply retailer, and Elizabeth Arden Red Door Salons, Inc., an operator
of day spas.
MICHAEL LAZARUS joined the Board of Directors in January 1996. He co-founded
Weston Presidio Capital in 1991, a $300 million private equity fund with
offices in San Francisco and Boston. He serves as a Managing Partner. Prior to
the formation of Weston Presidio Capital, Mr. Lazarus served as Managing
Director and Director of the Private Placement Department of Montgomery
Securities since 1986. From 1983 to 1986, he was in senior management of
Berkeley International, an international venture capital firm. Mr. Lazarus was
with Price Waterhouse from 1977 to 1983. Mr. Lazarus is a director of Just For
Feet, Inc., an athletic footwear retailer, Guitar Center, Inc., a music
speciality retailer, and various privately held companies. Mr. Lazarus
received his B.A. in Accounting from Grove City College and is a C.P.A.
MARSHALL PAYNE joined the Board of Directors in June 1994. He has been with
Cardinal Investment Company, Inc. since 1983 and is currently Vice President.
Mr. Payne also serves on the board of several private and the following public
companies: Ace Cash Express, Inc., a chain of retail financial services
stores, and Leslie Building Products, Inc., a building products manufacturer.
Mr. Payne received his B.A. from Stanford University and his M.B.A. from
Harvard Business School.
BOARD OF DIRECTORS AND COMMITTEES
Pursuant to the Company's Certificate of Incorporation, upon completion of
the Offering, the Board of Directors will be classified into three classes,
each with three directors. One class (comprised of Messrs. Ball and Hemmig,
with one vacancy) will be elected for a term expiring at the annual meeting of
stockholders to be held in 1999; another class (comprised of Messrs. Camp,
Ferguson and Payne) will be elected to hold office for an initial term
expiring at the annual meeting to be held in 2000; and another class
(comprised of Messrs. Christopher, Gordon and Lazarus) will be elected to hold
office for an initial term expiring at the annual meeting to be held in 2001.
Thereafter, the successors of the class of directors whose term expires at the
meeting will be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election. Officers are appointed by the Board of Directors and serve at its
discretion.
The Company maintains an Audit Committee, a Compensation Committee and a
Real Estate Committee. The Audit Committee oversees actions taken by the
Company's independent auditors. The Compensation Committee reviews the
compensation levels of the Company's executive officers and
41
<PAGE>
makes recommendations to the Board of Directors regarding compensation. The
Compensation Committee also administers the 1998 Stock Incentive Plan. See "--
Benefit Plans--1998 Stock Incentive Plan". The Real Estate Committee evaluates
and approves potential store locations.
COMPENSATION OF DIRECTORS
Non-employee directors receive $1,000 for each meeting of the Company's
Board of Directors attended, $500 for each Committee meeting attended and
reimbursement of travel expenses. Non-employee Board members will receive
option grants at periodic intervals under the Automatic Option Grant Program
of the 1998 Stock Incentive Plan and will also be eligible to receive
discretionary option grants under the Discretionary Option Grant Program of
such plan. See "--Benefit Plans--1998 Stock Incentive Plan".
On May 30, 1997, the Company granted to each of Messrs. Camp, Hemmig,
Lazarus and Payne an option to purchase 3,500 shares of Common Stock and to
each of Messrs. Ball and Ferguson an option to purchase 7,000 shares of Common
Stock, at an exercise price of $10.49 per share, the fair market value per
share of Common Stock on such date. On the effective date of the Offering,
each of Messrs. Ball, Camp, Ferguson, Hemmig, Lazarus and Payne will receive
an option to purchase 14,000 shares of Common Stock at the initial public
offering price per share. The options are immediately exercisable for all of
the option shares but any shares purchased under the options are subject to
repurchase by the Company, at the option exercise price paid per share, upon
the termination of the optionee's service with the Company prior to vesting in
the option shares. The shares subject to each option grant will vest in a
series of three equal annual installments upon the optionee's completion of
each of the three years of service with the Company after the grant date. The
options have a maximum term of 10 years measured from the grant date, subject
to earlier termination following the optionee's cessation of service. The
shares subject to each option will vest in full in the event the Company is
acquired by merger or asset sale, unless the options are assumed by, and the
repurchase rights with respect to unvested option shares are assigned to, the
successor corporation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Messrs. Ferguson, Hemmig and Payne. No executive officer of the
Company serves on the board of directors or compensation committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation earned by the Company's Chief Executive Officer and each of the
two other most highly compensated executive officers of the Company whose
total salary and bonus for the fiscal year ended January 31, 1998 exceeded
$100,000 (collectively, the "Named Executive Officers") for services rendered
in all capacities to the Company and its subsidiaries during such fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- -------------
NUMBER OF
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#)(2) COMPENSATION(3)
------------------ ---- --------- -------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Gordon.......... 1997 $153,077 $33,456 $21,346 28,000 $183
Chairman of the Board, 1996 111,536 37,260 16,110 70,000 --
President and Chief 1995 100,160 20,000 9,600 140,000 --
Executive Officer
Thomas Christopher...... 1997 $133,038 23,862 $11,400 28,000 $157
Executive Vice 1996 101,538 28,350 12,000 52,500 --
President and Chief 1995 87,769 15,000 7,200 -- --
Operating Officer
Thomas Low.............. 1997 $103,562 17,712 $ 9,700 28,000 $116
Senior Vice President 1996 83,846 22,950 7,200 42,000 --
and Chief Financial Of-
ficer 1995 57,621 8,800 2,400 43,750 --
</TABLE>
- --------
(1) "Other Annual Compensation" includes: (i) for 1997 a $4,273 relocation
allowance and a $4,273 medical allowance provided to Mr. Gordon and (ii)
car allowances provided to Messrs. Gordon, Christopher and Low.
(2) The options listed in the table were granted under the Company's 1995
Stock Option Plan. See "Management--Option/SAR Grants in Last Fiscal Year"
for a description of the terms of these options. The options outstanding
under the 1995 Stock Option Plan will be incorporated into the new 1998
Stock Incentive Plan, but will continue to be governed by their existing
terms. See "Management--Benefit Plans".
(3) Represents contributions by the Company to the Company's 401(k) Plan which
was implemented in November 1997.
43
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows, with respect to the Named Executive Officers,
certain information concerning the grant of stock options during 1997. No
stock appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR PRICE(2) DATE 5% 10%
---- ---------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stephen Gordon(4)....... 28,000 5.7% $11.54(4) 9/2/07 $ 155,326 $ 438,702
Thomas Christopher(4)... 28,000 5.7% $10.49 9/2/07 $ 184,706 $ 468,082
Thomas Low(4)........... 28,000 5.7% $10.49 9/2/07 $ 184,706 $ 468,082
</TABLE>
- --------
(1) The options are immediately exercisable for all of the option shares but
any shares purchased under the options are subject to repurchase by the
Company, at the option exercise price paid per share, upon the termination
of the optionee's service with the Company prior to vesting in the option
shares. The shares subject to each option grant will vest in a series of
three equal annual installments upon the optionee's completion of each of
the three years of service with the Company after the grant date. The
options have a maximum term of ten years measured from the grant date,
subject to earlier termination following the optionee's cessation of
service. The shares subject to each option will vest in full in the event
the Company is acquired by merger or asset sale, unless the options are
assumed by, and the repurchase rights with respect to unvested option
shares are assigned to, the successor corporation.
(2) The exercise price may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. Alternatively, the option may
be exercised through a cashless exercise procedure pursuant to which the
optionee provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Company, out of the sale proceeds, an
amount equal to the exercise price plus all applicable withholding taxes.
The Compensation Committee may also assist an optionee in the exercise of
an option by (i) authorizing a loan from the Company in a principal amount
not to exceed the aggregate exercise price plus any tax liability incurred
in connection with the exercise or (ii) permitting the optionee to pay the
option price in installments over a period of years upon terms established
by the Compensation Committee.
(3) There can be no assurance provided to any executive officer or other
holder of the Company's securities that the actual stock appreciation over
the ten year option term will be at the assumed 5% and 10% levels or at
any other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
options granted to the Named Executive Officers.
(4) In addition to the options listed in the above table, on the date the
Underwriting Agreement is executed for the Offering (the "Underwriting
Date"), Messrs. Gordon, Christopher and Low will receive option grants
under the Company's 1998 Stock Incentive Plan to purchase 67,900, 58,100
and 48,300 shares of Common Stock, respectively, at an exercise price per
share equal to the initial public offering price. The options will become
exercisable in a series of three equal annual installments upon the
optionee's completion of each of the three years of service measured from
the option grant date, subject to earlier termination following the
optionee's cessation of service. The options will accelerate and become
exercisable in full in the event the Company is acquired by merger or
asset sale, unless the options are assumed by the successor corporation.
(5) Mr. Gordon's options were granted with an exercise price per share equal
to 110% of the fair market value per share of Common Stock on the
September 4, 1997 option grant date. The fair market value of Mr. Gordon's
options on the date of grant was $10.49 per share.
44
<PAGE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option holdings for
1997 with respect to the Named Executive Officers. No options or stock
appreciation rights were exercised by any such individual during such year,
and no stock appreciation rights were outstanding as of January 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
END(#) FISCAL YEAR-END($)(2)
---------------------------- -------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen Gordon........... 238,000 -- $1,980,540 --
Thomas Christopher....... 457,765 -- $4,182,316 --
Thomas Low............... 113,750 -- $ 810,394 --
</TABLE>
- --------
(1) The shares purchasable upon exercise of the options are subject to
repurchase by the Company, at the exercise price paid per share, upon the
optionee's termination of service with the Company prior to vesting in the
shares. As of January 31, 1998, the number of vested shares for which each
Named Executive Officer's option was exercisable was as follows: Mr.
Gordon--105,007 shares; Mr. Christopher--386,015 shares; and Mr. Low--
35,007 shares.
(2) Based on the deemed fair market value of the option shares as of January
31, 1998 ($10.49 per share), as determined by the Company's Board of
Directors, less the option exercise price payable for those shares.
BENEFIT PLANS
1998 STOCK INCENTIVE PLAN. The Company's 1998 Stock Incentive Plan (the
"1998 Plan") is intended to serve as the successor equity incentive program to
the Company's 1995 Stock Option Plan, as amended (the "Predecessor Plan"). The
1998 Plan was adopted by the Board and approved by the stockholders in April
1998. The 1998 Plan became effective upon its adoption by the Board (the "Plan
Effective Date"). However, the Automatic Option Grant, Salary Investment
Option Grant and Director Fee Option Grant programs will not become effective
until the date the Underwriting Agreement is executed for the Offering (the
"Underwriting Date").
A total of 3,287,662 shares of Common Stock have been authorized for
issuance under the 1998 Plan. Such share reserve consists of (i) the number of
shares available for issuance under the Predecessor Plan on the Underwriting
Date, including the shares subject to outstanding options, and (ii) an
additional increase of 980,000 shares. In addition, the number of shares of
Common Stock reserved for issuance under the 1998 Plan will automatically be
increased on the first trading day of each calendar year, beginning in
calendar year 2000, by an amount equal to the lesser of (i) three percent of
the total number of shares of Common Stock outstanding on the last trading day
of the preceding calendar year or (ii) 966,202 shares. In no event, however,
may any one participant in the 1998 Plan receive option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
250,000 shares of Common Stock in the aggregate per calendar year.
On the Underwriting Date, outstanding options and unvested shares issued
under the Predecessor Plan will be incorporated into the 1998 Plan, and no
further option grants will be made under the Predecessor Plan. The
incorporated options will continue to be governed by their existing terms,
unless the Plan Administrator elects to extend one or more features of the
1998 Plan to those options. Except as otherwise noted below, the incorporated
options have substantially the same terms as will be in effect for grants made
under the Discretionary Option Grant Program of the 1998 Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non- employee Board members
and consultants) may, at the discretion of the Plan Administrator, be
45
<PAGE>
granted options to purchase shares of Common Stock at an exercise price not
less than 100% of their fair market value on the grant date, (ii) the Stock
Issuance Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the
time of issuance or as a bonus tied to the performance of services, (iii) the
Salary Investment Option Grant Program which may, in the Plan Administrator's
sole discretion, be activated for one or more calendar years and, if so
activated, will allow executive officers and other highly compensated
employees the opportunity to apply a portion of their base salary to the
acquisition of special below-market stock option grants, (iv) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares
of Common Stock at an exercise price equal to 100% of their fair market value
on the grant date and (v) the Director Fee Option Grant Program which may, in
the Plan Administrator's sole discretion, be activated for one or more
calendar years and, if so activated, will allow non-employee Board members the
opportunity to apply a portion of the annual retainer fee otherwise payable to
them in cash each year to the acquisition of special below-market option
grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a non-
statutory stock option under the Federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. However, any discretionary
option grants or stock issuances to members of the Compensation Committee
shall be made by a disinterested majority of the Board. The Compensation
Committee will also have the exclusive authority to select the executive
officers and other highly compensated employees who may participate in the
Salary Investment Option Grant Program in the event that program is activated
for one or more calendar years, but neither the Compensation Committee nor the
Board will exercise any administrative discretion with respect to option
grants under the Salary Investment Option Grant Program or under the Automatic
Option Grant or Director Fee Option Grant Program for the non-employee Board
members. All grants under those three latter programs will be made in strict
compliance with the express provisions of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1998 Plan may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full-recourse, interest-bearing promissory note in payment of the exercise
price and any associated withholding taxes incurred in connection with such
exercise or purchase.
The Plan Administrator will have the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the Common Stock on the
new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (ii) the
aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of Common Stock. None of the
incorporated options from the Predecessor Plan contain any stock appreciation
rights.
46
<PAGE>
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not
to be assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the Discretionary Option Grant and Stock
Issuance Programs will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have complete discretion to
grant one or more options under the Discretionary Option Grant Program which
will become fully exercisable for all the option shares in the event those
options are assumed in the acquisition and the optionee's service with the
Company or the acquiring entity involuntarily terminates within a designated
period (not to exceed eighteen months) following such acquisition. The vesting
of outstanding shares under the Stock Issuance Program may be accelerated upon
similar terms and conditions. The Plan Administrator will also have the
authority to grant options which will immediately vest upon an acquisition of
the Company, whether or not those options are assumed by the successor
corporation. The Plan Administrator is also authorized under the Discretionary
Option Grant and Stock Issuance Programs to grant options and to structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in control of the
Company (whether by successful tender offer for more than 50% of the
outstanding voting stock or by a change in the majority of the Board by reason
of one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
involuntary termination of the individual's service within a designated period
(not to exceed eighteen months) following such change in control. The options
incorporated from the Predecessor Plan will immediately vest upon an
acquisition of the Company by merger or asset sale, unless those options are
assumed or replaced by, and the Company's repurchase rights assigned to, the
successor entity. The Plan Administrator will have the discretion to extend
the acceleration provisions of the 1998 Plan to options outstanding under the
Predecessor Plan.
In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer
and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of Common Stock on the grant date. The
option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the amount of salary invested in that option.
The option will become exercisable in a series of twelve (12) equal monthly
installments over the calendar year for which the salary reduction is to be in
effect and will be subject to full and immediate vesting upon certain changes
in the ownership or control of the Company.
Under the Automatic Option Grant Program, each individual who is serving as
a non-employee member of the Board on the Underwriting Date will receive at
that time an option grant for 2,000 shares of Common Stock with an exercise
price equal to the price per share at which the Common Stock is to be sold in
the Offering. Each individual who first becomes a non-employee Board member at
any time after the completion of the Offering will automatically receive an
option grant for 7,000 shares as of the date such individual joins the Board,
provided such individual has not been in the prior employ of the Company. In
addition, on the date of each annual stockholders meeting held after the Plan
Effective Date, each non-employee Board member who is to continue to serve as
a non-employee Board member will automatically be granted an option to
purchase 3,500 shares of Common Stock, provided such individual has served on
the Board for at least six months.
47
<PAGE>
Each automatic grant for the non-employee Board members will have a term of
ten years, subject to earlier termination following the optionee's cessation
of Board service. Each automatic option will be immediately exercisable for
all of the option shares; however, any unvested shares purchased under the
option will be subject to repurchase by the Company, at the exercise price
paid per share, should the optionee cease Board service prior to vesting in
those shares. The shares subject to each 2,000-share option granted on the
Underwriting Date will vest over a three-year period in successive equal
annual installments upon the individual's completion of each year of Board
service measured from the option grant date. The shares subject to each
initial 7,000 share automatic option grant made after the Underwriting Date
will vest over a three year period in successive equal annual installments
upon the individual's completion of each year of Board service measured from
the option grant date. The shares subject to each annual 3,500-share automatic
option grant will vest upon the individual's completion of three years of
Board service measured from the option grant date. However, the shares subject
to each automatic grant will immediately vest in full upon certain changes in
control or ownership of the Company or upon the optionee's death or disability
while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for
which the retainer fee would otherwise be payable in cash. The option will
have an exercise price per share equal to one-third of the fair market value
of the option shares on the grant date, and the number of shares subject to
the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of
Common Stock on the grant date. As a result, the total spread on the option
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee invested in that option. The option will become
exercisable for the option shares in a series of twelve (12) equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii)
the successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option
Grant and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile
tender offer for more than 50% of the Company's outstanding voting stock. In
return for the surrendered option, the optionee will be entitled to a cash
distribution from the Company in an amount per surrendered option share equal
to the excess of (i) the highest price per share of Common Stock paid in
connection with the tender offer over (ii) the exercise price payable for such
share.
The Board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Plan will terminate on the earliest of
(i) April 20, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
48
<PAGE>
1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board and approved by
the stockholders in April, 1998 and will become effective immediately upon the
execution of the Underwriting Agreement for the Offering. The Purchase Plan is
designed to allow eligible employees of the Company and participating
subsidiaries to purchase shares of Common Stock, at semi-annual intervals,
through their periodic payroll deductions under the Purchase Plan, and a
reserve of 475,000 shares of Common Stock has been established for this
purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the date of this Prospectus and will end on the
last business day in August 2000. The next offering period will commence on
the first business day in September 2000, and subsequent offering periods will
commence as designated by the Plan Administrator.
Individuals who are eligible employees (scheduled to work more than 20 hours
per week for more than 5 calendar months per year) on the start date of any
offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date (the first business day of March or
September each year). Individuals who become eligible employees after the
start date of the offering period may join the Purchase Plan on any subsequent
semi-annual entry date within that offering period. However, employees who
join the Company after the date of the Offering must have completed 90 days
continuous employment with the Company before they may join the Purchase Plan.
Payroll deductions may not exceed 15% of total cash earnings and the
accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase date (the
last business day in February and August each year) at a purchase price per
share equal to 85% of the lower of (i) the fair market value of the Common
Stock on the participant's entry date into the offering period or (ii) the
fair market value on the semi-annual purchase date. In no event, however, may
any one participant purchase more than 500 shares, nor may all participants in
the aggregate purchase more than 118,750 shares on any one semi-annual
purchase date.
Should the fair market value per share of Common Stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of such acquisition. The purchase price will be equal to
85% of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately
prior to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business day
of February 2008 (ii) the date on which all shares available for issuance
under the Purchase Plan shall have been sold pursuant to purchase rights
exercised thereunder or (iii) the date on which all purchase rights are
exercised in connection with an acquisition of the Company by merger or asset
sale.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require stockholder
approval.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company does not presently have any employment contracts in effect with
the Chief Executive Officer or any of the other executive officers named in
the Summary Compensation Table.
49
<PAGE>
The Company provides incentives such as salary, benefits and option grants to
attract and retain qualified employees.
In the event that the Company is acquired by merger or asset sale, each
outstanding option held by the Chief Executive Officer and the other executive
officers under the 1998 Plan will automatically accelerate in full, and all
unvested shares held by such individuals under such Plan will immediately vest
in full, except to the extent such options are to be assumed by, and the
Company's repurchase rights with respect to those shares are to be assigned
to, the successor corporation. The Plan Administrator will have the authority
to grant options which will immediately vest upon an acquisition of the
Company, whether or not those options are assumed by the successor
corporation. The Plan Administrator is also authorized under the Discretionary
Option Grant and Stock Issuance Programs to grant options and to structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in control of the
Company (whether by merger or asset sale, or successful tender offer for more
than fifty percent (50%) of the outstanding voting stock or a change in the
majority of the Board by reason of one or more contested elections for Board
membership), with such vesting to occur either at the time of such change in
control or upon the subsequent termination of the individual's service within
a designated period (not to exceed eighteen months) following such change in
control. The options incorporated from the Predecessor Plan will immediately
vest upon an acquisition of the Company by merger or asset sale, unless those
options are assumed by, and the Company's repurchase rights are assigned to,
the successor entity. The Plan Administrator will have the discretion to
extend the acceleration provisions of the 1998 Plan to options outstanding
under the Predecessor Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") eliminates, to the fullest extent permitted by
Delaware law, liability of a director to the Company or its stockholders for
monetary damages for conduct as a director. Although liability for monetary
damages has been eliminated, equitable remedies such as injunctive relief or
rescission remain available. In addition, a director is not relieved of his or
her responsibilities under any other law, including the federal securities
laws.
The Company's Certificate of Incorporation requires the Company to indemnify
its directors to the fullest extent permitted by Delaware law. The Company has
also entered into indemnification agreements with each of the Company's
directors. The Company believes that the limitation of liability provisions in
its Certificate of Incorporation and indemnification agreements may enhance
the Company's ability to attract and retain qualified individuals to serve as
directors. See "Description of Capital Stock".
50
<PAGE>
CERTAIN TRANSACTIONS
The Company believes that the transactions described below contain terms no
less favorable to the Company than would be obtained from unaffiliated third
parties. The Company obtained the requisite approval of its stockholders and
Board of Directors for the transactions described below.
RECENT FINANCINGS
In January 1996, the Company sold 2,596,825 shares of Series B Preferred
Stock at a purchase price of $2.38 per share to a group of 32 persons,
including most of the Company's then existing stockholders. The following
directors, executive officers and beneficial owners of more than five percent
of the Company's Common Stock (assuming the conversion of all shares of
Preferred Stock into Common Stock) acquired beneficial ownership of Series B
Preferred Stock in the Series B Preferred Stock offering:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS/5% STOCKHOLDERS NO. OF SHARES
-------------------------------------------- -------------
<S> <C>
Robert Camp.................................................... 10,535
Thomas Christopher............................................. 63,105
Ray Hemmig..................................................... 21,385
Michael Lazarus/Weston Presidio Capital II, L.P................ 1,175,440
Marshall Payne/Scout Ventures.................................. 79,135
E.W. Rose III.................................................. 192,605
</TABLE>
In October 1996, the Company sold 1,701,658 shares of Series C Preferred
Stock at a purchase price of $3.53 per share to a group of 37 persons,
comprised exclusively of the Company's then existing stockholders. The
following directors, executive officers and beneficial owners of more than
five percent of the Company's Common Stock (assuming the conversion of all
shares of Preferred Stock into Common Stock) acquired beneficial ownership of
Series C Preferred Stock in the Series C Preferred Stock offering:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS/5% STOCKHOLDERS NO. OF SHARES
-------------------------------------------- -------------
<S> <C>
Robert Camp.................................................... 8,274
Thomas Christopher............................................. 49,000
Ray Hemmig..................................................... 50,939
Thomas Low..................................................... 5,789
Michael Lazarus/Weston Presidio Capital II, L.P................ 402,241
Marshall Payne/Scout Ventures.................................. 188,216
E. W. Rose III................................................. 458,136
</TABLE>
In May 1997, the Company sold 2,783,795 shares of Series D Preferred Stock
to a group of 11 persons at a purchase price of $10.49 per share. The
following directors, executive officers and beneficial owners of more than
five percent of the Company's Common Stock (assuming the conversion of all
shares of Preferred Stock into Common Stock) acquired beneficial ownership of
Series D Preferred Stock in the Series D Preferred Stock offering:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS/5% STOCKHOLDERS NO. OF SHARES
-------------------------------------------- -------------
<S> <C>
Damon Ball/Desai Capital....................................... 1,035,741
David Ferguson/Chase Venture Capital Associates, L.P........... 1,430,030
</TABLE>
In May 1997, the Company also issued warrants to purchase 27,734 shares of
Series D Preferred Stock to Montgomery Securities at an exercise price of
$12.59 per share (the "Series D Warrant"). The Series D Warrant expires on May
16, 2002. Montgomery Securities acted as the placement agent to
51
<PAGE>
the Company for the Series D Preferred Stock transaction and received
customary fees for its services. Montgomery Securities is the predecessor
entity of NationsBanc Montgomery Securities LLC.
In May 1997, the Company also redeemed 1,325,541 shares of Common Stock at a
redemption price of $10.49 per share from a group of 26 stockholders. The
following directors, executive officers and beneficial owners of more than
five percent of the Company's Common Stock (assuming the conversion of all
shares of Preferred Stock into Common Stock) sold shares of the Company's
Common Stock in the redemption:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS/5% STOCKHOLDERS NO. OF SHARES
-------------------------------------------- -------------
<S> <C>
Thomas Christopher............................................. 167,951
Stephen Gordon................................................. 571,998
Ray Hemmig..................................................... 31,864
Thomas Low..................................................... 15,512
Marshall Payne/Scout Ventures.................................. 105,588
E.W. Rose III.................................................. 245,854
</TABLE>
REGISTRATION RIGHTS
Pursuant to a Restated Investors Rights Agreement (the "Investor Rights
Agreement") between the Company, the Series D Warrant holders and holders of
the Company's Series A, Series B, Series C and Series D Preferred Stock
(collectively, the "Holders"), the Holders and certain other stock and warrant
holders have certain registration rights. If, at any time after the earlier of
(i) May 9, 2000 or (ii) six months after the effective date of the first
registration statement for a public offering of securities of the Company, (A)
the Holders of at least 40% of Registrable Securities then outstanding or (B)
any Holder who purchased at least $10,000,000 of the Series D Preferred Stock,
request in writing that the Company file a registration statement for all or a
portion of the Registrable Securities then outstanding, providing that the
aggregate offering price to the public would exceed $10,000,000, the Company
will, subject to certain limitations, use its best efforts to cause such
shares to be registered within 90 days of receipt of such a request.
"Registrable Securities" consist of Common Stock issuable upon conversion of
the Company's Series A, B, C and D Preferred Stock and outstanding warrants.
The Company is not obligated to effect more than three registrations under
this demand registration provision.
In addition, if the Company receives from (A) Holders of at least 40% of the
Registrable Securities then outstanding or (B) any Holder who purchased at
least $10,000,000 of the Series D Preferred Stock, a written request or
requests that the Company effect a registration on Form S-3, providing the
anticipated aggregate offering price would exceed $500,000, the Company will,
subject to certain limitations, cause such shares to be registered as soon as
practicable. Holders also have unlimited "piggyback" registration rights which
are exercisable within 20 days of notice of the Company's proposal to register
any of its stock or other securities under the Securities Act in connection
with the public offering of such securities solely for cash. All registration
expenses, exclusive of underwriting discounts and commissions, of demand
registrations, S-3 registrations, or piggyback registrations, shall be borne
by the Company.
All registration rights terminate upon an occurrence of either (i) the
expiration of four years from date of the Company's initial public offering or
(ii) when all shares held by a Holder can be sold within a given three month
period, without compliance with the registration requirements of the
Securities Act, pursuant to Rule 144 thereunder.
52
<PAGE>
LOANS
A Loan Agreement was entered into between the Company's Chief Executive
Officer, Stephen Gordon, and his spouse ("Borrowers") and the Company in
February 1997 for $1,100,000 bearing an interest rate of six percent per annum.
The Borrowers pledged to the Company 20,697 shares of Common Stock as
collateral for any amounts funded under the agreement. The loan was repaid in
full in May 16, 1997, including $7,348 in interest. Other unsecured loans,
bearing interest at various rates, totaling $56,850 were funded at various
dates prior to 1997 and were repaid in full, including $1,144 in interest, in
May 1997.
OTHER AGREEMENTS, TRANSACTIONS AND RELATIONSHIPS
The Company leases its store at 417 Second Street, Eureka, California from
Mr. and Mrs. Gordon. Pursuant to a written lease, the Company pays
approximately $34,000 annually to Mr. and Mrs. Gordon for use of the store. In
1995, 1996, 1997 and the first quarter of 1998, such lease payments totaled
$27,900, $33,700, $33,600 and $8,400, respectively.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of May 2, 1998 and as adjusted to reflect
the sale of the Common Stock in the Offering, by (i) each person known by the
Company to own beneficially more than five percent of the Common Stock, (ii)
each director and Named Executive Officer of the Company, (iii) each of the
Selling Stockholders and (iv) all current directors and executive officers as
a group. Except as otherwise noted, the Company believes the persons listed
below have sole investment and voting power with respect to the Common Stock
owned by them.
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP NUMBER OWNERSHIP
PRIOR TO OF SHARES AFTER THE
THE OFFERING(1) TO BE SOLD OFFERING(1)
----------------------- IN THE -----------------
NUMBER PERCENT OFFERING(1) NUMBER PERCENT
------------ ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
OFFICERS, DIRECTORS AND
5% STOCKHOLDERS
Stephen Gordon(2)....... 3,524,752 25.99% -- 3,524,752 21.57%
E.W. Rose, III(3)....... 1,649,137 12.38 230,295 1,418,842 8.81
Weston Presidio Capital
II, L.P.(4)............ 1,577,681 11.84 -- 1,577,681 9.80
Chase Venture Capital
Associates, L.P.(5).... 1,430,030 10.73 -- 1,430,030 8.88
Thomas Christopher(6)... 1,154,594 8.38 -- 1,154,594 6.97
Desai Funds(7).......... 1,035,741 7.77 124,289 911,452 5.66
Marshall Payne(8)....... 711,753 5.33 99,393 612,360 3.79
Ray Hemmig(9)........... 217,217 1.63 -- 217,217 1.35
Thomas Low(10).......... 139,027 1.03 -- 139,027 *
Robert Camp(11)......... 72,359 * -- 72,359 *
Michael Lazarus(12)..... 38,500 * -- 38,500 *
Damon Ball(13).......... 7,000 * -- 7,000 *
David Ferguson(14)...... 7,000 * -- 7,000 *
All directors and
executive officers
as a group (9
persons)(15)........... 5,872,202 41.06 99,393 5,772,809 33.80
OTHER SELLING STOCKHOLD-
ERS
Marcia Aaron............ 9,240 * 1,290 7,950 *
Beck Investments, a
General
Partnership(16)........ 102,739 * 9,100 93,639 *
Peter Breck............. 6,909 * 965 5,944 *
C.J. Burgess Co.(17).... 216,874 1.63 30,286 186,588 1.16
Debbie Crady............ 16,114 * 2,250 13,864 *
Jay Eastman............. 2,765 * 386 2,379 *
Ed Fitzgerald........... 2,765 * 386 2,379 *
Mark Goodman............ 6,909 * 965 5,944 *
George Howard........... 137,585 1.03 19,213 118,372 *
K. Scott Johnson........ 1,526 * 213 1,313 *
Amy Langston............ 18,207 * 2,543 15,664 *
Don Neustadt............ 79,450 * 11,095 68,355 *
Roger Todd Rankin....... 54,908 * 7,668 47,240 *
Dave Smith.............. 3,717 * 519 3,198 *
Eric Stroud............. 36,708 * 5,126 31,582 *
Byrd Teague............. 18,207 * 2,543 15,664 *
Jeff Westmont........... 8,288 * 1,157 7,131 *
Kathleen Wright......... 18,207 * 2,543 15,664 *
</TABLE>
- --------
* Less than 1.0%
(1) Shares that the person or group has the right to acquire within 60 days
after May 2, 1998 are deemed to be outstanding in calculating the number
of shares beneficially owned and the percentage ownership of the person
or group but are not deemed to be outstanding as to any other person or
group. Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 238,000 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998. Also includes 140,000 shares of Common
Stock held by the Christine B. Gordon 1998 Qualified Grantor Retained
Annuity Trust, of which Christine Gordon, the spouse of Stephen J.
Gordon, is the sole trustee, and 140,000 shares held by the Stephen J.
Gordon 1998 Qualified Grantor Retained Annuity Trust, of which Stephen J.
Gordon is the sole trustee. If the Underwriters' over-allotment option is
exercised, Mr. Gordon has agreed to sell up to 69,444 shares in the
option.
(3) Excludes approximately 1,260,994 shares held by persons associated with
Cardinal Investment Company, Inc., of which Mr. Rose is the sole
shareholder. Mr. Rose disclaims beneficial ownership of such shares.
54
<PAGE>
(4) Excludes 38,500 shares of Common Stock subject to options held by Mr.
Lazarus, a general partner of the general partner of Weston Presidio
Capital II, L.P.
(5) Excludes 7,000 shares of Common Stock subject to options held by David
Ferguson a general partner of the general partner of Chase Venture
Capital Associates, L.P.
(6) Includes 112,000 shares of Common Stock held by the Barbara Christopher
1997 Qualified Grantor Retained Annuity Trust, of which Barbara
Christopher, the spouse of Thomas A. Christopher, is the sole trustee,
and 112,000 shares of Common Stock held by the Thomas A. Christopher 1997
Qualified Grantor Annuity Trust, of which Thomas A. Christopher is the
sole trustee. Also includes 457,765 shares of Common Stock subject to
options exercisable within 60 days of May 2, 1998. If the Underwriters'
over-allotment option is exercised, Mr. Christopher and/or the trusts
described above have agreed to sell up to 27,778 shares in the option.
(7) Excludes 7,000 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998 held by Mr. Ball.
(8) Excludes approximately 2,335,655 shares held by persons associated with
Cardinal Investment Company Inc., of which Mr. Payne is a Vice President.
Mr. Payne disclaims beneficial ownership of such shares. Includes 137,277
shares held by Scout Ventures, a General Partnership, of which Mr. Payne
is a general partner. Includes 38,500 shares of Common Stock subject to
options exercisable within 60 days of May 2, 1998. If the Underwriters'
over-allotment option is exercised, Mr. Payne and Scout Ventures, a
General Partnership, have agreed to sell up to an aggregate of 56,685
shares in the option.
(9) Includes 38,500 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998.
(10) Includes 113,750 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998. If the Underwriters' over-allotment option
is exercised, Mr. Low has agreed to sell up to 13,889 shares in the
option.
(11) Includes 38,500 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998.
(12) Includes 38,500 shares of Common Stock subject to options exercisable
within sixty days of May 2, 1998. Excludes 1,577,681 shares of Common
Stock held by Weston Presidio Capital II, L.P. ("WPC"). Mr. Lazarus is a
general partner of the general partner of WPC. Mr. Lazarus disclaims
beneficial ownership of such shares.
(13) Includes 7,000 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998. Excludes 1,035,741 shares of Common Stock
held by Equity Linked Investors II and Private Equity Investors III, L.P.
(collectively, the "Desai Funds") Mr. Ball is a Senior Vice President of
Desai Capital Management Incorporated which manages the assets of the
Desai Funds.
(14) Includes 7,000 shares of Common stock subject to options exercisable
within 60 days of May 2, 1998. Excludes 1,430,030 shares of Common Stock
held by Chase Venture Capital Associates, L.P.
(15) See footnotes 2, 6, 8, 9, 10, 11, 12, 13 and 14.
(16) Includes 3,500 shares and warrants to purchase 26,320 shares held by
Michael Beck individually.
(17) Mr. Gordon's father-in-law is the officer, director and sole stockholder
of C.J. Burgess Co.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $.0001 par value
per share, and 5,000,000 shares of Preferred Stock, $.0001 par value per
share.
COMMON STOCK
As of May 2, 1998, 13,324,843 shares of Common Stock were outstanding, held
of record by 61 stockholders. After the Offering, 16,103,381 shares will be
outstanding. Concurrently with the completion of the Offering, each share of
the Company's Preferred Stock will be exchanged for and converted into one
share of the Company's Common Stock. The following description of rights
assumes this conversion.
Holders of Common Stock are entitled to receive dividends as may from time
to time be declared by the Board of Directors of the Company out of funds
legally available therefor. See "Dividend Policy". Holders of Common Stock are
entitled to one vote per share on all matters on which the holders of Common
Stock are entitled to vote and do not have any cumulative voting rights.
Holders of Common Stock have no preemptive, conversion, redemption or sinking
fund rights. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share equally and ratably in
the assets of the Company, if any, remaining after the payment of all
liabilities of the Company and the liquidation preference of any outstanding
class or series of Preferred Stock. The outstanding shares of Common Stock
are, and the shares of Common Stock offered by the Company in the Offering
when issued will be, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to any series of Preferred
Stock that the Company may issue in the future, as described below.
PREFERRED STOCK
The Board of Directors has the authority to issue Preferred Stock in one or
more series and to fix the number of shares constituting any such series and
the preferences, limitations and relative rights, including dividend rights,
dividend rate, voting rights, terms of redemption, redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by the stockholders of the Company.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock.
The potential issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. The Company has no current plans to issue shares of
Preferred Stock.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law, as amended ("Section 203"), which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years following the date
that such stockholder became an interested stockholder, unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
that resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at
56
<PAGE>
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and
also officers and (y) by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combinations to include (i) any merger or
consolidation involving the corporation or any majority-owned subsidiary of
the corporation and any other person or entity, (ii) subject to certain
exceptions, any sale, transfer, pledge or other disposition of 10% or more of
the assets of the corporation or any majority-owned subsidiary of the
corporation involving the interested stockholder, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation or any majority-owned subsidiary of the corporation of any stock
of the corporation to the interested stockholder, (iv) any transaction
involving the corporation or any majority-owned subsidiary of the corporation
that has the effect of increasing the proportionate share of the stock of any
class or series of the corporation or any majority-owned subsidiary of the
corporation beneficially owned by the interested stockholder or (v) the
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation or any majority-owned subsidiary of the corporation. In general,
Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Company's Certificate of Incorporation and Bylaws include provisions
that may have the effect of discouraging, delaying or preventing a change in
control of the Company or an unsolicited acquisition proposal that a
stockholder might consider favorable, including a proposal that might result
in the payment of a premium over the market price for the shares held by
stockholders. These provisions are summarized in the following paragraphs.
CLASSIFIED BOARD OF DIRECTORS
The Certificate of Incorporation and Bylaws provide for the Board to be
divided into three classes of directors serving staggered, three year terms.
The classification of the Board has the effect of requiring at least two
annual stockholder meetings, instead of one, to replace a majority of members
of the Board.
SUPERMAJORITY VOTING
The Certificate of Incorporation requires the approval of the holders of at
least 66 2/3% of the Company's combined voting power to effect certain
amendments to the Certificate of Incorporation or to effect any business
combination (as defined in Section 203) relating to the Company. The Bylaws
may be amended by either (a) a majority of the Board or (b) the holders of a
majority of the Company's voting stock, provided that certain amendments
approved by stockholders require the approval of at least 66 2/3% of the
Company's combined voting power.
AUTHORIZED BUT UNISSUED OR UNDESIGNATED CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. No Preferred Stock will
be designated upon consummation of the
57
<PAGE>
Offering. After the Offering, the Company will have outstanding 16,103,381
shares of Common Stock. The authorized but unissued (and in the case of
Preferred Stock, undesignated) stock may be issued by the Board in one or more
transactions. In this regard, the Company's Certificate of Incorporation
grants the Board broad power to establish the rights and preferences of
authorized and unissued Preferred Stock. The issuance of shares of Preferred
Stock pursuant to the Board's authority described above could decrease the
amount of earnings and assets available for distribution to holders of Common
Stock and adversely affect the rights and powers, including voting rights, of
such holders and may have the effect of delaying, deferring or preventing a
change in control of the Company. The Board does not currently intend to seek
stockholder approval prior to any issuance of Preferred Stock, unless
otherwise required by law.
SPECIAL MEETINGS OF STOCKHOLDERS
The Bylaws provide that special meetings of stockholders of the Company may
be called only by the Board, or by the Company's Chairman of the Board or
President.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Certificate of Incorporation and the Bylaws provide that an action
required or permitted to be taken at any annual or special meeting of the
stockholders of the Company may only be taken at a duly called annual or
special meeting of stockholders. This provision prevents stockholders from
initiating or effecting any action by written consent, and thereby taking
actions opposed by the Board.
NOTICE PROCEDURES
The Bylaws establish advance notice procedures with regard to all
stockholder proposals to be brought before meetings of stockholders of the
Company, including proposals relating to the nomination of candidates for
election as directors, the removal of directors and amendments to the
Certificate of Incorporation or Bylaws. These procedures provide that notice
of such stockholder proposals must be timely given in writing to the Secretary
of the Company prior to the meeting. Generally, to be timely, notice must be
received by the Secretary of the Company not less than 120 days prior to the
meeting. The notice must contain certain information specified in the Bylaws.
OTHER ANTI-TAKEOVER PROVISIONS
See "Management--1998 Stock Incentive Plan" for a discussion of certain
provisions of the Stock Incentive Plan which may have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals.
LIMITATION OF DIRECTOR LIABILITY
The Certificate of Incorporation limits the liability of directors of the
Company (in their capacity as directors but not in their capacity as officers)
to the Company or its stockholders to the fullest extent permitted by Delaware
law. Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, which relates to
unlawful payments of dividends or unlawful stock repurchases or redemptions or
(iv) for any transaction from which the director derived an improper personal
benefit.
INDEMNIFICATION ARRANGEMENTS
The Bylaws provide that the directors and officers of the Company shall be
indemnified and provide for the advancement to them of expenses in connection
with actual or threatened proceedings
58
<PAGE>
and claims arising out of their status as such to the fullest extent permitted
by the Delaware General Corporation Law. Prior to consummation of the
Offering, the Company will enter into indemnification agreements with each of
its directors and executives officers that will provide them with rights to
indemnification and expense advancement to the fullest extent permitted under
the Delaware General Corporation Law.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Boston Equiserve
Limited Partnership.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market, or the prospect of such sales, could adversely affect prevailing
market prices.
Upon completion of the Offering, 16,103,381 shares of Common Stock will be
outstanding. Of these shares, the 3,330,000 shares sold in the Offering will
be freely tradeable without restriction under the Securities Act, unless
purchased by an "affiliate" of the Company, as that term is defined in Rule
144. The remaining 12,773,381 shares outstanding after completion of the
Offering are "restricted securities" as defined in Rule 144 and may be sold in
the public market only if registered under the Securities Act or if they
qualify for an exemption from registration, including an exemption pursuant to
Rule 144.
The Company, the Selling Stockholders, the Company's directors and officers
and each holder of % or more of the Company's outstanding Common Stock as of
the date hereof have agreed that, subject to certain exceptions, during the
period beginning from the date of this Prospectus, and continuing to and
including the date 180 days after the date of this Prospectus (or earlier with
the consent of the Underwriters), they will not offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities of the
Company that are substantially similar to the shares of the Common Stock or
which are convertible into or exchangeable for securities that are
substantially similar to the shares of the Common Stock without the prior
written consent of the Underwriters. Upon expiration of these agreements, all
of these shares will be eligible for immediate resale in the public market
subject to the limitations of Rule 144.
In general under Rule 144, a person, including an "affiliate" of the
Company, who has beneficially owned restricted shares for at least one year is
entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 161,033 shares immediately following the Offering) or the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are subject to certain manner
of sale limitations, notice requirements and the availability of current
public information about the Company. Rule 144(k) provides that a person who
is not an "affiliate" of the issuer at any time during the three months
preceding a sale and who has beneficially owned shares for at least two years
is entitled to sell those shares at any time without compliance with the
public information, volume limitation, manner of sale and notice provisions of
Rule 144.
As of May 2, options to purchase 1,639,806 shares of Common Stock were
outstanding under the 1995 Stock Option Plan. Simultaneously with the
completion of the Offering, options to purchase 547,300 shares of Common Stock
will be granted under the 1998 Stock Incentive Plan. The Company intends to
file as soon as practicable following completion of the Offering a
registration statement on Form S-8 under the Securities Act covering shares of
Common Stock reserved for issuance under the 1995 Stock Option Plan and the
1998 Stock Incentive Plan. Based on the number of options expected to be
outstanding upon completion of the Offering and shares reserved for issuance
under the 1998 Stock Incentive Plan, the registration statement would cover
3,287,662 shares. See "Management--Benefit Plans". The registration statement
will become effective immediately upon filing, whereupon, subject to the
satisfaction of applicable exercisability periods, Rule 144 volume limitations
applicable to affiliates and, in certain cases, the agreements with the
Underwriters referred to above, shares of Common Stock to be issued upon
exercise of outstanding options granted pursuant to the 1995 Stock Option Plan
and 1998 Stock Incentive Plan will be available for immediate resale in the
open market.
60
<PAGE>
VALIDITY OF THE ISSUANCE OF THE COMMON STOCK
The validity of the issuance of the Common Stock offered in the Offering
will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. Brown & Wood LLP, San Francisco, California, will act as
counsel for the Underwriters.
EXPERTS
The Financial Statements for Restoration Hardware, Inc. as of February 1,
1997 and January 31, 1998 and for each of the three years in the period ended
January 31, 1998 and for Michael's Concepts In Wood, Inc. as of and for the
year ended January 31, 1998 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein, and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered in the
Offering. This Prospectus omits certain information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered in the
Offering, reference is made to such Registration Statement, exhibits and
schedules. 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. The Registration Statement,
including the exhibits and schedules filed therewith, may be inspected without
charge at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates and from the Commission's Internet
Web site at http://www.sec.gov.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
RESTORATION HARDWARE, INC.
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at February 1, 1997 and January 31, 1998 and
May 2, 1998 (unaudited)................................................. F-3
Statements of Consolidated Operations for the fiscal years ended January
27, 1996, February 1, 1997 and January 31, 1998 and for the unaudited
three months ended May 3, 1997 and May 2, 1998.......................... F-4
Statements of Consolidated Stockholders' Equity for the fiscal years
ended January 27, 1996, February 1, 1997 and January 31, 1998 and for
the unaudited three months ended May 2, 1998 ........................... F-5
Statements of Consolidated Cash Flows for the fiscal years ended January
27, 1996, February 1, 1997 and January 31, 1998 and for the unaudited
three months ended May 3, 1997 and May 2, 1998.......................... F-6
Notes to Consolidated Financial Statements............................... F-7
MICHAEL'S CONCEPTS IN WOOD, INC.
Independent Auditors' Report............................................. F-18
Balance Sheet at January 31, 1998........................................ F-19
Statement of Operations for the fiscal year ended January 31, 1998....... F-20
Statement of Shareholder's Equity for the fiscal year ended January 31,
1998.................................................................... F-21
Statement of Cash Flows for the fiscal year ended January 31, 1998....... F-22
Notes to Financial Statements............................................ F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders
Restoration Hardware, Inc.
Corte Madera, California:
We have audited the accompanying consolidated balance sheets of Restoration
Hardware, Inc. and its subsidiary as of February 1, 1997 and January 31, 1998,
and the related statements of consolidated operations, stockholders' equity
and cash flows for each of the three fiscal years in the period ended January
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Restoration Hardware, Inc.
and subsidiary as of February 1, 1997 and January 31, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended January 31, 1998 in conformity with generally accepted
accounting principles.
San Francisco, California
April 6, 1998 (May 27, 1998 as to the last two paragraphs of Note 10)
F-2
<PAGE>
RESTORATION HARDWARE, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, MAY 2,
1997 1998 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 325 $ 912 $ 1,387
Accounts receivable....................... 2,017 3,820 4,495
Merchandise inventories................... 14,092 40,363 48,685
Prepaid expense and other................. 357 1,709 2,658
------- ------- --------
Total current assets..................... 16,791 46,804 57,225
Property and equipment, net................ 14,841 39,009 47,508
Long-term deferred tax asset............... 435 1,070 1,070
Goodwill................................... -- -- 4,029
Other assets............................... 163 350 476
------- ------- --------
Total assets............................. $32,230 $87,233 $110,308
======= ======= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..... $ 7,236 $22,359 $ 24,352
Revolving line of credit.................. 495 10,323 27,789
Current portion of capital lease
obligations.............................. 176 197 262
Current portion of notes payable.......... 239 -- 1,174
Current portion of deferred lease
incentives............................... 186 1,392 1,479
Deferred tax liability.................... 155 607 607
Taxes payable............................. 802 1,718 (425)
Other current liabilities................. 1,001 2,020 1,797
------- ------- --------
Total current liabilities................ 10,290 38,616 57,035
Commitments and Contingencies.............. -- -- --
Long-term portion of capital lease
obligations............................... 358 158 636
Long-term portion of notes payable......... 312 -- 3,527
Long-term portion of deferred lease
incentives................................ 5,274 15,264 16,236
Deferred rent.............................. 635 1,910 2,332
------- ------- --------
Total liabilities........................ 16,869 55,948 79,766
------- ------- --------
Redeemable preferred stock:
Series A, convertible, no par value,
2,634,415 shares authorized, 2,634,415,
2,492,686 and 2,492,686 issued and
outstanding, respectively (aggregate
liquidation preference of $1,750, $1,656
and $1,656 (unaudited), respectively).... 1,665 1,571 1,571
Series B, convertible, no par value,
2,596,825 shares authorized, 2,596,825,
2,218,370 and 2,218,370 issued and
outstanding, respectively (aggregate
liquidation preference of $6,175, $5,277
and $5,277 (unaudited), respectively).... 6,072 5,172 5,172
Series C, convertible, no par value,
1,701,650 shares authorized, 1,701,650,
1,656,431 and 1,656,431 issued and
outstanding, respectively (aggregate
liquidation preference of $6,000, $5,840
and $5,840 (unaudited), respectively).... 5,951 5,792 5,792
Series D, convertible, no par value,
2,783,795 shares authorized, none,
2,783,795 and 2,783,795 issued and
outstanding (aggregate liquidation
preference of $30,902 and $30,902
(unaudited), respectively)............... -- 28,075 28,075
------- ------- --------
Total redeemable preferred stock......... 13,688 40,610 40,610
------- ------- --------
Stockholders' equity:
Common stock, no par value, 13,790,000 and
24,500,000 shares authorized,
respectively, 4,925,725, 4,171,223 and
4,173,561 (unaudited) issued and
outstanding, respectively................ 679 541 544
Retained earnings(deficit)................ 994 (9,866) (10,612)
------- ------- --------
Total stockholders' equity............... 1,673 (9,325) (10,068)
------- ------- --------
Total liabilities, redeemable preferred
stock and stockholders' equity.......... $32,230 $87,233 $110,308
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RESTORATION HARDWARE, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
------------------------------------ --------------------
JANUARY 27, FEBRUARY 1, JANUARY 31, MAY 3, MAY 2,
1996 1997 1998 1997 1998
----------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 13,238 $ 39,672 $ 97,872 $ 11,907 $ 32,647
Cost of sales and occu-
pancy.................. 8,540 25,299 65,728 8,752 23,634
--------- ---------- --------- --------- ---------
Gross profit.......... 4,698 14,373 32,144 3,155 9,013
Selling, general and
administrative
expenses............... 4,075 12,213 27,080 3,733 9,553
Preopening store ex-
penses................. 162 681 1,869 256 298
--------- ---------- --------- --------- ---------
Income from
operations........... 461 1,479 3,195 (834) (838)
Interest expense--net... (48) (113) (139) (79) (426)
--------- ---------- --------- --------- ---------
Income before income
taxes................ 413 1,366 3,056 (913) (1,264)
Provision for income
taxes.................. 177 570 1,308 (371) (518)
--------- ---------- --------- --------- ---------
Net income (loss)..... $ 236 $ 796 $ 1,748 $ (542) $ (746)
========= ========== ========= ========= =========
Redeemable preferred
stock repurchases in
excess of
carrying value......... -- -- 4,778 -- --
--------- ---------- --------- --------- ---------
Income (loss)
available to common
stockholders......... $ 236 $ 796 $ (3,030) $ (542) $ (746)
--------- ---------- --------- --------- ---------
Earnings (loss) per
share:
Basic................. $ .05 $ .16 $ (.69) $ (.11) $ (.18)
--------- ---------- --------- --------- ---------
Diluted............... $ .03 $ .07 $ (.69) $ (.11) $ (.18)
--------- ---------- --------- --------- ---------
Weighted average shares
outstanding:
Basic................. 4,914,687 4,925,725 4,386,207 4,925,725 4,172,996
--------- ---------- --------- --------- ---------
Diluted............... 7,593,127 10,902,918 4,386,207 4,925,725 4,172,996
--------- ---------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RESTORATION HARDWARE, INC.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 28, 1995........ 4,910,675 $ 656 $ (25) $ 631
Issuance of common stock........... 50,050 33 -- 33
Common stock repurchased........... (35,000) (10) (13) (23)
Net income......................... -- -- 236 236
--------- ----- -------- --------
BALANCE AT JANUARY 27, 1996........ 4,925,725 679 198 877
Net income......................... -- -- 796 796
--------- ----- -------- --------
BALANCE AT FEBRUARY 1, 1997........ 4,925,725 679 994 1,673
Redeemable preferred stock
repurchases in excess of
carrying value.................... -- -- (4,778) (4,778)
Common stock repurchased........... (754,502) (138) (7,830) (7,968)
Net income......................... -- -- 1,748 1,748
--------- ----- -------- --------
BALANCE AT JANUARY 31, 1998........ 4,171,223 541 (9,866) (9,325)
Issuance of common stock
(unaudited)....................... 2,338 3 -- 3
Net income (loss) (unaudited)...... -- -- (746) (746)
--------- ----- -------- --------
BALANCE AT MAY 2, 1998
(UNAUDITED)....................... 4,173,561 $ 544 $(10,612) $(10,068)
========= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RESTORATION HARDWARE, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDING
----------------------------------- ----------------
JANUARY 27, FEBRUARY 1, JANUARY 31, MAY 3, MAY 2,
1996 1997 1998 1997 1998
----------- ----------- ----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)....... $ 236 $ 796 $ 1,748 $ (542) $ (746)
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 533 1,119 2,665 497 1,122
Deferred income taxes.. 11 (165) (183) -- --
Changes in assets and
liabilities:
Accounts receivable... (277) (1,527) (1,803) 120 2,080
Merchandise
inventories.......... (2,821) (10,308) (26,271) (1,658) (6,116)
Prepaid expenses and
other assets......... (74) (319) (1,539) (193) (894)
Accounts payable and
accrued expenses..... 2,894 3,889 15,123 109 (2,239)
Taxes payable......... 162 449 916 (1,187) (2,144)
Other current
liabilities.......... 346 655 1,019 (355) (224)
Deferred rent......... 158 336 1,275 271 423
Deferred lease
incentives and other
long-term
liabilities.......... 1,563 3,848 11,196 959 1,059
------- -------- -------- ------- -------
Net cash provided by
(used in) operating
activities.......... 2,731 (1,227) 4,146 (1,979) (7,679)
------- -------- -------- ------- -------
Cash flows from investing
activities
Capital expenditures.... (4,991) (10,600) (26,833) (3,415) (8,133)
Payment for purchase of
The Michaels Furniture
Company................ -- -- -- -- (5,530)
Repay shareholder
advance................ -- -- -- -- 508
------- -------- -------- ------- -------
Net cash provided by
(used in) investing
activities............. (4,991) (10,600) (26,833) (3,415) (13,155)
Cash flows from financing
activities:
Borrowings (repayments)
under revolving line of
credit--net............ 1,027 (531) 9,828 6,428 15,905
Principal payments--
capital lease
obligations............ (3) (11) (179) (56) (59)
Borrowings under term
loan................... -- 511 1,000 392 5,460
Repayments under term
loan................... (47) (100) (1,551) -- --
Issuance of redeemable
preferred stock........ 6,072 5,951 26,922 -- --
Issuance of common
stock.................. 33 -- -- -- 3
Preferred and common
stock repurchases...... (23) -- (12,746) -- --
------- -------- -------- ------- -------
Net cash provided by
financing
activities........... 7,059 5,820 23,274 6,764 21,309
------- -------- -------- ------- -------
Net increase (decrease)
in cash and cash
equivalents............. 4,799 (6,007) 587 1,370 475
------- -------- -------- ------- -------
Cash and cash equiva-
lents:
Beginning of period..... 1,533 6,332 325 325 912
------- -------- -------- ------- -------
End of period............ $ 6,332 $ 325 $ 912 $ 1,695 $ 1,387
======= ======== ======== ======= =======
Additional cash flow in-
formation:
Cash paid during the
year for interest (net
of amount
capitalized)........... $ 83 $ 191 $ 507 $ 99 $ 762
======= ======== ======== ======= =======
Cash paid during the
year for taxes......... $ 97 $ 301 $ 574 $ 732 $ 1,629
======= ======== ======== ======= =======
Supplemental schedule of
non cash investing and
financing activities:
Equipment acquired
through noncash capital
lease transactions..... $ 542 $ 169 $ -- $ 245 $ --
======= ======== ======== ======= =======
</TABLE>
The Company purchased all of the capital stock of The Michaels Furniture
Company for $5.0 million in March 1998. In conjunction with the acquisition,
liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................................... $11,036
Cash paid for the capital stock.................................. (5,400)
-------
Liabilities assumed............................................ $ 5,636
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Restoration Hardware, Inc. and its subsidiary (together the "Company") is a
specialty retailer of high-quality home furnishings, decorative accessories
and hardware. The Company operated as a sole proprietorship from 1981 to 1987
and was incorporated in the state of California in 1987. At January 31, 1998
the Company operated a total of 41 stores in 20 states. The Company operates
on a 52-53 week fiscal year ending on the Saturday closest to January 31.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Restoration
Hardware, Inc. and its subsidiaries. All intercompany balances and
transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid, fixed income instruments purchased with
original maturities of three months or less.
MERCHANDISE INVENTORIES
Inventories are stated at the lower of cost or market determined under the
weighted average method. Cost includes certain buying and distribution costs
related to the procurement and processing of merchandise.
PREOPENING STORE EXPENSES
Preopening store expenses, including store set-up and certain labor and
hiring costs, are expensed as incurred.
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful life of
the asset, typically ranging from five to twelve years for equipment. The cost
of leasehold improvements is amortized over the useful life of the asset or
the applicable lease term, whichever is less. Computer hardware and software
costs are included in fixtures and equipment and are amortized over estimated
useful lives of three to five years. Leasehold improvements include
capitalized interest of $20,000 and $301,000 as of February 1, 1997 and
January 31, 1998.
CAPITALIZED LEASES
Noncancellable leases which meet the criteria of capital leases are
capitalized as assets and amortized over the lease term, using the interest
method.
F-7
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-LIVED ASSETS
The Company's policy is to review long-lived assets and certain identifiable
intangibles, including goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable based on estimated future cash flows calculated on a store by
store basis. Based on the Company's reviews as of January 31, 1998 and
February 1, 1997, no adjustments were recognized to the carrying value of such
assets.
DEFERRED RENT AND DEFERRED LEASE INCENTIVES
Certain of the Company's operating leases contain predetermined fixed
escalations of the minimum rentals during the original term of the lease. For
these leases, the Company recognizes the related rental expense on a straight-
line basis over the life of the lease and records the difference between the
amount charged to operations and amounts paid as deferred rent. As part of its
lease agreements, the Company receives certain lease incentives. These
allowances have been deferred and are amortized on a straight-line basis over
the life of the lease as a reduction of rent expense.
REVENUE RECOGNITION
The Company recognizes revenue at the point of sale. Merchandise refunds are
recorded at the time of return, as the effect of returns are not significant
to the Company's operating results.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. For the fiscal years ended
January 27, 1996, February 1, 1997 and January 31, 1998, advertising costs
were $345,000, $837,000, and $2,608,000, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash
equivalents. The Company places its cash with financial institutions. At
times, such amounts may be in excess of the FDIC insurance limits.
TAXES ON INCOME
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. In estimating
future tax consequences, the Company generally considers all expected future
events other than changes in the tax law or rates.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, Accounting for Stock Issued to
Employees.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, revolving line of credit borrowings and long-term debt
approximates their estimated fair value.
At January 31, 1998 the Company had redeemable preferred stock with carrying
values totalling $40.6 million and estimated values totalling $117.7 million
based upon discounted cash flow valuation methods.
F-8
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings
Per Share, requires dual presentation of two earnings per share ("EPS")
amounts, basic EPS and diluted EPS, on the face of all income statements.
Basic EPS excludes dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if common stock options and warrants were exercised into
common stock.
The following is a reconciliation of the number of shares (denominator) used
in the basic and diluted EPS computations (shares in thousands):
<TABLE>
<CAPTION>
EFFECT OF
CONVERTIBLE EFFECT OF DILUTED
PREFERRED STOCK OPTIONS
WEIGHTED AVERAGE SHARES BASIC EPS STOCK AND WARRANTS DILUTED EPS
----------------------- --------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
Fiscal year ended January
27, 1996................ 4,914,687 2,678,440 0 7,593,127
Fiscal year ended
February 1, 1997........ 4,925,725 5,720,695 256,498 10,902,918
Fiscal year ended January
31, 1998................ 4,386,207 0 0 4,386,207
</TABLE>
--------
The basic and diluted EPS share amounts assume the conversion of Series
A, B, C and D preferred stock into common stock at a ratio of one-to-one as
of January 31, 1998. Such preferred stock will automatically convert into
common stock upon the completion of the Company's initial public offering
of its common stock.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. Management believes this will have no
impact on the Company's financial position or results of operations.
SFAS No. 131, Disclosures about Segment Reporting of an Enterprise and
Related Information, establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosure about products and
services, geographic areas, and major customers. Adoption of this statement
will not impact the Company's financial position, results of operations or
cash flows and any effect will be limited to the form and content of its
disclosures. This statement is effective for fiscal years beginning after
December 15, 1997.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the fiscal
year ended January 31, 1998.
F-9
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, MAY 2
1997 1998 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements.................. $12,456 $34,504 $42,439
Furniture, fixtures and equipment....... 3,495 8,435 11,803
Equipment under capital leases.......... 736 736 736
------- ------- -------
Total................................. 16,687 43,675 54,978
Less accumulated depreciation........... (1,846) (4,666) (7,470)
------- ------- -------
Property and equipment, net............. $14,841 $39,009 $47,508
======= ======= =======
</TABLE>
(3) LEASES
The Company leases certain property consisting of retail stores, the
corporate offices and distribution center and equipment. Leases expire at
various dates through 2013. The retail store, distribution center and
corporate office leases generally provide that the Company assume the
maintenance and all or a portion of the property tax obligations on the leased
property. Most store leases also provide for minimum annual rentals, with
provisions for additional rent based on a percentage of sales and for payment
of certain expenses.
The aggregate future minimum rental payments under leases in effect at
January 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES TOTAL
----------- ------- --------- --------
<S> <C> <C> <C>
1999........................................... $ 227 $ 11,378 $ 11,605
2000........................................... 164 11,740 11,904
2001........................................... 1 11,789 11,790
2002........................................... -- 11,583 11,583
2003........................................... -- 11,429 11,429
Thereafter through the year 2013............... -- 79,236 79,236
----- -------- --------
Minimum lease commitments...................... 392 $137,155 $137,547
======== ========
Less amount representing interest.............. (37)
-----
Present value of capital lease obligations..... 355
Less current portion........................... (197)
-----
Long-term portion.............................. $ 158
=====
</TABLE>
Minimum and contingent rental expense, which are based upon certain factors
such as sales volume, under operating leases, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Operating leases:
Minimum rental expense................. $ 920 $2,436 $7,041
Contingent rental expense.............. 153 408 474
------ ------ ------
Total................................ $1,073 $2,844 $7,515
====== ====== ======
</TABLE>
F-10
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) REVOLVING LINE OF CREDIT AND TERM LOAN
Revolving line of credit and notes payable consist of the following (in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, MAY 2,
1997 1998 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving line of credit................ $ 495 $10,323 $27,789
===== ======= =======
Term loan............................... $ 551 $ -- $ 3,527
Less current portion of term loan....... (239) -- 1,174
----- ------- -------
Total................................. $ 312 $ -- $ 4,701
===== ======= =======
</TABLE>
The Company has a revolving line of credit with a commercial bank which
allows the Company to borrow up to $50,000,000 through December 1999. Interest
on the revolving line of credit is payable monthly at the bank's prime rate
(8.5% at January 31, 1998). The line allows for letters of credit of up to
$1,500,000. Letters of credit to the extent outstanding reduce available
borrowings under the line.
The line of credit agreement requires compliance with certain financial loan
covenants, including capital expenditure limits, minimum net worth and working
capital ratios, and earnings coverage ratios. The agreement also prohibits
dividend payments and sales of assets, other than inventory in the normal
course of business. As of January 31, 1998, the Company was not in compliance
with its indebtedness to net worth ratio and for the year ended January 31,
1998, the Company was not in compliance with its maximum capital expenditure
and minimum inventory turnover ratio covenants. The Company has received
waivers from its bank for each covenant with which it was in non-compliance as
of and for the year ended January 31, 1998.
(5) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current payable:
Federal............................... $125 $ 610 $1,213
State................................. 41 125 278
---- ----- ------
Total current payable............... 166 735 1,491
---- ----- ------
Deferred:
Federal............................... 8 (139) (150)
State................................. 3 (26) (33)
---- ----- ------
Total deferred...................... 11 (165) (183)
---- ----- ------
Provision for income taxes.............. $177 $ 570 $1,308
==== ===== ======
</TABLE>
F-11
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The differences between the U.S. federal statutory tax rate and the
Company's effective rate are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory tax rate........ 34.0% 34.0% 34.0%
State income taxes (net of U.S. federal
income tax benefit)................... 6.5 5.5 5.4
Other.................................. 2.4 2.2 3.4
---- ---- ----
Effective income tax rate............ 42.9% 41.7% 42.8%
==== ==== ====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current deferred tax asset (liability)
Accrued expenses..................... $ 29 $ 113 $ 103
State tax benefit.................... 14 15 24
Inventory............................ (90) (283) (562)
Other................................ -- -- (172)
---- ----- ------
Net current deferred tax
liability......................... (47) (155) (607)
---- ----- ------
Long-term deferred tax asset
(liability):
Deferred lease credits............... 129 323 790
Fixed assets......................... 49 (16) (29)
Other................................ (16) 128 309
---- ----- ------
Net long-term deferred tax asset... 162 435 1,070
---- ----- ------
Net deferred tax asset................. $115 $ 280 $ 463
==== ===== ======
</TABLE>
(6) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company had outstanding four series of convertible preferred stock at
January 31, 1998. The first series, Series A convertible preferred stock, was
issued in June 1994 at a price of $0.66 per share. The Company issued
2,634,415 shares of Series A convertible preferred stock and subsequently
redeemed 141,729 of such shares in May 1997. The second series, Series B
convertible preferred stock, was issued in January 1996 at a price of $2.38
per share. The Company issued 2,596,825 shares of Series B convertible
preferred stock and subsequently redeemed 378,455 of such shares in May 1997.
The third series, Series C convertible preferred stock, was issued in October
1996 at a price of $3.53 per share. The Company issued 1,701,658 shares of
Series C convertible preferred stock and subsequently redeemed 45,227 of such
shares in May 1997. The fourth series, Series D convertible preferred stock
was issued in May 1997 at a price of $10.49 per share. The Company issued
2,783,795 shares of such Series D preferred stock.
F-12
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The holders of convertible preferred stock are entitled to receive, if and
when declared by the Board of Directors, dividends in cash or other assets
provided that the holders of Series D preferred stock receive such dividends
in preference to any payment of any dividend on any other capital stock of the
Company. All preferred stock dividends are noncumulative.
Each share of Series A, B, C and D convertible preferred stock is
convertible into common stock at the option of the holder at a ratio of one
for one. The shares will automatically convert into common stock immediately
upon the consummation of the Company's sale of its common stock in an initial
public offering that meets certain criteria.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series D preferred stock shall be entitled to receive, prior
and in preference to any other series of preferred stock (Series A, B and C)
and the holders of common stock, an amount equal to the greater of: (i) the
original purchase price plus the payment of a 8% dividend compounded annually
or (ii) the value such holder would have received if each outstanding share of
Series D preferred stock had been converted into common stock immediately
prior to such liquidation, dissolution or winding up of the Company. If assets
and funds are insufficient to permit full payment of the preference amount of
the Series D preferred stock, any assets and funds shall be distributed
ratably among the holders of Series D preferred stock.
At any time after June 10, 1999, if the Series A and B preferred stock have
not been converted to common stock, the holders of a majority of the then
outstanding Series A and B preferred stock can elect to have the Company
redeem all of such shares of preferred stock by paying for each share the
redemption price based on the redemption formula. At any time beginning
October 11, 2001, if the Series C preferred stock has not been converted to
common stock, the holders of a majority of the then outstanding Series C
preferred stock can elect to have the Company redeem all of the shares of
preferred stock by paying for each share the redemption price based on the
redemption formula. The redemption formula is the sum of four times earnings
before depreciation, amortization, interest and taxes for the prior twelve-
month period plus working capital, divided by the number of shares
outstanding.
If (a) shares of Series D preferred stock have not been converted to common
stock on or before May 9, 2005, or (b) in the event that any other capital
stock of the Company is to be redeemed, the Company shall, in the event that
the holders of the Series D preferred stock elect to be redeemed, redeem the
Series D preferred stock for a redemption price equal to the original purchase
price, plus 8% dividend compounded annually, before any redemption payment is
made in respect to any other series of preferred stock (Series A, B and C) or
the common stock.
STOCK BASED COMPENSATION PLANS
On June 10, 1994, the Board of Directors adopted the 1994 Incentive Stock
Option Plan ("1994 Plan"). The 1994 Plan authorized the issuance of up to
754,530 shares of common stock in connection with incentive stock option
awards granted to key employees of the Company. In January 1996, the Board of
Directors approved the 1995 Stock Option Plan ("1995 Plan"), which serves as
the successor to the 1994 Plan. The 1995 Plan authorized the Board of
Directors to grant options to key employees, directors, and consultants to
purchase an aggregate of 1,624,280 shares of common stock, including those
that had been previously granted under the 1994 Plan. In 1997, the Board of
Directors amended the 1995 Plan to increase the number of shares authorized
for issuance by 685,720 shares. The vesting, exercise prices and other terms
of the options are fixed by the Board of Directors. Options are granted at
prices not less than the fair market value at the date of grant for incentive
stock options and not less than 85% of the fair market value for nonstatutory
stock options. These options generally
F-13
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expire ten years from the date of grant and vest ratably over a three-year
period. The options are generally exercisable upon grant but, if any options
are exercised before becoming vested, the holder can not sell or vote the
shares until such shares have vested. If the holder leaves the Company before
the options are fully vested, the Company has the right to repurchase unvested
options at the employee's original exercise price. In the event of an initial
public offering, certain outstanding options shall immediately become fully
vested.
A summary of activity under the above option Plans is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding and exercis-
able at January 28,
1995..................... 377,265 $ 0.66
Granted (weighted aver-
age fair value of
$0.10)................. 376,250 0.66
Exercised............... --
Canceled................ --
---------
Outstanding and exercis-
able at January 27,
1996..................... 753,515 0.66
Granted (weighted aver-
age fair value of
$0.24)................. 483,735 1.55
Exercised............... --
Canceled................ (31,640) 1.43
---------
Outstanding and exercis-
able, February 1, 1997... 1,205,610 1.00
Granted (weighted aver-
age fair value of
$1.95)................. 489,104 10.49
Exercised............... --
Canceled................ (55,965) 3.51
---------
Outstanding and exercis-
able, January 31, 1998... 1,638,749 3.76
=========
Vested at January 31,
1998..................... 742,518 0.80
=========
Available for future grant
at January 31, 1998...... 671,251
=========
</TABLE>
Additional information regarding options outstanding as of January 31, 1998
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
------------------------ ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.66.................. 753,515 7.0 $ 0.66 753,515 $ 0.66
1.43.................. 344,330 8.5 1.43 344,330 1.43
2.12.................. 63,105 8.8 2.12 63,105 2.12
10.49-11.54............ 477,799 9.6 10.55 477,799 10.49
--------- --- ------ --------- ------
$ 0.66-$11.54........... 1,638,749 8.2 $ 3.76 1,638,749 $ 3.75
========= === ====== ========= ======
</TABLE>
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles
Board No. 25 ("APB 25"), Accounting for Stock Issued to Employees and its
related interpretations. As all stock based awards have been granted at their
then fair market value, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
F-14
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS 123"), requires the disclosure of pro forma net
income had the Company adopted the fair value method as of the beginning of
fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees
is calculated through the use of option pricing models, even though such
models were developed to estimate the fair value of freely traded, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 54 months; stock
volatility considered to be 0% since the Company is a private company; risk
free interest rates, 5.7%, 5.7% and 7.0% in 1996, 1997 and 1998; and no
dividends during the expected term. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the awards had been amortized to expense
over the vesting period of the awards, pro forma net income and per share
amounts would have been as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income...................... $ 234 $ 779 $ 1,655
Pro forma net income (loss) per share
available to common stockholders......... $ 234 $ 779 $ (3,135)
Pro forma net income (loss) per share:
Basic.................................... $0.05 $0.16 $ (0.71)
Diluted.................................. $0.03 $0.07 $ (0.71)
</TABLE>
However, the impact of outstanding nonvested stock options granted prior to
1995 has been excluded from the pro forma calculation.
In June 1994, the Company issued 131,705 warrants to purchase shares of
common stock at $0.90 per share. The warrants were issued in connection with a
stockholder agreement and management believes such warrants were issued at
fair market value on the date of grant. The warrants were immediately
exercisable and expire on June 10, 2000. At January 31, 1998, 127,036 of the
warrants were outstanding.
In May 1997, the Company issued 27,734 warrants at $12.59 per share in
connection with the Series D preferred stock. The warrants were deemed to have
nominal value at the date of grant. The warrants were immediately exercisable
and expire on May 16, 2002.
In April 1998, the Board of Directors adopted the 1998 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan is designed to allow
eligible employees, based on specified length of service requirements, of the
Company and participating subsidiaries to purchase shares of common stock, at
semi-annual intervals, through their periodic payroll deductions under the
Purchase Plan. A reserve of 475,000 shares of common stock has been
established for this purpose. Individuals who are eligible employees may enter
the Purchase Plan twice yearly and payroll deductions may not exceed 15% of
total cash earnings. The purchase price per share will equal 85% of the lower
of (i) the fair market value of the common stock on the participant's entry
date into the offering period or (ii) the fair market value on the semi-annual
purchase date. The Board may at any time alter, suspend or discontinue the
Purchase Plan. However, certain amendments to the Purchase Plan may require
stockholder approval.
F-15
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for its employees who meet certain service and
age requirements. Participants may contribute up to 15% of their salaries to a
maximum of $10,000 and qualify for favorable tax treatment under Section
401(k) of the Internal Revenue Code.
(8) RELATED PARTY TRANSACTIONS
The Company leases a store from the chief executive officer and a
partnership of which the chief executive officer is a partner. For the fiscal
years ended February 1, 1997 and January 31, 1998, rents of $33,700 and
$33,600 were paid to the chief executive officer and the partnership,
respectively.
A Loan Agreement was entered into between the Company's Chief Executive
Officer, Stephen Gordon, and his spouse ("Borrowers") and the Company in
February 1997 for $1,100,000 bearing an interest rate of six percent per
annum. The Borrowers pledged to the Company 20,697 shares of common stock of
the Company as collateral for any amounts funded under the agreement. The loan
was repaid in full in May 16, 1997, including $7,348 in interest. Other
unsecured loans, bearing interest at various rates, totaling $56,850 were
funded at various dates prior to 1997 and were repaid in full, including
$1,144 in interest, in May 1997.
(9) COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal claims, actions and complaints.
Although the ultimate resolution of legal proceedings cannot be predicted with
certainty, management believes that disposition of these matters will not have
a material adverse effect on the Company's consolidated financial statements.
(10) SUBSEQUENT EVENTS
On March 20, 1998, the Company acquired 100% of the outstanding stock of The
Michaels Furniture Company, Inc. ("Michaels"), a privately owned manufacturer
of wood furniture, from its sole shareholder. The Michaels acquisition will be
accounted for under the purchase method of accounting and all acquired assets
and liabilities will be recorded at their estimated fair market values.
Payment for the Michaels' stock consisted of an initial cash payment of $5
million at March 20, 1998, date of close. The Company will also pay cash
contingent consideration for the stock equal to 35% of Michaels' earnings
before interest, taxes, depreciation and amortization ("EBITDA") for the
fiscal year ending January 30, 1999 and 25% of Michaels' EBITDA for years
ending January 29, 2000 and January 27, 2001. Additionally, the Company will
transfer to the former sole shareholder of Michaels 3.3% of Michaels' common
stock in the fiscal years ending January 30, 1999 and January 29, 2000 and
3.4% in the fiscal year ending January 27, 2001 if Michaels' EBITDA exceeds
certain agreed-upon amounts in each of those years. Michael Vermillion, the
sole owner of Michaels, remained the President of Michaels.
The total estimated purchase price to be recorded by Restoration Hardware is
approximately $5.4 million and consists of the $5 million initial purchase
price paid for Michaels shares acquired and approximately $400,000 in
transaction costs directly related to the acquisition.
The purchase price will be allocated to assets acquired and liabilities
assumed based on their estimated fair values in accordance with the purchase
method of accounting for business combinations.
F-16
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Pro forma unaudited results of operations for the year ended January 31,
1998 as if the acquisition had occurred on February 2, 1997 and based upon a
preliminary allocation of the purchase price are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31, 1998
----------------
(UNAUDITED)
<S> <C>
Pro forma sales................................................ $114,045
Pro forma income before income taxes........................... 3,162
Pro forma net income........................................... 1,846
</TABLE>
In May 1998, the Board of Directors of the Company effected a seven-for-one
stock split of the Company's common stock. All share and per share data in the
accompanying financial statements have been retroactively adjusted to reflect
the split.
On May 27, 1998, the Company reincorporated in the state of Delaware.
* * * * * *
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Michael's Concepts In Wood, Inc.
Sacramento, California
We have audited the accompanying balance sheet of Michael's Concepts In
Wood, Inc. ("Michaels") as of January 31, 1998, and the related statements of
operations, shareholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Michaels' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Michael's Concepts In Wood, Inc. as of
January 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
April 16, 1998
F-18
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ --
Accounts receivable......................................... 2,741
Inventories................................................. 1,908
Advance to shareholder...................................... 495
Prepaid expense and other................................... 82
------
Total current assets...................................... 5,226
Property and equipment, net................................... 1,487
Other assets.................................................. 35
------
Total assets.............................................. $6,748
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................ $2,273
Accrued expenses............................................ 500
Current portion of notes payable............................ 1,435
Current portion of capital lease obligations................ 83
Income taxes payable........................................ 298
------
Total current liabilities................................. 4,589
Notes payable................................................. 163
Capital lease obligations..................................... 533
------
Total liabilities......................................... 5,285
------
Shareholder's equity:
Common stock--no par value, 1,000 shares authorized, issued
and outstanding............................................ 10
Additional paid-in-capital.................................. 80
Retained earnings........................................... 1,373
------
Total shareholder's equity................................ 1,463
------
Total liabilities and shareholder's equity................ $6,748
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31, 1998
-----------------
<S> <C>
Net sales..................................................... $21,529
Cost of goods sold............................................ 16,113
-------
Gross profit................................................ 5,416
Selling, general and administrative expenses.................. 4,439
-------
Income from operations...................................... 977
Interest expense.............................................. (232)
-------
Income before income taxes.................................. 745
Provision for income taxes.................................... 264
-------
Net income.................................................. $ 481
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN- RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1997.... 1,000 $10 $80 $ 892 $ 982
Net income..................... 481 481
----- --- --- ------ ------
BALANCE AT JANUARY 31, 1998.... 1,000 $10 $80 $1,373 $1,463
===== === === ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JANUARY 31,
1998
-----------
<S> <C>
Cash flows from operating activities:
Net Income........................................................ $481
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization.................................... 298
Deferred income taxes............................................ (64)
Change in assets and liabilities:
Accounts receivable............................................. (801)
Inventories..................................................... (565)
Advance to shareholder.......................................... (362)
Prepaid expenses and other assets............................... (33)
Accounts payable and accrued expenses........................... 944
----
Net cash used in operating activities.......................... (102)
----
Cash flows from investing activities:
Capital expenditures.............................................. (370)
----
Cash flows from financing activities:
Borrowings on revolving line of credit, net....................... 559
Principal payments under capital lease obligations................ (73)
Borrowings under term loans....................................... 36
Payments under vehicle loans...................................... (50)
----
Net cash provided by financing activities...................... 472
----
Net increase (decrease) in cash and equivalents.................... --
Cash and cash equivalents:
Beginning of period............................................... --
----
End of period..................................................... $ --
====
Additional cash flow information:
Cash paid during the year for interest............................ $232
====
Cash paid during the year for taxes............................... $ --
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Michael's Concepts In Wood, Inc., a California corporation ("Michaels")
manufactures wood furniture. Michaels' fiscal year ends on the Saturday
closest to January 31.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid, fixed income instruments purchased with
original maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost (first-in, first out) or market.
Costs include certain buying and distribution costs related to the procurement
and processing of inventory.
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line and declining balance methods over their estimated useful
lives, generally five to seven years. Leasehold improvements are amortized on
a straight-line basis over the lesser of the related lease terms or useful
lives.
TAXES ON INCOME
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
Michaels' financial statements or tax returns. In estimating future tax
consequences, all expected future events are considered other than changes in
the tax law.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable, notes
receivable, accounts payable, notes payable and capital lease obligations
approximate their estimated fair values.
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Based on Michaels' review
as of January 31, 1998, no adjustments were recognized to the carrying value
of such assets.
F-23
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment, as the effect of
returns are not significant to the Company's operating results.
IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. In addition, this statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from the retained earnings and additional paid in capital in
the equity section of a statement of financial position. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes this will have no impact on Michaels' financial position or results
of operations.
SFAS No. 131, "Disclosures about Segment Reporting of an Enterprise and
Related Information" establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosure about products and
services, geographic areas, and major customers. Adoption of this statement
will not impact Michaels' consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and
content of its disclosures. This statement is effective for fiscal years
beginning after December 15, 1997.
(2) INVENTORIES
Inventories consist of the following at January 31, 1998 (in thousands):
<TABLE>
<S> <C>
Raw materials......................................................... $ 836
Work in progress...................................................... 815
Finished goods........................................................ 257
------
$1,908
======
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at January 31, 1998 (in
thousands):
<TABLE>
<S> <C>
Machinery........................................................... $ 1,653
Leasehold improvements.............................................. 588
Equipment, furniture and fixtures................................... 175
Machinery under capital leases...................................... 711
Vehicles............................................................ 31
-------
Total............................................................. 3,158
Less accumulated depreciation....................................... (1,671)
-------
Property and equipment, net....................................... $ 1,487
=======
</TABLE>
F-24
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) LEASES
Michaels leases its manufacturing facility which includes its corporate
offices and certain manufacturing equipment. The manufacturing facility and
corporate office lease provides for Michaels to assume the maintenance of and
all of the property tax obligations on the leased property.
The minimum rental payments required under capital leases (with interest
rates ranging from 13.0% to 13.9%) and noncancellable operating leases with an
initial lease term in excess of one year at January 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
JANUARY 31, LEASES LEASES TOTAL
----------- ------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1999............................................. $154 $ 647 $ 801
2000............................................. 154 509 663
2001............................................. 154 501 655
2002............................................. 145 496 641
2003............................................. 136 493 629
Thereafter....................................... 115 7,134 7,249
---- ------ -------
Minimum lease commitments........................ 858 $9,780 $10,638
====== =======
Less amount representing interest................ 242
----
Present value of capital lease obligations....... 616
Less current portion............................. 83
----
Long-term portion................................ $533
====
</TABLE>
For the year ended January 31, 1998, minimum rental expense under operating
leases was approximately $627,000. The net book value for machinery under
capital leases was $617,000 as of January 31, 1998.
(5) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Federal............................................... $296 $(53) $243
State................................................. 32 (11) 21
---- ---- ----
Provision for income taxes............................ $328 $(64) $264
==== ==== ====
</TABLE>
The differences between the U.S. federal statutory tax rate and Michaels'
effective rate are as follows:
<TABLE>
<S> <C>
U.S. federal statutory tax rate........................................ 34.0%
State income taxes (net of U.S. federal income tax benefit)............ 6.7
Manufacturers investment tax credit.................................... (5.6)
Other.................................................................. 0.3
----
Effective income tax rate............................................ 35.4%
====
</TABLE>
F-25
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of Michaels' deferred tax assets and liabilities at
January 31, 1998 (in thousands) are as follows:
<TABLE>
<S> <C>
Long-term deferred tax asset (liability):
Fixed assets........................................................ $(34)
State tax........................................................... 10
Vacation accrual.................................................... 29
----
Net deferred tax asset............................................ $ 5
====
</TABLE>
(6) NOTES PAYABLE
The following loans are outstanding (in thousands):
<TABLE>
<S> <C>
$2,500,000 revolving line of credit, principal due on April 30, 1998.
Interest at Bank's base loan rate plus 0.75% per annum, currently at
9.25%, payable monthly, secured by all assets of Michaels........... $1,236
Equipment purchase line of credit, due April 30, 1998. Interest
payable at Bank's base loan rate, plus 1.25% per annum, currently
9.75%, secured by all assets of Michaels............................ 109
Term loan. Monthly principal payments of $6,667, plus interest at
Bank's base loan rate plus 1.5% per annum, currently at 10.0%,
secured by all assets of Michaels. Remaining principal due at
maturity on November 1, 2000 ....................................... 227
Vehicle loan. Monthly payments of $565, including interest at 8.56%
per annum, secured by vehicle....................................... 17
Machinery loan. Monthly payments of $408 including interest at 11.5%
per annum, secured by machinery..................................... 9
------
Total notes payable................................................ 1,598
Less: current portion.............................................. 1,435
------
Total long-term notes payable...................................... $ 163
======
</TABLE>
The revolving line of credit agreement, equipment purchase line of credit
agreement and term loan agreement require compliance with certain financial
loan covenants, including net worth, debt to net worth ratio, current ratio,
debt service coverage ratio, minimum net income, and capital expenditure
limits. The agreements also prohibit Michaels from making dividend payments or
loans. As of January 31, 1998, Michaels was not in compliance with its debt to
net worth ratio and current ratio covenants. For the year ended January 31,
1998, Michaels was not in compliance with its maximum capital expenditures
covenants. Michaels has received waivers from its bank through April 29, 1998
for each covenant with which it was in non-compliance as of and for the year
ended January 31, 1998.
Principal payments on notes payable at January 31, 1998 are due as follows
(in thousands):
<TABLE>
<S> <C>
FISCAL YEAR
-----------
1999................................. $1,435
2000................................. 91
2001................................. 72
------
$1,598
Total................................
======
</TABLE>
F-26
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(7) RELATED PARTY TRANSACTIONS
Michaels leases its manufacturing and warehousing facilities from the sole
officer and shareholder of Michaels. Rent expense for such leases was $362,000
for the year ended January 31, 1998.
Substantially all assets of Michaels were pledged as collateral for personal
debt of the sole shareholder of Michaels (see note 8 Subsequent Event).
(8) SUBSEQUENT EVENT
On March 20, 1998, 100% of Michaels' outstanding stock was purchased by
Restoration Hardware, Inc. ("Restoration"), a specialty retailer of home
furnishings, decorative accessories and hardware, and the largest customer of
Michaels. Sales to Restoration Hardware represented $5,356,000, or 25%, of
total sales for the year ended January 31, 1998.
As a result of this transaction, the former owner will become the President
of Michaels. Additionally, the former owner was required to pay off his
Advance to Shareholder note and to remove all Michaels assets as collateral on
his personal debt. Michaels continues to lease the facilities and certain
equipment from the former owner. The lease terms are at current fair market
rents and the lease rate will remain constant through the ten year term of the
lease.
F-27
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters has severally agreed
to purchase from the Company and the Selling Stockholders, the respective
number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co.............................................
BancAmerica Robertson Stephens..................................
NationsBanc Montgomery Securities LLC...........................
Piper Jaffray Inc...............................................
---------
Total....................................................... 3,330,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the Underwriters.
Certain stockholders of the Company have granted the Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 499,500 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise their over-allotment option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
3,330,000 shares of Common Stock offered.
The Company, the Selling Stockholders, the Company's directors and officers
and each holder of the Company's outstanding Common Stock as of the date
hereof have agreed that, subject to certain exceptions, during the period
beginning from the date of this Prospectus and continuing to and including the
date 180 days after the date of this Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities of the Company that are substantially similar to the shares of the
Common Stock or which are convertible into or exchangeable for securities that
are substantially similar to the shares of the Common Stock without the prior
written consent of the Underwriters.
The Underwriters have informed the Company that they do not expect sales to
accounts over which the Underwriters exercise discretionary authority to
exceed five percent of the total number of shares of Common Stock offered by
them.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company and the Underwriters. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to
U-1
<PAGE>
prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
The Underwriters may reserve, for sale at the initial public offering price,
up to approximately 300,000 shares of Common Stock which may be sold to
directors, employees and persons having business relationships with the
Company. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares of Common Stock not so purchased will be
offered by the Underwriters on the same basis as the other shares of Common
Stock offered in the Offering.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "RSTO".
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Common Stock; and short
positions created by the Underwriters involve the sale by the Underwriters of
a greater number of shares of Common Stock than they are required to purchase
from the Company and the Selling Stockholders in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to broker-dealers in respect of the Common Stock sold in the Offering
may be reclaimed by the Underwriters if such securities are repurchased by the
Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be effected on the Nasdaq National Market, in the over-
the-counter market or otherwise.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
U-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Dilution................................................................. 15
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Pro Forma Combined Condensed Financial Information....................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 27
Management............................................................... 38
Certain Transactions..................................................... 51
Principal and Selling Stockholders....................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 60
Validity of the Issuance of the Common Stock............................. 61
Experts.................................................................. 61
Additional Information................................................... 61
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
---------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,330,000 SHARES
LOGO
[LOGO OF RESTORATION HARDWARE]
COMMON STOCK
($.0001 PAR VALUE)
---------------
PROSPECTUS
---------------
GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY 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, payable by the Registrant in connection with the offer
and sale of the Common Stock being registered. All amounts are estimates
except the registration fee, the NASD filing fee and the Nasdaq National
Market entry and application fee.
<TABLE>
<S> <C>
Registration fee..................................................... $ 20,355
NASD filing fee...................................................... 7,400
Blue Sky fees and expenses (including legal fees).................... 10,000
Nasdaq National Market entry and application fee..................... 95,000
Accounting fees and expenses......................................... 400,000
Other legal fees and expenses........................................ 350,000
Transfer agent and registrar fee..................................... 35,000
Printing and engraving............................................... 175,000
Miscellaneous........................................................ 207,245
---------
Total.............................................................. 1,300,000
=========
</TABLE>
- --------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers
and permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. The Registrant's
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into Indemnity
Agreements with its officers and directors, a form of which is attached as
Exhibit 10.4 hereto and incorporated herein by reference. The Indemnification
Agreements provide the Registrant's officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. The Registrant maintains directors and officers liabilities
insurance. Reference is made to Section 8 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since April 1, 1995, the Company has issued and sold the following
securities:
II-1
<PAGE>
1. On October 29, 1995, the Company issued and sold 35,000 shares of its
Common Stock at an aggregate purchase price of $23,250 to Thomas Low.
2. On January 19, 1996 and January 26, 1996, the Company issued and sold an
aggregate of 2,596,825 shares of its Series B Preferred Stock at an
aggregate purchase price of $6,175,250 to 32 investors, all of whom the
Company believes were "accredited investors".
3. On October 18, 1996, the Company issued and sold an aggregate of
1,701,658 shares of its Series C Preferred Stock at an aggregate
purchase price of $5,999,560 to 37 investors, all of whom the Company
believes were "accredited investors".
4. On May 16, 1997, the Company issued and sold an aggregate of 2,783,795
shares of its Series D Preferred Stock at an aggregate purchase price of
$29,200,021 to 11 investors, all of whom the Company believes were
"accredited investors". Montgomery Securities, the predecessor entity of
NationsBanc Montgomery Securities LLC, acted as the placement agent for
this transaction and received customary fees for its services.
5. On May 16, 1997, the Company issued warrants to purchase 27,734 shares
of its Series D Preferred Stock, at an exercise price of $12.59 per
share, to Montgomery Securities.
6. On May 30, 1997, the Company issued 4,669 shares of Common Stock upon
the exercise of certain warrants, at an aggregate exercise price of
$4,188, to two investors.
7. On February 23, 1998, the Company issued 2,338 shares of Common Stock to
an employee at an aggregate purchase price of $3,340 pursuant to an
exercise of options under the Company's 1995 Stock Option Plan.
The issuances described in paragraphs 1, 2, 3 and 6 were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act. No placement agent was utilized in connection with these
sales. The issuances described in paragraphs 4 and 5 were deemed exempt from
registration under the Securities Act in reliance on Regulation D of the
Securities Act. The issuance described in paragraph 7 was deemed exempt from
registration under the Securities Act in reliance upon rule 701 promulgated
under the Securities Act. In addition, the recipients of the securities in
each transaction listed in paragraphs 1 through 8 represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates issued in such transactions. All recipients
had access, through their relationships with the Company, to information about
the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Second Amended and Restated Certificate of Incorporation
3.2 Bylaws, as amended to date
4.1 Reference is made to Exhibit 3.1
4.2 Reference is made to Exhibit 3.2
4.3 Specimen Common Stock Certificate
5.1 Opinion of Brobeck, Phleger & Harrison LLP
*10.1 Form of 1995 Stock Option Plan
10.2 Form of 1998 Stock Incentive Plan
*10.3 Form of 1998 Employee Stock Purchase Plan
*10.4 Form of Indemnity Agreement for Officers and Directors
*10.5 Restated Investors Rights Agreement dated May 16, 1997 among the
Company, the founders and Common Stock Warrantholders, Series D
Warrantholders and Common Stock holders and Investors.
*10.6 Stock Purchase Agreement dated March 20, 1998 between the Company and
Michael Vermillion.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.7 Supply Agreement dated March 20, 1998 between the Company, Michaels
Concepts in Wood, Inc. and Michael Vermillion.
*10.8 Lease Agreement dated May 4, 1994 between the Company and Stephen and
Christine Gordon.
*10.9 Commercial Lease and Deposit Receipt dated October 18, 1994 and
Addendums dated October 20, 1994 and November 21, 1994 between the
Company and H. Koch and Sons.
*10.10 Office Lease dated February 21, 1997 between the Company and Paradise
Point Partners.
*10.11 Standard Industrial/Commercial Multi-Tenant Lease dated May 12, 1997
between the Company and Mortimer B. Zuckerman.
10.12 Fourth Amended and Restated Loan and Security Agreement dated April
, 1998
*21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1)
*24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
*Previously filed.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF SAN FRANCISCO, STATE OF CALIFORNIA, ON MAY 30, 1998.
Restoration Hardware, Inc.
/s/ Stephen Gordon
By: _________________________________
STEPHEN GORDON CHAIRMAN OF THE
BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE FOLLOWING CAPACITIES.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman of the May 30, 1998
* Board, President
- ------------------------------------- and Chief Executive
STEPHEN GORDON Officer (Principal
Executive Officer)
Director, Executive May 30, 1998
* Vice President and
- ------------------------------------- Chief Operating
THOMAS CHRISTOPHER Officer
Chief Financial May 30, 1998
* Officer, Senior
- ------------------------------------- Vice President and
THOMAS LOW Secretary
(Principal
Financial Officer
and Principal
Accounting Officer)
* Director May 30, 1998
- -------------------------------------
ROBERT CAMP
* Director May 30, 1998
- -------------------------------------
RAYMOND HEMMIG
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director May 30, 1998
- -------------------------------------
MICHAEL LAZARUS
* Director May 30, 1998
- -------------------------------------
MARSHALL PAYNE
* Director May 30, 1998
- -------------------------------------
DAMON BALL
* Director May 30, 1998
- -------------------------------------
DAVID FERGUSON
*Pursuant to Power of Attorney previously filed with the Commission.
/s/ Stephen Gordon Attorney-in-Fact
- -------------------------------------
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation
3.2 Bylaws, as amended to date
4.1 Reference is made to Exhibit 3.1
4.2 Reference is made to Exhibit 3.2
4.3 Specimen Common Stock Certificate
5.1 Opinion of Brobeck, Phleger & Harrison LLP
*10.1 Form of 1995 Stock Option Plan
10.2 Form of 1998 Stock Incentive Plan
*10.3 Form of 1998 Employee Stock Purchase Plan
*10.4 Form of Indemnity Agreement for Officers and Directors
*10.5 Restated Investors Rights Agreement dated May 16, 1997 among the
Company, the founders and Common Stock Warrantholders, Series D
Warrantholders and Common Stock holders and Investors.
*10.6 Stock Purchase Agreement dated March 20, 1998 between the Company and
Michael Vermillion.
10.7 Supply Agreement dated March 20, 1998 between the Company, Michaels
Concepts in Wood, Inc. and Michael Vermillion.
*10.8 Lease Agreement dated May 4, 1994 between the Company and Stephen and
Christine Gordon.
*10.9 Commercial Lease and Deposit Receipt dated October 18, 1994 and
Addendums dated October 20, 1994 and November 21, 1994 between the
Company and H. Koch and Sons.
*10.10 Office Lease dated February 21, 1997 between the Company and Paradise
Point Partners.
*10.11 Standard Industrial/Commercial Multi-Tenant Lease dated May 12, 1997
between the Company and Mortimer B. Zuckerman.
10.12 Fourth Amended and Restated Loan and Security Agreement dated April,
1998
*21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1)
*24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
*Previously filed.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
<PAGE>
EXHIBIT 1.1
RESTORATION HARDWARE, INC.
Common Stock
(par value $.001 per share)
_____________________
Underwriting Agreement
----------------------
., 1998
Goldman, Sachs & Co.,
BancAmerica Robertson Stephens,
NationsBanc Montgomery Securities LLC,
Piper Jaffray Inc.,
c/o Goldman, Sachs & Co.,
555 California Street, 45th Floor
San Francisco, CA 94104
Ladies and Gentlemen:
Restoration Hardware, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of . shares of common stock, par value $.001 per share ("Stock"), of the Company
and the stockholders of the Company named in Schedule II hereto (the "Selling
Stockholders") propose, subject to the terms and conditions stated herein, to
sell to the Underwriters an aggregate of . shares and, at the election of the
Underwriters, up to . additional shares of Stock. The aggregate of . shares to
be sold by the Company and the Selling Stockholders is herein called the "Firm
Shares" and the aggregate of . additional shares to be sold by the Selling
Stockholders is herein called the "Optional Shares". The Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof are herein collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-51027) (the
"Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in
the form heretofore delivered to you, have been declared effective by the
Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed
<PAGE>
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Act"), which became effective upon filing, no other document with respect
to the Initial Registration Statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or the Rule
462(b) Registration Statement, if any, has been issued and no proceeding
for that purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in the Initial Registration Statement or
filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of
final prospectus filed with the Commission pursuant to Rule 424(b) under
the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule
430A under the Act to be part of the Initial Registration Statement at the
time it was declared effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, each as amended
at the time such part of the Initial Registration Statement became
effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus;"
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein or by a Selling Stockholder
expressly for use in the preparation of the answers therein to Items 7 and
11(m) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein or
by a Selling Stockholder expressly for use in the preparation of the
answers therein to Items 7 and 11(m) of Form S-1;
2
<PAGE>
(iv) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree, except to
the extent that any such loss or interference would not have a material
adverse effect on the business, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole (a
"Material Adverse Effect") and otherwise than as set forth or contemplated
in the Prospectus; and, since the respective dates as of which information
is given in the Registration Statement and the Prospectus, there has not
been any change in the capital stock or long-term debt of the Company or
any of its subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, taken as a
whole, in each case otherwise than as set forth or contemplated in the
Prospectus;
(v) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as would not have a Material Adverse Effect; and any real property and
buildings held under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases with such exceptions as
would not have a Material Adverse Effect;
(vi) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases properties or conducts any business so as to require such
qualification, except to the extent that the failure to so qualify or be in
good standing would not have a Material Adverse Effect; and each subsidiary
of the Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation;
(vii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued and outstanding shares of capital
stock of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform in all material respects to the
description of the Stock contained in the Prospectus; and all of the issued
shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued, are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or indirectly
by the Company, free and clear of all liens, encumbrances, equities or
claims, except for any such liens, encumbrances, equities or claims that
would not have a Material Adverse Effect;
(viii) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and, when
issued and delivered
3
<PAGE>
against payment therefor as provided herein, will be duly and validly
issued and fully paid and non-assessable and will conform in all material
respects to the description of the Stock contained in the Prospectus;
(ix) The issue and sale of the Shares to be sold by the Company
hereunder and the compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which any of
the property or assets of the Company or any of its subsidiaries is subject
(except for such conflicts, breaches, violations or defaults which have
been consented to or waived prior to the execution and delivery of this
Agreement or which would not have a Material Adverse Effect), nor will any
such action result in any violation of any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties (except for such
violations that would not have a Material Adverse Effect), nor will such
action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or in any violation of any statute;
and no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares, registration under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and such consents,
approvals, authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in violation
of its respective Certificate of Incorporation or By-laws. Neither the
Company nor any of its subsidiaries is in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease
or other agreement or instrument to which it is a party or by which it or
any of its properties may be bound, except for such defaults that would not
have a Material Adverse Effect;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the documents
referred to therein, are accurate and fair in all material respects;
(xii) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect; and, to the best of the Company's
4
<PAGE>
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(xiii) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
and
(xiv) Deloitte & Touche LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(b) Each of the Selling Stockholders, severally and not jointly,
represents and warrants to, and agrees with, each of the Underwriters and the
Company that:
(i) All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Stockholder of this
Agreement and the Power of Attorney and the Custody Agreement hereinafter
referred to, and for the sale and delivery of the Shares to be sold by such
Selling Stockholder hereunder (except such consents, approvals,
authorizations or orders as may be required under the Act or state
securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters), have been obtained; and
such Selling Stockholder has full right, power and authority to enter into
this Agreement, the Power-of-Attorney and the Custody Agreement and to
sell, assign, transfer and deliver the Shares to be sold by such Selling
Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound or to which any of the property or
assets of such Selling Stockholder is subject except for such conflicts,
breaches, violations or defaults which have been consented to or waived
prior to the execution and delivery of this Agreement, nor will such action
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of such Selling Stockholder if such Selling
Stockholder is a corporation, the Partnership Agreement of such Selling
Stockholder if such Selling Stockholder is a partnership or any statute or
any order, rule or regulation of any court or governmental agency or body
having jurisdiction over such Selling Stockholder or the property of such
Selling Stockholder;
(iii) Such Selling Stockholder has good and valid title to the Shares
to be sold by such Selling Stockholder hereunder, or good and valid title
to shares of preferred stock of the Company which are convertible into such
Shares, free and clear of all liens, encumbrances, equities or claims
(other than encumbrances imposed by the Act and state
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securities or Blue Sky laws of certain jurisdictions); immediately prior to
the First Time of Delivery (as defined in Section 4 hereof) such Selling
Stockholder will have good and valid title to the Shares to be sold by such
Selling Stockholder hereunder, free and clear of all liens, encumbrances,
equities or claims (other than encumbrances imposed by the Act and state
securities or Blue Sky laws of certain jurisdictions); and, upon delivery
of such Shares and payment therefor pursuant hereto, good and valid title
to such Shares, free and clear of all liens, encumbrances, equities or
claims (other than encumbrances imposed by the Act and state securities or
Blue Sky laws of certain jurisdictions and other than liens, encumbrances,
equities or claims created by or caused by the Underwriters), will pass to
the several Underwriters;
(iv) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, such
Selling Stockholder will not offer, sell, contract to sell or otherwise
dispose of, including, without limitation, through the entry into a cash-
settled derivative instrument, except as provided hereunder, any shares of
Stock or any securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to
receive, Stock or any such substantially similar securities (other than (i)
pursuant to stock option plans existing on, or upon the conversion or
exchange of convertible or exchangeable securities outstanding as of, the
date of this Agreement; provided, however, that any security received upon
the exercise, exchange or conversion of any other security will become
subject to the restrictions on disposition contained in this paragraph,
(ii) bona fide gifts to transferees who agree to be bound by a like
restriction or (iii) private sales to persons who were shareholders prior
to the closing of the Public Offering), without the prior written consent
of Goldman, Sachs & Co.;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably 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 Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling
Stockholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus, when they
become effective or are filed with the Commission, as the case may be, will
conform in all material respects to the requirements of the Act and the
rules and regulations of the Commission thereunder and will not 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
not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder will deliver to
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you prior to or at the First Time of Delivery (as hereinafter defined) a
properly completed and executed United States Treasury Department Form W-9
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the Shares
to be sold by such Selling Stockholder hereunder, or shares of preferred
stock of the Company which are convertible into such Shares, have been
placed in custody under a Custody Agreement, in the form heretofore
furnished to you (the "Custody Agreement"), duly executed and delivered by
such Selling Stockholder to BancBoston, N.A., as custodian (the
"Custodian"), and such Selling Stockholder has duly executed and delivered
to you prior to the date hereof a Power of Attorney (the "Power of
Attorney"), appointing the persons indicated in Schedule II hereto, and
each of them, as such Selling Stockholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Stockholder, to determine the purchase price to
be paid by the Underwriters to the Selling Stockholders as provided in
Section 2 hereof, to authorize the delivery of the Shares to be sold by
such Selling Stockholder hereunder and otherwise to act on behalf of such
Selling Stockholder in connection with the transactions contemplated by
this Agreement and the Custody Agreement; and
(ix) The Shares represented by the certificates held in custody for
such Selling Stockholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder; the arrangements made by such
Selling Stockholder for such custody, and the appointment by such Selling
Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to that
extent irrevocable; the obligations of the Selling Stockholders hereunder
shall not be terminated by operation of law (to the full extent permitted
by law), whether by the death or incapacity of any individual Selling
Stockholder or, in the case of an estate or trust, by the death or
incapacity of any executor or trustee or the termination of such estate or
trust, or in the case of a partnership or corporation, by the dissolution
of such partnership or corporation, or by the occurrence of any other
event; if any individual Selling Stockholder or any such executor or
trustee should die or become incapacitated, or if any such estate or trust
should be terminated, or if any such partnership or corporation should be
dissolved, or if any other such event should occur, before the delivery of
the Shares hereunder, certificates representing the Shares shall be
delivered by or on behalf of the Selling Stockholders in accordance with
the terms and conditions of this Agreement and of the Custody Agreements
(to the full extent permitted by law); and actions taken by the Attorneys-
in-Fact pursuant to the Powers of Attorney shall be as valid (to the full
extent permitted by law) as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of whether or not
the Custodian, the Attorneys-in-Fact, or any of them, shall have received
notice of such death, incapacity, termination, dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) the Company
and each of the Selling Stockholders agree, severally and not jointly, to sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company and each of the Selling Stockholders,
at a purchase price per share of $., the number of Firm Shares (to be adjusted
by you so as to eliminate fractional shares) determined by multiplying the
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aggregate number of Shares to be sold by the Company and each of the Selling
Stockholders as set forth opposite their respective names in Schedule II hereto
by a fraction, the numerator of which is the aggregate number of Firm Shares to
be purchased by such Underwriter as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the aggregate
number of Firm Shares to be purchased by all of the Underwriters from the
Company and all of the Selling Stockholders hereunder and (b) in the event and
to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, certain of the Selling Stockholders (as and
to the extent set forth opposite their names in Schedule II hereto), severally
and not jointly, agree, severally and not jointly, to sell to each of the Under
writers, and each of the Underwriters agrees, severally and not jointly, to
purchase from such Selling Stockholders, severally and not jointly, at the
purchase price per share set forth in clause (a) of this Section 2, that portion
of the number of Optional Shares as to which such election shall have been
exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
Certain of the Selling Stockholders (as and to the extent set forth
opposite their names in Schedule II hereto), severally and not jointly, hereby
grant, severally and not jointly, to the Underwriters the right to purchase at
their election up to . Optional Shares, at the purchase price per share set
forth in the paragraph above, for the sole purpose of covering overallotments in
the sale of the Firm Shares. Any such election to purchase Optional Shares
shall be made in proportion to the maximum number of Optional Shares to be sold
by each such Selling Stockholder as set forth in Schedule II hereto, and may be
exercised only by written notice from you to the Company and the Attorneys-in-
Fact, given within a period of 30 calendar days after the date of this Agreement
and setting forth the aggregate number of Optional Shares to be purchased and
the date on which such Optional Shares are to be delivered, as determined by you
but in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you, the Company and the Attorneys-in-Fact otherwise agree in
writing, earlier than two or later than ten business days after the date of such
notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) Certificates for the Shares to be purchased by each Underwriter
hereunder, in definitive form, and in such authorized denominations and
registered in such names as Goldman, Sachs & Co. may request upon at least two
New York business days' prior notice to the Company and the Selling Stockholders
shall be delivered by or on behalf of the Company and the Selling Stockholders
to Goldman, Sachs & Co., for the account of such Underwriter, through the
facilities of the Depository Trust Company ("DTC"), against payment by or on
behalf of such Underwriter of the purchase price therefor by wire transfer of
Federal (same-day) funds to the account specified by the Company and the
Custodian, as their interests may appear, to Goldman, Sachs & Co. at least two
New York business days in advance. The Company will cause the certificates
representing the Shares to be made
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available for checking and packaging at least twenty-four hours prior to the
Time of Delivery (as defined below) with respect thereto at the office of DTC or
its designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New
York time, on ., 1998 or such other time and date as Goldman, Sachs & Co., the
Company and the Attorneys-in-Fact may agree upon in writing, and, with respect
to the Optional Shares, 9:30 a.m., New York time, on the date specified by
Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the
Underwriters' election to purchase such Optional Shares, or such other time and
date as Goldman, Sachs & Co., the Company and the Attorneys-in-Fact may agree
upon in writing. Such time and date for delivery of the Firm Shares is herein
called the "First Time of Delivery", such time and date for delivery of the
Optional Shares, if not the First Time of Delivery, is herein called the "Second
Time of Delivery", and each such time and date for delivery is herein called a
"Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(l) hereof, will be delivered at the offices
of Brobeck, Phleger and Harrison LLP, Two Embarcadero Place, Palo Alto,
California (the "Closing Location"), and the Shares will be delivered at the
Designated Office, all at such Time of Delivery. A meeting will be held at the
Closing Location at . p.m., New York City time, on the New York Business Day
next preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose, or of
any request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in
the event of the issuance of any stop order or of any order preventing or
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suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to
obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction or to take
any other action which would subject it to taxation;
(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any events shall have occurred as
a result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus in order
to comply with the Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in securities
as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct
such statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue
of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations of the Commission thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, including, without
limitation, through the entry into a cash-settled derivative instrument,
except as provided hereunder, any shares of Stock or any securities of the
Company that are substantially similar to the Shares, including but not
limited to any securities that are convertible into or exchangeable for, or
that represent the
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right to receive, Stock or any such substantially similar securities (other
than pursuant to stock option or other benefit plans existing on, or upon
the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement; provided, however, that any
security received upon the exercise, exchange or conversion of any other
security will become subject to the restrictions on disposition contained
in this paragraph) , without the prior written consent of Goldman, Sachs &
Co.;
(f) During a period of three years from the effective date of the
Registration Statement, to furnish to its stockholders as soon as
practicable after the end of each fiscal year an annual report (including a
balance sheet and statements of income, stockholders' equity and cash flows
of the Company and its consolidated subsidiaries certified by independent
public accountants) and, as soon as practicable after the end of each of
the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of three years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information that is available
without undue expense concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under
the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
Nasdaq Stock Market's National Market ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act.
6. The Company and each of the Selling Stockholders covenant and agree
with one another and with the several Underwriters that (a) the Company will pay
or cause to be paid the
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following: (i) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares under the Act and
all other expenses in connection with the preparation, printing and filing of
the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey; (iv) all fees and expenses in connection with listing the
Shares on NASDAQ; (v) the filing fees incident to, and the reasonable fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; (viii) all other
costs and expenses incident to the performance of its obligations hereunder
which are not otherwise specifically provided for in this Section; and (ix) the
fees and expenses of the Attorneys-in-Fact and the Custodian; and (b) such
Selling Stockholder will pay or cause to be paid all expenses and taxes incident
to the sale and delivery of the Shares to be sold by such Selling Stockholder to
the Underwriters hereunder. In connection with clause (b) of the preceding
sentence, Goldman, Sachs & Co. agrees to pay New York State stock transfer tax,
and the Company agrees to reimburse Goldman, Sachs & Co. for associated carrying
costs if such tax payment is not rebated on the day of payment and for any
portion of such tax payment not rebated. It is understood, however, that the
Company shall bear, and the Selling Stockholders shall not be required to pay or
to reimburse the Company for, the cost of any other matters not directly
relating to the sale and purchase of the Shares pursuant to this Agreement, and
that, except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall
have been initiated
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or threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with to
your reasonable satisfaction;
(b) Brown & Wood LLP, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of Delivery,
with respect to the matters covered in paragraphs (i), (ii), (vi), (ix) and
(xi) of subsection (c) below as well as such other related matters as you
may reasonably request, and such counsel shall have received such papers
and information as they may reasonably request to enable them to pass upon
such matters;
(c) Brobeck, Phleger & Harrison LLP, counsel for the Company, shall
have furnished to you their written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with requisite corporate power and authority to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued and outstanding shares of
capital stock of the Company (including the Shares being delivered at
such Time of Delivery) have been duly authorized and, upon payment for
the Shares in accordance with this Agreement, will be validly issued
and fully paid and non-assessable; and the Shares conform in all
material respects to the description of the Stock contained in the
Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction where the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified in any such
jurisdiction would not have a Material Adverse Effect (such counsel
being entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact upon
certificates of officers of the Company, provided that such counsel
shall state that they believe that both you and they are justified in
relying upon such opinions and certificates);
(iv) Each subsidiary of the Company has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation (based solely on such
counsel's review of certificates from public officials); and all of
the issued shares of capital stock of each such subsidiary have been
duly and validly authorized and issued, are fully paid and non-
assessable, and (except for directors' qualifying shares) are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims other than any liens, encumbrances,
equities or claims which would not have a Material
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Adverse Effect (such counsel being entitled to rely in respect of the
opinion in this clause upon opinions of local counsel and in respect
of matters of fact upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates);
(v) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending
or threatened against the Company or any of its subsidiaries which, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect;
(vi) This Agreement has been duly authorized, executed and
delivered by or on behalf of the Company;
(vii) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is
subject (in each case filed as an Exhibit to the Registration
Statement), which conflict, breach, violation or default would have a
Material Adverse Effect, nor will such action result in any violation
of (a) the provisions of the Certificate of Incorporation or By-laws
of the Company or (b) any United States Federal or California statute,
rule or regulation which, in such counsel's experience, is normally
applicable to transactions of the type contemplated hereby or the
General Corporation Law of the State of Delaware ("DGCL") or (c) to
the knowledge of such counsel, without any independent inquiry, any
order known to such counsel of any United States Federal, Delaware or
California court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their properties
which violation, with respect to (b) and (c) only, would have a
Material Adverse Effect; provided, however, that such counsel
expresses no opinion with respect to clearance of the underwriting
arrangements with the National Association of Securities Dealers, Inc.
or as to Blue Sky or state securities law matters in connection with
the purchase and distribution of the Shares by the Underwriters;
(viii) Based solely on such counsel's review of the statutes,
rules and regulations referred to in the immediately preceding
paragraph, no consent, approval, authorization, order, registration or
qualification of or with any United States Federal or California court
or governmental agency or body or pursuant to the DGCL is required for
the issue and sale of the Shares or the consummation by the Company of
the transactions contemplated by this Agreement, except such as
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have been made or obtained under the Exchange Act, the registration
under the Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters, as to
which such counsel expresses no opinion;
(ix) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, in all
material respects;
(x) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in
the Investment Company Act; and
(xi) The Registration Statement (as of its effective date) and
the Prospectus (as of its date of issue) and any further amendments
and supplements thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
and other financial data included therein or omitted therefrom, as to
which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Act and the rules and
regulations thereunder; although they do not assume any responsibility
for the accuracy, completeness or fairness of the statements contained
in the Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (ix) of this Section 7(c),
they have participated in conferences with certain officers and other
representatives of the Company, representatives of the independent
public accountants of the Company, and the Underwriters and counsel
for the Underwriters, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were
discussed and, on the basis of such participation (relying as to
certain relevant matters of fact upon the representations, warranties
and statements of the Company and officers and other representatives
of the Company) but without independent verification of the accuracy,
completeness or fairness of any of the information contained in the
Registration Statement, the Prospectus, or any amendment or supplement
thereto, nothing has come to such counsel's attention which leads such
counsel to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules and other financial data included therein or omitted
therefrom, as to which such counsel need express no opinion) contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading or that, as of its date, the Prospectus or any
further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules and other financial data included therein or omitted
therefrom, as to which such counsel need express no opinion) contained
15
<PAGE>
an untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as
of such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules and other financial data included
therein or omitted therefrom, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
and they do not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a
character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or
the Prospectus which are not filed or described as required;
(d) The respective counsel for each of the Selling Stockholders, as
indicated in Schedule II hereto, each shall have furnished to you their
written opinion with respect to each of the Selling Stockholders for whom
they are acting as counsel (a draft of each such opinion is attached as
Annex II(c) hereto), dated the First Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Stockholder and constitute
valid and binding agreements of such Selling Stockholder in accordance
with their terms;
(ii) This Agreement has been duly executed and delivered by or
on behalf of such Selling Stockholder; and the sale of the Shares to
be sold by such Selling Stockholder hereunder and the compliance by
such Selling Stockholder with all of the provisions of this Agreement,
the Power-of-Attorney and the Custody Agreement and the consummation
of the transactions herein and therein contemplated will not conflict
with or result in a breach or violation of any terms or provisions of,
or constitute a default under, any statute, indenture, mortgage, deed
of trust, loan agreement or other material agreement or instrument
known to such counsel to which such Selling Stockholder is a party or
by which such Selling Stockholder is bound or to which any of the
property or assets of such Selling Stockholder is subject, nor will
such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of such Selling Stockholder
if such Selling Stockholder is a corporation, the Partnership
Agreement of such Selling Stockholder if such Selling Stockholder is a
partnership or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over such
Selling Stockholder or the property of such Selling Stockholder;
(iii) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the
Shares to be sold by such
16
<PAGE>
Selling Stockholder hereunder, except [NAME ANY SUCH CONSENT,
APPROVAL, AUTHORIZATION OR ORDER] which [HAS] [HAVE] been duly
obtained and [IS] [ARE] in full force and effect, such as have been
obtained under the Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters;
(iv) Immediately prior to the First Time of Delivery, such
Selling Stockholder was the holder of record of the Shares to be sold
at the First Time of Delivery by such Selling Stockholder under this
Agreement; and
(v) Good and valid title to such Shares, free and clear of all
liens, encumbrances, equities or claims, has been transferred to each
of the several Underwriters who have purchased such Shares in good
faith and without notice of any such lien, encumbrance, equity or
claim or any other adverse claim within the meaning of the Uniform
Commercial Code.
In rendering the opinion in paragraph (iv), such counsel may rely upon a
certificate of such Selling Stockholder in respect of matters of fact as to
ownership of, and liens, encumbrances, equities or claims on, the Shares sold
by such Selling Stockholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate;
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent
to the date of this Agreement and also at each Time of Delivery, Deloitte &
Touche LLP shall have furnished to you and to the board of directors of the
Company a letter or letters, dated the respective dates of delivery
thereof, in form and substance reasonably satisfactory to you, to the
effect set forth in Annex I hereto (the executed copy of the letter
delivered prior to the execution of this Agreement is attached as Annex
I(a) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex I(b)
hereto);
(f) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus,
and (ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any change, or
any development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, in each case otherwise than
as set forth or contemplated in the Prospectus, the effect of which, in any
such case described in Clause (i) or (ii), is in the judgment of the
Underwriters so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or
17
<PAGE>
the delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities
declared by United States Federal or New York or California State
authorities; or (iv) the outbreak or escalation of hostilities involving
the United States or the declaration by the United States of a national
emergency or war, if the effect of any such event specified in this Clause
(iv) in the judgment of the Underwriters makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(h) The Shares at such Time of Delivery shall have been duly listed
for quotation on NASDAQ, subject to notice of issuance;
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each of the stockholders of the
Company named in Schedule III hereto, substantially to the effect set forth
in Subsection 1(b)(iv) hereof, in form and substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(k) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of
officers of the Company and of the Selling Stockholders, respectively,
satisfactory to you as to the accuracy of the representations and
warranties of the Company and the Selling Stockholders, respectively,
herein at and as of such Time of Delivery, as to the performance by the
Company and the Selling Stockholders of all of their respective obligations
hereunder to be performed at or prior to such Time of Delivery, and as to
such other matters as you may reasonably request, and the Company shall
have furnished or caused to be furnished certificates as to the matters set
forth in subsections (a) and (f) of this Section.
8. (a) The Company and Stephen Gordon, Thomas Christopher and Thomas Low,
jointly and severally, will indemnify and hold harmless each Underwriter against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for
18
<PAGE>
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company and such Selling
Stockholders shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein; and provided, further, that the liability of each
of Stephen Gordon, Thomas Christopher and Thomas Low pursuant to this Section
8(a) shall not exceed the product of the number of Shares sold by each such
Selling Stockholder (including any Optional Shares) and the initial public
offering price as set forth in the Prospectus.
(b) Each Selling Stockholder other than Stephen Gordon, Thomas
Christopher and Thomas Low will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Selling
Stockholder expressly for use therein; and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that such Selling Stockholder shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein; provided, further, that the liability of such Selling
Stockholder pursuant to this Section 8(b) shall not exceed the product of the
number of Shares sold by such Selling Stockholder (including any Optional
Shares) and the initial public offering price as set forth in the Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against any losses, claims, damages or liabilities to
which the Company or such Selling Stockholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not
19
<PAGE>
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in any Preliminary Prospectus, the Registration Statement or the Prospectus or
any such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or such Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. If the indemnifying party does not
assume the defense of such action, it is understood that the indemnifying party
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to one separate firm of
local attorneys in each such jurisdiction) at any time for all such indemnified
parties, which firms shall be designated in writing by you, if the indemnified
parties under this Section consist of any Underwriter or any of their respective
controlling persons, or by the Company, if the indemnified parties under this
Section consist of the Company or any of the Company's directors, officers or
controlling persons or any Selling Stockholder. The indemnifying party shall
not be liable for any settlement of an action or claim for monetary damages
which an indemnified party may effect without the consent of the indemnifying
party, which consent shall not be unreasonably withheld. No indemnifying party
shall, without the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment with
respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
Notwithstanding anything herein to the contrary, an indemnifying party will not
be liable for the settlement of any action or claim effected without its prior
written consent.
20
<PAGE>
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company, the Selling Stockholders and the
Underwriters from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (d) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company, the Selling Stockholders and the Underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company, the Selling Stockholders and the Underwriters shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company or the Selling Stockholders, as the
case may be, bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The 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, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
each of the Selling Stockholders and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this subsection (e) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (e). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (e) 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 subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission and no Selling Stockholder shall be required to
contribute any amount in excess of the amount equal to the initial public
offering price per Share set forth on the cover page of the Prospectus
multiplied by the number of Shares sold by the Selling Stockholder (including
Optional Shares) hereunder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section 8 shall be in addition to any liability which the Company and the
respective Selling
21
<PAGE>
Stockholders may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company (including any person who, with his or her
consent, is named in the Registration Statement as about to become a director of
the Company) and to each person, if any, who controls the Company or any Selling
Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company and the Selling Stockholders shall be entitled to
a further period of thirty-six hours within which to procure another party or
other parties reasonably satisfactory to you to purchase such Shares on such
terms. In the event that, within the respective prescribed periods, you notify
the Company and the Selling Stockholders that you have so arranged for the
purchase of such Shares, or the Company and the Selling Stockholders notify you
that they have so arranged for the purchase of such Shares, you or the Company
and the Selling Stockholders shall have the right to postpone a Time of Delivery
for a period of not more than seven days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees to file
promptly any amendments to the Registration Statement or the Prospectus which in
your opinion may thereby be made necessary. The term "Underwriter" as used in
this Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the
22
<PAGE>
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company or the Selling Stockholders, except
for the expenses to be borne by the Company and the Selling Stockholders and the
Underwriters as provided in Section 6 hereof and the indemnity and contribution
agreements in Section 8 hereof; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Stockholders, or any officer
or director or controlling person of the Company, or any controlling person of
any Selling Stockholder, and shall survive delivery of and payment for the
Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholders as provided herein, the Company will
reimburse the Underwriters through you for all out-of-pocket expenses approved
in writing by you, including fees and disbursements of counsel, reasonably
incurred by the Underwriters in making preparations for the purchase, sale and
delivery of the Shares not so delivered, but the Company and the Selling
Stockholders shall then be under no further liability to any Underwriter in
respect of the Shares not so delivered except as provided in Sections 6 and 8
hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
Underwriters; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you in care of Goldman, Sachs & Co., 85 Broad Street,
New York, New York 10004, Attention: Registration Department; if to any Selling
Stockholder shall be delivered or sent by mail, telex or facsimile transmission
to counsel for such Selling Stockholder at its address set forth in Schedule II
hereto; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Secretary; provided, however, that any notice
to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire or telex constituting such
Questionnaire, which address will be supplied to the Company or the Selling
Stockholders by you on request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
23
<PAGE>
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholders and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of the
Company and each person who controls the Company, any Selling Stockholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us . counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement among each of the Underwriters, the Company and
each of the Selling Stockholders. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company and the Selling Stockholders for examination, upon
request, but without warranty on your part as to the authority of the signers
thereof.
24
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Stockholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and
binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
RESTORATION HARDWARE, INC.
By:...............................
Name:
Title:
[NAMES OF SELLING STOCKHOLDERS]
By:...............................
Name:
Title:
As Attorney-in-Fact acting on behalf of each
of the Selling Stockholders named in
Schedule II to this Agreement.
Accepted as of the date written
above at San Francisco, California:
Goldman, Sachs & Co.
BancAmerica Robertson Stephens
NationsBanc Montgomery Securities LLC
Piper Jaffray Inc.
By:....................................
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
25
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
TOTAL NUMBER OF NUMBER OF OPTIONAL
FIRM SHARES SHARES TO BE PURCHASED
UNDERWRITER TO BE PURCHASED IF MAXIMUM OPTION EXERCISED
----------- --------------- ---------------------------
<S> <C> <C>
Goldman, Sachs & Co....................
BancAmerica Robertson Stephens.........
NationsBanc Montgomery Securities LLC..
Piper Jaffray Inc......................
Total.............................
</TABLE>
26
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
TOTAL NUMBER OF NUMBER OF SHARES TO
FIRM SHARES BE SOLD IF MAXIMUM
TO BE SOLD OPTION EXERCISED
---------- ----------------
<S> <C> <C>
The Company...............................
The Selling Stockholder(s):
[NAME OF SELLING STOCKHOLDER](A).......
[NAME OF SELLING STOCKHOLDER](B).......
[NAME OF SELLING STOCKHOLDER](C).......
[NAME OF SELLING STOCKHOLDER](D).......
[NAME OF SELLING STOCKHOLDER](E).......
Total................................
</TABLE>
. . . . . . . . . . . . . . . . . . . .
(a) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(b) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(c) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(d) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(e) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
27
<PAGE>
SCHEDULE III
[Weston Presidio Capital II, L.P.
Chase Venture Capital Associates, L.P.
Desai Funds]
Raymond Hemmig
Robert Camp
Michael Lazarus
Damon Ball
David Ferguson
Bill Ashton
Marta Benson
Dale Dombrowski
Nina Johnson
Kellie Kong
David Loretta
Mary Ness
Gerilyn Rapmund
Randy Reimer
Ed Robinson
Anne Wilson
28
<PAGE>
ANNEX I
FORM OF COMFORT LETTER
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the applicable
published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial forecasts
and/or pro forma financial information) examined by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the related
published rules and regulations thereunder; and, if applicable, they have made a
review in accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim financial
statements, selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited financial
statements of the Company for the periods specified in such letter, as indicated
in their reports thereon, copies of which have been separately furnished to the
Underwriters;
(iii) They have made a review in accordance with standards established by
the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus as indicated in
their reports thereon copies of which have been separately furnished to the
Underwriters and on the basis of specified procedures including inquiries of
officials of the Company who have responsibility for financial and accounting
matters regarding whether the unaudited condensed consolidated financial
statements referred to in paragraph (vi)(A)(i) below comply as to form in all
material respects with the applicable accounting requirements of the Act and the
related published rules and regulations, nothing came to their attention that
caused them to believe that the unaudited condensed consolidated financial
statements do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company for the
five most recent fiscal years included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the audited
consolidated financial statements for such five fiscal years which were included
or incorporated by reference in the Company's Annual Reports on Form 10-K for
such fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the basis of
limited procedures specified
1
<PAGE>
in such letter nothing came to their attention as a result of the foregoing
procedures that caused them to believe that this information does not conform in
all material respects with the disclosure requirements of Items 301, 302, 402
and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an examination in
accordance with generally accepted auditing standards, consisting of a reading
of the unaudited financial statements and other information referred to below, a
reading of the latest available interim financial statements of the Company and
its subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements included
in the Prospectus, inquiries of officials of the Company and its subsidiaries
responsible for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their attention
that caused them to believe that:
(A) (i) the unaudited consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, or (ii) any material modifications should be made to
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally accepted accounting
principles;
(B) any other unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in the
unaudited consolidated financial statements from which such data and items
were derived, and any such unaudited data and items were not determined on
a basis substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included in the
Prospectus;
(C) the unaudited financial statements which were not included in the
Prospectus but from which were derived any unaudited condensed financial
statements referred to in Clause (A) and any unaudited income statement
data and balance sheet items included in the Prospectus and referred to in
Clause (B) were not determined on a basis substantially consistent with the
basis for the audited consolidated financial statements included in the
Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the consolidated capital
stock (other than issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were outstanding
on the date of the latest financial statements included in the Prospectus)
2
<PAGE>
or any increase in the consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated net current assets or
stockholders' equity or other items specified by the Underwriters, or any
increases in any items specified by the Underwriters, in each case as
compared with amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which are described
in such letter; and
(F) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause (E)
there were any decreases in consolidated net revenues or operating profit
or the total or per share amounts of consolidated net income or other items
specified by the Underwriters, or any increases in any items specified by
the Underwriters, in each case as compared with the comparable period of
the preceding year and with any other period of corresponding length
specified by the Underwriters, except in each case for decreases or
increases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and (vi)
above, they have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified by
the Underwriters, which are derived from the general accounting records of the
Company and its subsidiaries, which appear in the Prospectus, or in Part II of,
or in exhibits and schedules to, the Registration Statement specified by the
Underwriters, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
3
<PAGE>
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RESTORATION HARDWARE, INC.
The undersigned, Stephen Gordon and Thomas Low, hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
---
respectively, of said corporation.
TWO: The Certificate of Incorporation of said corporation was
---
originally filed in the Office of the Secretary of State of the State of
Delaware on April 2, 1998 and the First Amended and Restated Certificate of
Incorporation of said corporation was originally filed in such office on May
___, 1998.
THREE: The First Amended and Restated Certificate of Incorporation of
-----
said corporation shall be amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is Restoration Hardware, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is the
Corporation Trust Corporation.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that the
<PAGE>
Corporation is authorized to issue is Forty Five Million (45,000,000). Forty
Million (40,000,000) shares shall be Common Stock, par value $0.0001 per share,
and Five Million (5,000,000) shares shall be Preferred Stock, par value $0.0001
per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon each series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or of any of them. The rights, privileges, preferences and
restrictions of any such additional series may be subordinated to, pari passu
----------
with (including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote), or senior to any of those of any present or future class or series of
Preferred Stock or Common Stock. The Board of Directors is also authorized to
increase or decrease the number of shares of any series prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to
time by, or in the manner provided in the Bylaws or by resolution duly adopted
by the Board of Directors.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.
At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.
2.
<PAGE>
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the closing of the initial public
offering of the Corporation's Common Stock, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three (3) years. At the third annual meeting of stockholders following the
initial public offering of the Corporation's Common Stock, the term of office of
the Class III directors shall expire and Class III directors shall be elected
for a full term of three (3) years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three (3) years to
succeed the directors of the class whose terms expire at such annual meeting.
If the number of directors is hereafter changed, each director then serving as
such shall nevertheless continue as a director of the Class of which he is a
member until the expiration of his current term and any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
although less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.
ARTICLE VII
Stockholders of the Corporation shall take action by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE VIII
The affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of voting stock entitled to vote at an election of directors
shall be required for the
3.
<PAGE>
approval or authorization of any Business Combination as such term is defined in
Section 203 of the GCL.
ARTICLE IX
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the subject only to limits
created by applicable Delaware law (statutory or non-statutory), with respect to
action for breach of duty to the Corporation, its stockholders, and others.
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving intentional misconduct or a knowing
violation of law, or (3) shall have derived an improper personal benefit. If
the GCL is hereafter amended to authorize the further elimination or limitation
of the liability of a director, the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the GCL, as so
amended.
Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic Corporation which was
predecessor Corporation of the Corporation or of another entity or enterprise at
the request of such predecessor Corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL of the State of Delaware. The rights to
indemnification and advancement of expenses conferred by this Article IX shall
be presumed to have been relied upon by the directors and officers of the
Corporation in serving
4.
<PAGE>
or continuing to serve the Corporation and shall be enforceable as contract
rights. Said rights shall not be exclusive of any other rights to which those
seeking indemnification may otherwise be entitled. The Corporation may, upon
written demand presented by a director or officer of the Corporation or of a
direct or indirect subsidiary of the Corporation, or by a person serving at the
request of the Corporation as a director or officer of another entity or
enterprise, enter into contracts to provide such persons with specified rights
to indemnification, which contracts may confer rights and protections to the
maximum extent permitted by the GCL of the State of Delaware, as amended and in
effect from time to time.
If a claim under this Article IX is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL of
the State of Delaware for the Corporation to indemnify the claimant for the
amount claimed, but the claimant shall be presumed to be entitled to
indemnification and the Corporation shall have the burden of proving that the
claimant has not met the standards of conduct for permissible indemnification
set forth in the GCL of the State of Delaware.
If the GCL of the State of Delaware is hereafter amended to permit the
Corporation to provide broader indemnification rights that said Law permitted
the Corporation to provide prior to such amendment, the indemnification rights
conferred by this Article IX shall be broadened to the fullest extent permitted
by the GCL of the State of Delaware, as so amended.
ARTICLE X
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and X of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.
FOUR: The foregoing amendment and restatement has been duly adopted
----
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
5.
<PAGE>
FIFTH: The foregoing amendment and restatement was approved by the
-----
holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
_______ __, 1998.
__________________________________________________
Stephen Gordon
President and Chief Executive Officer
__________________________________________________
Thomas Low
Secretary
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
RESTORATION HARDWARE, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
----------
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
----------
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
----------
directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such date
----------
and time as shall be designated from time to time by the Board of Directors and
stated in the notice of
<PAGE>
the meeting. At each annual meeting, the stockholder shall elect directors to
succeed those whose terms expire in that year and shall transact such other
business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place,
----------
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
----------
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
----------
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may only be called by the Board.
Section 6. Written notice of a special meeting stating the place,
----------
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not
2.
<PAGE>
fewer than ten (10) nor more than sixty (60) days before the date of the
meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
----------
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
----------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted that might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
----------
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
3.
<PAGE>
Section 10. Unless otherwise provided in the certificate of
-----------
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
Section 11. Nominations for election to the Board of Directors must
-----------
be made by the Board of Directors or by a committee appointed by the Board of
Directors for such purpose or by any stockholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Nominations by stockholders must be preceded by notification in writing received
by the secretary of the corporation not less than one-hundred twenty (120) days
prior to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the following information as to each proposed
nominee and as to each person, acting alone or in conjunction with one or more
other persons as a partnership, limited partnership, syndicate or other group,
who participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies to
vote for the nominee:
(a) the name, age, residence, address, and business address of each
proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of business
and address of the corporation or other organization in which such employment is
carried on of each proposed nominee and of each such person;
4.
<PAGE>
(c) the amount of stock of the corporation owned beneficially, either
directly or indirectly, by each proposed nominee and each such person; and
(d) a description of any arrangement or understanding of each proposed
nominee and of each such person with each other or any other person regarding
future employment or any future transaction to which the corporation will or may
be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
Section 12. At any meeting of the stockholders, only such business
-----------
shall be conducted as shall have been brought before the meeting (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than one hundred twenty (120) days prior to the date of the meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and
5.
<PAGE>
address, as they appear on the corporation's books, of the stockholder proposing
such business, and the name and address of the beneficial owner, if any, on
whose behalf the proposal is made, (c) the class and number of shares of the
corporation which are owned beneficially and of record by such stockholder of
record and by the beneficial owner, if any, on whose behalf of the proposal is
made and (d) any material interest of such stockholder of record and the
beneficial owner, if any, on whose behalf the proposal is made in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 12. The presiding officer of the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the procedures
prescribed by this Section 12, and if such person should so determine, such
person shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this Section 12, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this Section 12.
Section 13. Effective upon the closing of the corporation's initial
-----------
public offering of securities pursuant to a registration statement filed under
the Securities Act of 1933, as amended, the stockholders of the Corporation may
not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting in accordance with these
Bylaws and the Certificate of Incorporation.
6.
<PAGE>
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
----------
constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an incumbent director. The Board of
Directors shall be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible, as
determined by the Board of Directors, one class to hold office initially for a
term expiring at the annual meeting to be held in 1999, another class to hold
office initially for a term expiring at the annual meeting of stockholders held
in 2000 and another class to hold office initially for a term expiring at the
annual meeting of stockholders to be held in 2001, with the members of each
class to hold office until their successors are elected and qualified. At each
annual meeting of stockholders, the successors of the class of directors whose
term expires at that meeting shall be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election.
Section 2. Vacancies and newly created directorships resulting from
----------
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
election of the class for which such directors were chose and until their
successors are duly elected and qualified or until earlier resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by statute.
7.
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Section 3. The business of the corporation shall be managed by or
----------
under the direction of its Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
----------
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of Directors
----------
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
----------
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
----------
president on two (2) days' notice to each director by mail or forty-eight (48)
hours notice to each director either personally, or by telephone, telegram or
facsimile; special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of a
8.
<PAGE>
majority of the Board unless the Board consists of only one director, in which
case special meetings shall be called by the president or secretary in like
manner and on like notice on the written request of the sole director. A
written waiver of notice, signed by the person entitled thereto, whether before
or after the time of the meeting stated therein, shall be deemed equivalent to
notice.
Section 8. At all meetings of the board a majority of the directors
----------
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
----------
incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all
9.
<PAGE>
persons participating in the meeting can hear each other, and such participation
in a meeting shall constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
-----------
majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a
10.
<PAGE>
dividend or to authorize the issuance of stock. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
-----------
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
-----------
incorporation or bylaws, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
----------
certificate of incorporation or of these bylaws, notice is required to be given
to any director or
11.
<PAGE>
stockholder, it shall not be construed to mean personal notice (except as
provided in Section 7 of Article III of these Bylaws), but such notice may be
given in writing, by mail, addressed to such director or stockholder, at his
address as it appears on the records of the corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the same
shall be deposited in the United States mail. Notice to directors may also be
given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
----------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
----------
Board of Directors and shall be a president, a chief financial officer and a
secretary. The Board of Directors may elect from among its members a Chairman
of the Board. The Board of Directors may also choose one or more vice-
presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
----------
annual meeting of stockholders shall choose a president, a chief financial
officer, and a secretary and may choose vice presidents.
12.
<PAGE>
Section 3. The Board of Directors may appoint such other officers and
----------
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers of the corporation shall be
----------
fixed by the Board of Directors or any committee established by the Board of
Directors for such purpose. The salaries of agents of the corporation shall,
unless fixed by the Board of Directors, be fixed by the president or any vice-
president of the corporation.
Section 5. The officers of the corporation shall hold office until
----------
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
----------
meetings of the Board of Directors and of the stockholders at which he shall be
present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the
----------
president, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He shall have and may exercise such
powers as are, from time to time, assigned to him by the Board and as may be
provided by law.
13.
<PAGE>
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
----------
corporation; and in the absence of the Chairman of the Board he/she shall
preside at all meetings of the stockholders and the Board of Directors; he/she
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
Section 9. The president or any vice president shall execute bonds,
----------
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
-----------
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
-----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall
14.
<PAGE>
perform like duties for the standing committees when required. He/she shall
give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or president, under whose
supervision he/she shall be. He/she shall have custody of the corporate seal of
the corporation and he/she, or an assistant secretary, shall have authority to
affix the same to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such assistant secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by his signature.
Section 12. The assistant secretary, or if there be more than one,
-----------
the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
THE CHIEF FINANCIAL OFFICER
Section 13. The chief financial officer shall be the chief financial
-----------
officer of the corporation, shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
15.
<PAGE>
Section 14. He/she shall disburse the funds of the corporation as may
-----------
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. If required by the Board of Directors, he/she shall give
-----------
the corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his/her office and for the
restoration to the corporation, in case of his/her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his/her control
belonging to the corporation.
Section 16. The assistant treasurer, or if there shall be more than
-----------
one, the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
----------
to have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of
16.
<PAGE>
Directors, or the president or a vice-president and the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may be
----------
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar
17.
<PAGE>
before such certificate is issued, it may be issued by the corporation with the
same effect as if he/she were such officer, transfer agent or registrar at the
date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
----------
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
----------
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or
18.
<PAGE>
to express consent to corporate action in writing without a meeting, or entitled
to receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
(60) nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
----------
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
----------
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash,
19.
<PAGE>
in property, or in shares of the capital stock, subject to the provisions of the
certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
----------
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
----------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
----------
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
----------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
20.
<PAGE>
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized
----------
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section
6 shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such
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action, suit or proceeding upon receipt of an undertaking by or on behalf of
such director to repay such amount if it shall ultimately be determined that he
is not entitled to be indemnified by the corporation as authorized by relevant
sections of the General Corporation Law of Delaware. Notwithstanding the
foregoing, the corporation shall not be required to advance such expenses to an
agent who is a party to an action, suit or proceeding brought by the corporation
and approved by a majority of the Board of Directors of the corporation which
alleges willful misappropriation of corporate assets by such agent, disclosure
of confidential information in violation of such agent's fiduciary or
contractual obligations to the corporation or any other willful and deliberate
breach in bad faith of such agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been
22.
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"fiduciaries" of any employee benefit plan of the corporation which may exist
from time to time, Section 145 of the General Corporation Law of Delaware shall,
for the purposes of this Section 6, be interpreted as follows: an "other
enterprise" shall be deemed to include such an employee benefit plan, including
without limitation, any plan of the corporation which is governed by the Act of
Congress entitled "Employee Retirement Income Security Act of 1974," as amended
from time to time; the corporation shall be deemed to have requested a person to
serve an employee benefit plan where the performance by such person of his
duties to the corporation also imposes duties on, or otherwise involves services
by, such person to the plan or participants or beneficiaries of the plan; excise
taxes assessed on a person with respect to an employee benefit plan pursuant to
such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
----------
bylaws may be adopted by the affirmative vote of holders of at least 66-2/3%
vote of the outstanding voting stock of the corporation. These bylaws may also
be altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred
upon the Board of Directors by the certificate
23.
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of incorporation it shall not divest or limit the power of the stockholders to
adopt, amend or repeal bylaws.
24.
<PAGE>
CERTIFICATE OF ADOPTION BY THE
SECRETARY OF
RESTORATION HARDWARE, INC.
The undersigned, Thomas Low, hereby certifies that he is the duly
elected and acting Secretary of Restoration Hardware, Inc., a Delaware
corporation (the "Corporation"), and that the Bylaws attached hereto constitute
the Bylaws of said Corporation as duly adopted by Unanimous Written Consent of
the Board of Directors on May ___, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of May, 1998.
________________________________
Thomas Low
Secretary
25.
<PAGE>
COMMON STOCK COMMON STOCK
NUMBER SHARES
RH _________ ____________
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN BOSTON, MA OR NEW YORK, NY AND STATEMENTS AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTIONS ON SHARES
CUSIP 760981 10 0
[LOGO OF RESTORATION HARDWARE]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $0.0001 PAR VALUE PER
SHARE, OF
RESTORATION HARDWARE, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ /s/
--------------------- ---------------------
SENIOR VICE PRESIDENT, CHAIRMAN OF THE BOARD,
CHIEF FINANCIAL OFFICER AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
RESTORATION HARDWARE, INC.
DELAWARE
INCORPORATED MARCH 2, 1998
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/
---------------------
AUTHORIZED SIGNATURE
<PAGE>
RESTORATION HARDWARE, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ____________________ Custodian ____________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act _______________________________________________
tenants in common (State)
COM PROP -- as community property
UNIF TRF MIN ACT -- _____________________ Custodian (until age _________)
(Cust)
____________________________ under Uniform Transfers
(Minor)
to Minors Act ______________________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
| |
|______________________________________|
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated________________________________
X ______________________________________
X ______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _____________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
<PAGE>
EXHIBIT 5.1
June 1, 1998
Restoration Hardware, Inc.
15 Koch Road, Suite J
Corte Madera, CA 94925
Re: Registration Statement on Form S-1
----------------------------------
File No. 333-51027
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 originally
filed by Restoration Hardware, Inc. (the "Company") with the Securities and
Exchange Commission (the "Commission") on April 24, 1998, as thereafter amended
or supplemented (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of 3,330,000
shares of the Company's Common Stock (the "Shares"). The Shares include an over-
allotment option granted to the Underwriters to purchase 499,500 additional
Shares and are to be sold to the Underwriters as described in such Registration
Staement for resale to the public. As your counsel in connection with this
transaction, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the sale and issuance
of the Shares.
It is our opinion that, upon conclusion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, the Shares, when issued and sold in the manner described in the
Registration Statement, will be validly issued, fully paid and nonassessable.
We consent to the use of this Opinion as an exhibit to said
Registration Statement, and further consent to the use of our name wherever
appearing in said Registration Statement, including the prospectus constituting
a part thereof, and in any amendment thereto.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
Brobeck, Phleger & Harrison LLP
<PAGE>
EXHIBIT 10.2
RESTORATION HARDWARE, INC.
1998 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1998 Stock Incentive Plan is intended to promote the interests of
Restoration Hardware, Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
- the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special option grants,
- the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock, and
- the Director Fee Option Grant Program under which non-
employee Board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special option grant.
<PAGE>
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board.
Beginning with the Section 12 Registration Date, the Primary Committee shall
have sole and exclusive authority to administer the Discretionary Option Grant
and Stock Issuance Programs with respect to Section 16 Insiders.
B. Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions
of any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
E. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
F. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
2.
<PAGE>
G. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. Only non-employee Board members shall be eligible to participate
in the Automatic Option Grant and Director Fee Option Grant Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open
3.
<PAGE>
market. The maximum number of shares of Common Stock initially reserved for
issuance over the term of the Plan shall not exceed 3,287,662 shares, which
shall consist of (i) the number of shares which are estimated to remain
available for issuance, as of the Section 12 Registration Date, under the
Predecessor Plan as last approved by the Corporation's stockholders, including
the shares subject to outstanding options under that Predecessor Plan, and (ii)
an additional increase of 980,000 shares authorized by the Board and the
stockholders prior to the Section 12 Registration Date. In addition, the number
of shares of Common Stock reserved for issuance under the Plan will
automatically be increased on the first trading day of each calendar year,
beginning in calendar year 2000, by an amount equal to the lesser of three
------
percent 3% of the total number of shares of Common Stock outstanding on the last
trading day of the preceding calendar year, or (ii) six percent (6%) of the
total outstanding shares immediately following the initial public offering of
the Common Stock.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 250,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1998 calendar year.
C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation, at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section V of Article Two of the Plan shall NOT be
available for subsequent issuance under the Plan.
D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year, (iii) the number and/or
class of securities for which grants are subsequently to be made under the
Automatic Option Grant Program to new and continuing non-employee Board members,
(iv) the number and/or class of securities and the
4.
<PAGE>
exercise price per share in effect under each outstanding option under the Plan
and (v) the number and/or class of securities and price per share in effect
under each outstanding option incorporated into this Plan from the Predecessor
Plan. Such adjustments to the outstanding options are to be effected in a
manner which shall preclude the enlargement or dilution of rights and benefits
under such options. The adjustments determined by the Plan Administrator shall
be final, binding and conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Six and the documents evidencing the option, be payable in cash or check
made payable to the Corporation. Should the Common Stock be registered under
Section 12 of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
6.
<PAGE>
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
1. The following provisions shall govern the exercise of
any options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution.
(iii) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
7.
<PAGE>
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
---
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-----------
B. EXERCISE PRICE. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
8.
<PAGE>
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CHANGE IN CONTROL
A. Each option outstanding at the time of a Change in Control but
not otherwise fully exercisable shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not become
exercisable on such an accelerated basis if and to the extent: (i) such option
is, in connection with the Change in Control, to be assumed or otherwise
continued in full force or effect by the successor corporation (or parent
thereof) pursuant to the terms of the Change in Control transaction, (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing at the time of the Change in
Control transaction on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) or (ii) such accelerated vesting is precluded by
other limitations imposed by the Plan Administrator at the time the repurchase
right is issued.
C. Immediately following the consummation of the Change in Control,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control transaction.
9.
<PAGE>
D. Each option which is assumed in connection with a Change in
Control (or is otherwise to continue in effect) shall be appropriately
adjusted, immediately after such Change in Control, to apply to the number and
class of securities or other property which would have been issuable to the
Optionee in consummation of such Change in Control had the option been exercised
immediately prior to such Change in Control. Appropriate adjustments to reflect
such Change in Control shall also be made to (i) the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same, (ii) the maximum number
and/or class of securities available for issuance over the remaining term of the
Plan and (iii) the maximum number and/or class of securities for which any one
person may be granted stock options and direct stock issuances under the Plan
per calendar year.
E. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the accelerated vesting of one or
more outstanding options under the Discretionary Option Grant Program upon the
occurrence of a Change in Control, whether or not those options are to be
assumed or otherwise continued in full force and effect pursuant to the terms of
the Change in Control transaction. In addition, the Plan Administrator may
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall immediately
terminate, in whole or in part, at the time of a Change in Control and shall not
be assignable to the successor corporation (or parent thereof), and the shares
subject to those terminated repurchase rights shall accordingly vest in full at
the time of such Change in Control.
F. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the accelerated vesting, in whole or
in part, of one or more outstanding options under the Discretionary Option Grant
Program upon the Involuntary Termination of the Optionee's Service within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control in which those options do not otherwise
accelerate. In addition, the Plan Administrator may structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights will immediately terminate at the time of such Involuntary
Termination, and the shares subject to those terminated repurchase rights shall
accordingly vest in full at that time.
G. The portion of any Incentive Option accelerated in connection
with a Change in Control shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is
not exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
H. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
10.
<PAGE>
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then
the distribution to which the Optionee shall be entitled may be made in
shares of Common Stock valued at Fair Market Value on the option surrender
date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
-----
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.
11.
<PAGE>
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the time
exercisable for vested shares of Common Stock. In return for the
surrendered option, the Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (A) the Take-Over Price of
the shares of Common Stock which are at the time vested under each
surrendered option (or surrendered portion thereof) over (B) the aggregate
exercise price payable for such shares. Such cash distribution shall be
paid within five (5) days following the option surrender date.
(iii) The Plan Administrator shall, at the time the option with
such limited stock appreciation right is granted under the Discretionary
Option Grant Program, pre-approve any subsequent exercise of that right in
accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Plan Administrator or the Board shall be required at the
time of the actual option surrender and cash distribution.
(iv) The balance of the option (if any) shall remain
outstanding and exercisable in accordance with the documents evidencing
such option.
12.
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for those calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete
discretion to determine whether to approve the filed authorization in whole or
in part. To the extent the Primary Committee approves the authorization, the
individual who filed that authorization shall automatically be granted an option
under the Salary Investment Grant Program on the first trading day in January of
the calendar year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
13.
<PAGE>
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A divided by (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the approved reduction in the
Optionee's base salary for the calendar year, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
----------------------------
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
-------
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
- -------
(3)-year period measured from the date of the Optionee's cessation of Service.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control while the Optionee remains
in Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become fully exercisable with respect to the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. The successor corporation
14.
<PAGE>
(or parent thereof) in the Change in Control transaction shall assume each such
outstanding option so that each option under the Salary Investment Option Grant
Program shall remain exercisable for the fully-vested shares until the earliest
--------
to occur of (i) the expiration of the ten (10)-year option term, (ii) the
expiration of the three (3)-year period measured from the date of the Optionee's
cessation of Service or (iii) the surrender of the option in connection with a
Hostile Take-Over.
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph B. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
C. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
15.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. PURCHASE PRICE.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. VESTING PROVISIONS.
------------------
1. The Plan Administrator may issue shares of Common Stock
under the Stock Issuance Program which are fully and immediately vested upon
issuance or which are to vest in one or more installments over the Participant's
period of Service or upon attainment of specified performance objectives.
Alternatively, the Plan Administrator may issue share right awards under the
Stock Issuance Program which shall entitle the recipient to receive a specified
number of shares of Common Stock upon the attainment of one or more performance
goals established by the Plan Administrator. Upon the attainment of such
performance goals, fully-vested shares of Common Stock shall be issued in
satisfaction of those share right awards.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the
16.
<PAGE>
Participant's unvested shares of Common Stock and (ii) such escrow arrangements
as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
II. CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Change in Control, except to the extent (i) those repurchase
rights are to be assigned to the successor corporation (or parent thereof) in
connection with such Change in Control transaction or are otherwise to continue
in full force and effect pursuant to the terms of the Change in Control
transaction or (ii) such accelerated vesting is precluded by other limitations
imposed in the Stock Issuance Agreement.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate upon the
occurrence of a Change in Control and shall not be assignable to the successor
corporation (or parent thereof), and the shares of Common Stock subject to those
terminated rights shall immediately vest at the time of such Change in Control.
17.
<PAGE>
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate, in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof) or are otherwise continued in effect.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
18.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
-----------
below:
1. Each individual serving as a non-employee Board member
on the Underwriting Date shall automatically be granted at that time a Non-
Statutory Option to purchase 14,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 7,000 shares of Common Stock, provided
that individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
3. On the date of each Annual Stockholders Meeting held
after the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, whether or not that individual is standing for re-election to
the Board at that particular Annual Meeting, shall automatically be granted a
Non-Statutory Option to purchase 3,500 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 3,500-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received a stock
option grant from the Corporation prior to the Underwriting Date shall be
eligible to receive one or more such annual option grants over their period of
continued Board service.
B. EXERCISE PRICE.
--------------
1. The exercise price per share shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall be payable in one or more of
the alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
19.
<PAGE>
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each 14,000-share option granted on the
Underwriting Date and each initial 7,000-share grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of three (3) successive
equal annual installments over the Optionee's period of continued service as a
Board member, with the first such installment to vest upon the Optionee's
completion of one (1) year of Board service measured from the option grant date.
Each annual 3,500-share automatic option shall vest, and the Corporation's
repurchase right shall lapse, in a series of three (3) successive equal annual
installments over the Optionee's period of continued service as a Board member,
with the first such installment to vest upon the Optionee's completion of one
(1) year of Board service measured from the option grant date.
E. TERMINATION OF BOARD SERVICE. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution) shall have a twelve
(12)-month period following the date of such cessation of Board service in
which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the option
may not be exercised in the aggregate for more than the number of vested
shares of Common Stock for which the option is exercisable at the time of
the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-
month exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service for any
reason other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
20.
<PAGE>
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. The shares of Common Stock subject to each option outstanding at
the time of a Change in Control but not otherwise vested shall automatically
vest in full so that each such option shall, immediately prior to the effective
date of such Change in Control, become exercisable for all of those shares as
fully-vested shares of Common Stock and may be exercised for all or any portion
of those vested shares. Immediately following the consummation of the Change in
Control, each automatic option grant shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof) or otherwise continued in full force and effect pursuant to the
terms of the Change in Control transaction.
B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Change in Control.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or
consent of the Board or any Plan Administrator shall be required in connection
with such option surrender and cash distribution.
D. Each option which is assumed in connection with a Change in
Control (or otherwise continued in full and effect) shall be appropriately
adjusted, immediately after such Change in Control, to apply to the number and
class of securities or other property which would have been issuable to the
Optionee in consummation of such Change in Control had the option been exercised
immediately prior to such Change in Control. Appropriate adjustments shall also
be made to the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same.
E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
21.
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Plan Administrator shall have the sole and exclusive authority to
determine the calendar year or years (if any) the Director Fee Option Grant
Program is to be in effect. When the Director Fee Option Grant Program is in
effect, each non-employee Board member may elect to apply all or any portion of
the annual retainer fee otherwise payable in cash for his or her service on the
Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to first day of the calendar year for which the annual
retainer fee which is the subject of that election is otherwise payable. Each
non-employee Board member who files such a timely election shall automatically
be granted an option under this Director Fee Option Grant Program on the first
trading day in January in the calendar year for which the annual retainer fee
which is the subject of that election would otherwise be payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A divided by (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
22.
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
----------------------------
exercisable in a series of twelve (12) equal monthly installments upon the
Optionee's completion of each month of Board service over the twelve (12)-month
period measured from the grant date. Each option shall have a maximum term of
ten (10) years measured from the option grant date.
D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution. Such right of exercise shall lapse,
and the option shall terminate, upon the earlier of (i) the expiration of the
-------
ten (10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee's cessation of Board service.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control while the Optionee remains
a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Change in
Control, become fully exercisable with respect to the total number of shares of
Common Stock at the time subject to such option and may be exercised for any or
23.
<PAGE>
all of those shares as fully-vested shares of Common Stock. The successor
corporation (or parent thereof) in the Change in Control transaction shall
assume each such outstanding option so that each option under the Director Fee
Option Grant Program shall remain exercisable for the fully-vested shares until
the earliest to occur of (i) the expiration of the ten (10)-year option term,
--------
(ii) the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Board service or (iii) the surrender of the option in
connection with a Hostile Take-Over.
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required in connection with such option surrender and
cash distribution.
C. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
24.
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options or the vesting of their
shares. Such right may be provided to any such holder in either or both of the
following formats:
Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
25.
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately at the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date. However, no
options granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders.
If such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Section 12 Registration Date. All options
outstanding under the Predecessor Plan on the Section 12 Registration Date shall
be incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Changes in Control, may, in the Plan Administrator's discretion, be extended
to one or more options incorporated from the Predecessor Plan which do not
otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i) April
--------
19, 2008, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully-vested shares or (iii) the termination of
all outstanding options in connection with a Change in Control. Should the Plan
terminate on April 19, 2008, then all option grants and unvested stock issuances
outstanding at that time shall continue to have force and effect in accordance
with the provisions of the documents evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
26.
<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained
within twelve (12) months after the date the first such excess issuances are
made, then (i) any unexercised options granted on the basis of such excess
shares shall terminate and cease to be outstanding and (ii) the Corporation
shall promptly refund to the Optionees and the Participants the exercise or
purchase price paid for any excess shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for
the period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
27.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
------------------------------
program in effect under Article Two of the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
-----
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
-----------------
Corporation effected through any of the following transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction;
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation;
(iii) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders; or
(iv) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
E. COMMON STOCK shall mean the Corporation's common stock.
------------
A-1.
<PAGE>
F. CORPORATION shall mean Restoration Hardware, Inc., a Delaware
-----------
corporation, and its successors.
G. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option
---------------------------------
grant in effect for non-employee Board members under Article Six of the Plan.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
----------------------------------
grant program in effect under Article Two of the Plan.
I. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
-----------------
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
J. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.
A-2.
<PAGE>
M. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
-----------------
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
N. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.
O. INVOLUNTARY TERMINATION shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
P. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------
R. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
S. OPTIONEE shall mean any person to whom an option is granted under the
--------
Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
A-3.
<PAGE>
T. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
U. PARTICIPANT shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
V. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
--------------------------------------------
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant and Director
Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall
mean the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.
W. PLAN shall mean the Corporation's 1998 Stock Incentive Plan, as set
----
forth in this document.
X. PLAN ADMINISTRATOR shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Y. PLAN EFFECTIVE DATE shall mean April 19, 1998, the date on which the
-------------------
Board adopted the Plan.
Z. PREDECESSOR PLAN shall mean the Corporation's 1995 Stock Option Plan in
----------------
effect immediately prior to the Plan Effective Date hereunder.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-
-----------------
employee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and
to administer the Salary Investment Option Grant Program solely with respect to
the selection of the eligible individuals who may participate in such program.
AB. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.
A-4.
<PAGE>
AC. SECONDARY COMMITTEE shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
AD. SECTION 12 REGISTRATION DATE shall mean the date on which the Common
----------------------------
Stock is first registered under Section 12 of the 1934 Act.
AE. SECTION 16 INSIDER shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AF. SERVICE shall mean the performance of services for the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
AG. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
AH. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under Article Four of the Stock Issuance Program.
AI. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
----------------------
under the Plan.
AJ. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AK. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
--------------- -------
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
AL. TAXES shall mean the Federal, state and local income and employment
-----
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
AM. 10% STOCKHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-5.
<PAGE>
AN. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
AO. UNDERWRITING DATE shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
A-6.
<PAGE>
Exhibit 10.7
SUPPLY AGREEMENT
----------------
This Agreement is entered as of March 20, 1998, by and between The
Michaels Concepts in Wood, Inc. ("Seller"), a California corporation,
Restoration Hardware, Inc. ("Buyer"), a California corporation and Michael
Vermillion, an individual.
WHEREAS, Seller is engaged in the manufacture of certain furniture
products; and
WHEREAS, Buyer wishes to purchase a minimum volume of such products
from Seller and Seller is willing to supply Buyer with such minimum volume;
NOW, THEREFORE, in consideration of the premises and the mutual
promises and covenants set forth below, Seller and Buyer mutually agree as
follows:
ARTICLE I
---------
DEFINITIONS
-----------
1.1 "Agreement" shall mean this Supply Agreement, as amended from
---------
time to time.
1.2 "Delivery Date" shall mean a date for which delivery of Product
-------------
is properly requested in a purchase order.
1.3 "Product" shall mean each product supplied hereunder by Seller
-------
which is listed in and meets the specifications set forth in Exhibit I, attached
hereto and made a part hereof, as such Exhibit I is amended by the parties from
time to time.
1.4 "Term" shall have the meaning set forth in Section 5.1 hereof.
----
ARTICLE II
----------
SALE AND PURCHASE OF PRODUCTS
-----------------------------
2.1 Sale and Purchase. Seller agrees to sell to Buyer and Buyer
-----------------
agrees to purchase from Seller a minimum volume ("Base Volume") of Product for
each of the fiscal years ending January 30, 1999 (fiscal 1998), January 29, 2000
(fiscal 1999) and January 27, 2001 (fiscal 2000) under the terms and conditions
of certain purchase orders to be delivered by Buyer to Seller from time to time
in substantially the form attached hereto as Exhibit II. The Base
<PAGE>
Volume for fiscal years 1998, 1999 and 2000 will be thirteen million dollars
($13,000,000), fifteen million dollars ($15,000,000) and seventeen million
dollars ($17,000,000), respectively. It is understood that Seller may not in
connection with supply hereunder contract with respect to manufacture of Product
with any third parties.
ARTICLE III
-----------
PRICE AND PAYMENTS
------------------
3.1 Price. Buyer shall pay to Seller for Product purchased hereunder
-----
an amount equal to the lowest price, including all discounts, concessions and
allowances, paid by any other purchaser of Seller's Product during the fiscal
year in which Buyer's purchase occurs.
3.2 Method of Payment. All payments due hereunder to Seller shall be
-----------------
paid to Seller in United States dollars not later than thirty (30) days
following the date of the applicable invoice.
3.3 Examination of Books. Buyer shall have the right, at its own
--------------------
expense, for any period during which Product is purchased by Buyer hereunder and
for one (1) year thereafter, to have an independent public accountant,
reasonably acceptable to Seller, examine the relevant financial books and
records of account of Seller at normal business hours, upon reasonable demand,
to determine or verify the appropriate price of Product purchased hereunder. If
errors of five percent (5%) or more in Buyer's favor are discovered as a result
of such examination, Seller shall reimburse Buyer for the expense of such
examination and pay the deficiency with interest immediately. The opinion of
such independent public accountant shall be binding on the parties hereto with
respect to the cost of Product hereunder.
ARTICLE IV
----------
TERMINATION
-----------
4.1 Term. This Agreement shall continue in effect until January 27,
----
2001.
4.2 Termination by Mutual Agreement. This Agreement may be
-------------------------------
terminated upon mutual written agreement between the parties.
4.3 Termination for Default. If either party materially defaults in
-----------------------
the performance of any material agreement, condition or covenant of this
Agreement and such default or noncompliance shall not have been remedied within
thirty (30) days after receipt by the defaulting party of a notice thereof from
the other party, the party not in default may terminate this Agreement.
ARTICLE V
---------
MISCELLANEOUS
-------------
<PAGE>
5.1 Entire Agreement. This Agreement contains the entire agreement
----------------
of the parties regarding the subject matter hereof and supersedes all prior
agreements, understandings and negotiations regarding the same. This Agreement
may not be changed, modified, amended or supplemented except by a written
instrument signed by both parties. Furthermore, it is the intention of the
parties that this Agreement be controlling over additional or different terms of
any order, confirmation, invoice or similar document, even if accepted in
writing by both parties, and that waivers and amendments shall be effective only
if made by non-pre-printed agreements clearly understood by both parties to be
an amendment or waiver.
5.2 Assignability. This Agreement may not be assigned by either
-------------
party without the prior consent of the other party; provided, however that Buyer
may assign this Agreement to any entity which acquires substantially all of its
assets or business.
5.3 Severability. If any provision of this Agreement shall be held
------------
illegal or unenforceable, that provision shall be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain in full
force and effect and enforceable.
5.4 Further Assurances. Each party hereto agrees to execute,
------------------
acknowledge and deliver such further instruments, and to do all such other acts,
as may be necessary or appropriate in order to carry out the purposes and intent
of this Agreement.
5.5 Use of Party's Name. No right, express or implied, is granted by
-------------------
this Agreement to either party to use in any manner the name of the other or any
other trade name or trademark of the other in connection with the performance of
this Agreement.
5.6 Notice and Reports. All notices, consents or approvals required
------------------
by this Agreement shall be in writing and shall be deemed to have been given or
made for all purposes (i) upon personal delivery, (ii) one (1) day after being
sent, when sent by professional overnight courier service, (iii) five (5) days
after posting when sent by registered or certified mail or (iv) on the date of
transmission when sent by telegraph, telegram, telex or other form of "hard
copy" transmission, to either party hereto at the address set forth below or at
such other address as either party may designate by notice pursuant to this
Section 6.6.
If to Seller
or Michael Vermillion: Michael Vermillion
The Michaels Concepts in Wood, Inc.
5849 88th Street
Sacramento, CA 95822
If to Buyer: Thomas E. Low
c/o Restoration Hardware, Inc.
15 Koch Road, Suite J
Corte Madera, CA 94925
3.
<PAGE>
And a copy to:
Therese A. Mrozek
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
5.7 Relationships of the Parties. Both parties are independent
----------------------------
contractors under this Agreement. Nothing contained in this Agreement is
intended nor is to be construed so as to constitute Seller and Buyer as
partners, agents or joint venturers with respect to this Agreement. Neither
party hereto shall have any express or implied right or authority to assume or
create any obligations on behalf of or in the name of the other party or to bind
the other party to any contract, agreement or undertaking with any third party.
5.8 Waiver. The waiver by either party of a breach of any provisions
------
contained herein shall be in writing and shall in no way be construed as a
waiver of any succeeding breach of such provision or the waiver of the provision
itself.
5.9 Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of California without regard
to the conflicts of laws provisions thereof. BY EXECUTING THIS AGREEMENT, THE
PARTIES ARE AGREEING TO BE BOUND BY SECTION 9.15 (THE ARBITRATION PROVISION) OF
THAT CERTAIN STOCK PURCHASE AGREEMENT OF EVEN DATE HEREWITH BETWEEN BUYER AND
MICHAEL VERMILLION. THEREFORE, THE PARTIES ARE AGREEING TO HAVE ANY MATTER THAT
IS THE SUBJECT OF ARBITRATION PURSUANT TO THIS SECTION 5.9 DECIDED BY NEUTRAL
ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND ARE GIVING UP ANY RIGHTS THEY
MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY
EXECUTING THIS AGREEMENT, THE PARTIES ARE GIVING UP JUDICIAL RIGHTS TO DISCOVERY
AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE ARBITRATION
PROVISION OR ARE OTHERWISE PROVIDED BY CODE OF CIVIL PROCEDURE SECTION 1280 ET
SEQ.; IF ANY OF THE PARTIES REFUSES TO SUBMIT TO ARBITRATION IT MAY BE COMPELLED
TO ARBITRATE UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE. A PARTY'S AGREEMENT
TO THIS ARBITRATION IS VOLUNTARY. BY EXECUTING THIS AGREEMENT, EACH OF THE
PARTIES ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD THE FOREGOING AND HAS
AGREED TO SUBMIT DISPUTES ARISING OUT OF MATTERS INCLUDED IN THIS SECTION 5.9 TO
MUTUAL ARBITRATION. Service of process in any such action may be effected in
the manner provided in Section 5.6 for delivery of notices.
5.10 Captions. Paragraph captions are inserted for convenience only
--------
and in no way are to be construed to define, limit or affect the construction or
interpretation hereof.
4.
<PAGE>
5.11 Force Majeure. A party shall not be liable for nonperformance
-------------
or delay in performance (other than of obligations regarding payment of money or
confidentiality) caused by any event reasonably beyond the control of such party
including, but not limited to, wars, hostilities, revolutions, riots, civil
commotion, national emergency, strikes, lockouts, unavailability of supplies,
epidemics, fire, flood, earthquake, force of nature, explosion, embargo or any
other Act of God, or any law, proclamation, regulation, ordinance or other act
or order of any court, government or governmental agency.
5.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be effective as of the date first written above.
THE MICHAELS CONCEPTS IN WOOD, INC.
By: /s/ Michael Vermillion
----------------------------------------
Title: PRES
--------------------------------------
RESTORATION HARDWARE, INC.
By: /s/ Thomas Low
----------------------------------------
Title: CFO
--------------------------------------
SIGNATURE PAGE TO SUPPLY AGREEMENT
<PAGE>
EXHIBIT 10.12
FOURTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this
"Agreement") is made as of this _______ day of April, 1998, by and among
RESTORATION HARDWARE, INC. (sometimes herein "Restoration"), a California
corporation with its chief executive office and principal place of business at
15 Koch Road, Suite J, Corte Madera, California 94925 and THE MICHAELS FURNITURE
COMPANY, INC. (sometimes herein "Michael's") (each a "Borrower" and collectively
"Borrowers"); each of the lenders that is a signatory to this Agreement
(together with its successors and permitted assigns, individually, "Lender" and,
collectively, "Lenders"); and FLEET CAPITAL CORPORATION, a Rhode Island
corporation with an office at 15260 Ventura Boulevard, Suite 400, Sherman Oaks,
California 91403, as agent for the Lenders (in such capacity, together with its
successors, if any, in such capacity, "Agent"). Capitalized terms used in this
Agreement have the meanings assigned to them in Appendix A, General Definitions,
attached hereto. Accounting terms not otherwise specifically defined herein
shall be construed in accordance with GAAP consistently applied. This Agreement
amends and restates in full that certain Third Amended and Restated Loan and
Security Agreement dated December 11, 1997, among Restoration Hardware, Inc., as
the borrower, Sumitomo Bank of California, as a lender, and Fleet Capital
Corporation, as a lender and as agent (the "December 1997 Agreement").
SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, Lenders agree to make the Total Credit Facility available upon
Borrowers' request therefor, as follows:
1.1 Revolving Credit Loans.
----------------------
1.1.1 Loans and Reserves. Each Lender severally agrees, on the terms
------------------
and conditions of this Agreement and for so long as no Default or Event of
Default exists, to make Revolving Credit Loans to Borrowers from time to time
from and after the Closing Date, as requested by Borrowers in the manner set
forth in subsection 3.1.1 hereof, in a maximum principal amount at any time
outstanding up to but not exceeding:
(A) for Restoration, the amount of the Restoration Commitment
of such Lender for Revolving Credit Loans as in effect from time to time,
provided that in no event shall the aggregate principal amount of all Revolving
- --------
Credit Loans to Restoration plus the LC Amount exceed the lesser of (i) the
aggregate amount of the Restoration Commitments for Revolving Credit Loans as in
effect from time to time or (ii) the aggregate Restoration Borrowing Base at
such time minus reserves, if any, that may be established by Agent from time to
-----
time in accordance with this subsection; and provided, further that the
-------- -------
aggregate outstanding amount of Revolving Credit Loans to Restoration plus the
LC Amount shall not, for a period of at least 30 consecutive days in the period
from January 1 to February 28 of each year, exceed, for any reason, $15,000,000;
and
1
<PAGE>
(B) For Michael's, the amount of the Michael's Revolving Credit
Commitment of such Lender as in effect from time to time, provided that in no
--------
event shall the aggregate principal amount of all Revolving Credit Loans to
Michael's exceed the lesser of (i) the aggregate amount of the Michael's
Revolving Credit Commitments as in effect from time to time or (ii) the
aggregate Michael's Borrowing Base at such time minus reserves, if any, that may
-----
be established by Agent from time to time in accordance with this subsection.
Agent shall have the right to establish reserves in such amounts, and with
respect to such matters for each Borrower, as Agent shall deem necessary or
appropriate in the exercise of its reasonable commercial judgment, against the
amount of Revolving Credit Loans to each Borrower which such Borrower may
otherwise request under this subsection 1.1.1, including, without limitation,
with respect to (i) price adjustments, damages, unearned discounts, returned
products or other matters for which credit memoranda are issued in the ordinary
course of such Borrower's business; (ii) shrinkage, spoilage and obsolescence of
Inventory; (iii) slow moving Inventory; (iv) other sums chargeable against such
Borrower's Loan Account as Revolving Credit Loans as expressly provided for in
this Agreement; (v) amounts owing by such Borrower to any Person to the extent
secured by a Lien on, or trust over, any Property of such Borrower; (vi) amounts
owing and obligations incurred by Michael's in respect of obligations of Michael
Vermillion, and (vii) such other matters, events, conditions or contingencies as
to which Agent, in the exercise of its reasonable credit judgment, determines
reserves should be established from time to time hereunder.
1.1.2 Use of Proceeds. The Loans shall be used solely for (i) the
---------------
satisfaction in full on the Closing Date of the Indebtedness of Restoration to
the Lenders under the December 1997 Agreement (as provided in Section 1.5
hereof), (ii) the acquisition by Restoration of 100% of the capital stock of
Michael's, (iii) the purposes specified in Section 1.2, and (iv) Borrowers'
general operating capital needs in a manner consistent with the provisions of
this Agreement and all applicable laws.
1.2 Seasonal Facility. During the period from February 1, 1998 $500,000
-----------------
and (ii) 100% of actual store to December 31, 1998 and during the opening costs,
net of tenant improvement period from February 1 to December 31 of allowances;
provided that the aggregate each year thereafter, for so long as no amount
- --------
outstanding under the Seasonal Default or Event of Default exists, Facility
shall not exceed $10,000,000 at Lenders shall, ratably in accordance with any
time, and provided, further, that the their respective Restoration Commitments,
-------- -------
balance of the Seasonal Facility shall be provide a seasonal facility ("Seasonal
paid in full at all times from and Facility") to Restoration to fund the
including January 1 to and including opening of new stores in an amount for
January 31 of each year. Amounts drawn each such store opening equal to the
under the Seasonal Facility (each, a lesser of (i) "Seasonal Loan") shall be
payable interest-only until January 1 of each year (commencing January 1, 1999)
at which time all amounts outstanding under the Seasonal Facility, along with
all accrued but unpaid interest thereon, shall be due and payable in full.
Within the foregoing requirements and during the foregoing time periods, amounts
drawn under the Seasonal Facility may repaid and reborrowed from time to time;
provided that Restoration may borrow only one time in connection with the
- --------
2
<PAGE>
opening of any particular store. All outstanding principal and interest on the
Seasonal Loans shall be due and payable upon any termination of this Agreement.
1.3 Letters Of Credit. Agent shall, for so long as no Default or Event of
-----------------
Default exists, and if requested by Restoration, cause to be issued letters of
credit for the account of Restoration (collectively with any guaranties thereof
given by Agent, "Letters of Credit"); provided that the aggregate outstanding
--------
amount, without duplication, of all Letters of Credit (the "LC Amount") at any
time shall not exceed $1,500,000. The Letters of Credit shall constitute a
subline of the Restoration Commitment. No Letter of Credit may have an
expiration date that is after the last day of the Original Term or the then
current Renewal Term. Immediately upon the issuance of each Letter of Credit,
the Agent shall be deemed to have sold and transferred to each Lender, and each
Lender shall be deemed to have purchased and received from the Agent, in each
case irrevocably and without any further action by any party, an undivided
interest and participation in such Letter of Credit, as applicable, each drawing
thereunder and the obligations of Restoration under this Agreement in respect
thereof in an amount equal to the product of (x) such Lender's Restoration
Commitment Percentage times (y) the maximum amount available to be drawn under
such Letter of Credit (assuming compliance with all conditions to drawing). Any
amounts paid by Agent or Lenders in connection with any Letter of Credit shall
be treated as Revolving Credit Loans to Restoration, shall be secured by all of
the Collateral and, unless and until converted in accordance with the terms of
this Agreement, shall bear interest and be payable at the same rate and in the
same manner as Base Rate Revolving Credit Loans. A reserve shall be charged
against the Restoration Borrowing Base based on 100% of the LC Amount from time
to time. All Letters of Credit will be processed through Agent's Treasury and
International Services Group.
1.4 Term Loan. Lenders agree, ratably in accordance with their respective
---------
Michael's Term Loan Commitments, to make a term loan to Michael's on the Closing
Date in the principal amount of $5,000,000. The Term Loan shall be repayable to
the Lenders in accordance with the terms of the Term Notes, shall be amortized
as set forth in the following schedule and shall be secured by all of the
Collateral.
Period Monthly Principal Payment
-----------------------------------------------------------------
July 1, 1998 through $ 41,666.67
September 1, 1998
October 1, 1998 $ 53,571.43
through April 1, 1999
May 1, 1999 through $ 41,666.67
April 1, 2000
May 1, 2000 through $ 83,333.33
April 1, 2001
3
<PAGE>
May 1, 2001 through $125,000.00
April 1, 2002
May 1, 2002 through $125,000.00
March 1, 2003 (with the final principal installment
being all remaining unpaid principal)
1.5 Amendment and Restatement. On the Closing Date, all loans outstanding
-------------------------
under the December 1997 Agreement shall become Loans to Restoration under this
Agreement, of the same type and amount, and the Loans by each of the Lenders
shall be adjusted according to their Commitment Percentage hereunder.
SECTION 2. INTEREST, FEES AND CHARGES
2.1 Interest.
--------
2.1.1 Rates of Interest.
-----------------
(i) Interest shall accrue on the principal amount of the
Base Rate Portions of the Revolving Credit Loans outstanding at the end of
each day at a fluctuating rate per annum equal to the Base Rate, subject to
reduction as provided below in this subsection 2.1.2. If either Borrower
properly exercises its LIBOR Option, as provided in Section 2.3, interest
shall accrue on the principal amount of the LIBOR Revolving Credit Portions
outstanding at the end of each day at a rate per annum equal to 200 basis
points plus the LIBOR Rate applicable to each LIBOR Revolving Credit
Portion for the corresponding LIBOR Period. If Restoration raises between
$15,000,000 and $30,000,000, net of costs of issuance, from an initial
public offering of its stock, and if no Default or Event of Default then
exists, the interest rates applicable to the LIBOR Revolving Credit Loans
shall be reduced by 25 basis points, commencing on the first day of the
first month after Borrower receives the proceeds from such offering. If
Borrower raises in excess of $30,000,000, net of costs of issuance, from an
initial public offering of its stock, and no Default or Event of Default
then exists, the interest rates applicable to the LIBOR Revolving Credit
Loans shall be reduced by 50 basis points (but as to Michael's, only if its
Term Loan is paid in full from the proceeds thereof), commencing on the
first day of the first month after Borrower receives the proceeds from such
offering. The foregoing interest rate reductions shall not be applicable to
Revolving Credit Loans which bear interest based upon the Base Rate.
(ii) Interest shall accrue on the principal amount of the
Seasonal Loans outstanding at the end of each day at a fluctuating rate per
annum equal to the Base Rate plus 0.75%.
(iii) Interest shall accrue on the unpaid principal balance of
the Term Loan outstanding from time to time at a fluctuating rate per annum
equal to 1.25% plus the Base Rate.
4
<PAGE>
2.1.2 Adjustment of Interest Rates. The rate of interest on all Base
----------------------------
Rate Loans shall increase or decrease by an amount equal to any increase or
decrease in the Base Rate, effective as of the opening of business on the day
that any such change in the Base Rate occurs.
2.1.3 Default Rate of Interest. Upon the occurrence of an Event of
------------------------
Default and during the continuation thereof, effective upon the serving of
notice by Agent to Borrowers, the principal amount of all Loans shall bear
interest at a fluctuating rate per annum equal to 2.0% in excess of the Base
Rate interest option then applicable to such Loans (the "Default Rate"). While
the Default Rate is in effect, the LIBOR Option shall not be available.
2.1.4 Letters of Credit. Restoration shall pay to Agent (for its own
-----------------
account as guarantor of a Letter of Credit) the following fees, payable as
indicated: (i) $95 upon issuance of a Letter of Credit, and (ii) $75 for any
amendment to a Letter of Credit, provided that automatic renewal or amendment to
increase and/or extend a Letter of Credit shall be billed as an issuance
thereof. In addition to the foregoing, if the LC Amount is in excess of
$100,000 at any time, Restoration shall pay to Agent, for the pro rata benefit
of Lenders, a fee equal to 2.0% of the LC Amount plus 2.0% of the face amount of
any Letter of Credit issued while the LC Amount is in excess of $100,000;
provided that such 2.0% fee shall be payable only once with respect to any
- --------
particular Letter of Credit. No other fees or costs in connection with the
issuance or guaranty of Letters of Credit shall be payable by Restoration.
2.1.5 Maximum Interest. In no event whatsoever shall the aggregate
----------------
of all amounts deemed interest hereunder and charged or collected pursuant to
the terms of this Agreement exceed the highest rate permissible under any law
which a court of competent jurisdiction shall, in a final determination, deem
applicable hereto.
2.2 Computation of Interest and Fees. Interest, unused line fees and
--------------------------------
collection charges hereunder shall be calculated daily and shall be computed on
the actual number of days elapsed over a year of 360 days. For the purpose of
computing interest hereunder, all items of payment received by Agent shall be
deemed applied by Agent on account of the Obligations (subject to final payment
of such items) on the day of receipt by Agent of such items in Agent's account
set forth in subsection 3.7.1 or in such other account to which Agent directs
payment.
2.3 LIBOR Option.
------------
(i) Upon the conditions that (1) Agent shall have received a
LIBOR Request from a Borrower at least 3 Business Days prior to the first
day of the LIBOR Period requested, (2) there shall have occurred no change
since the date of this Agreement in applicable law which would make it
unlawful for Lenders to obtain deposits of U.S. dollars in the London
interbank foreign currency deposits market, (3) as of the date of the LIBOR
Request and the first day of the LIBOR Period, there shall exist no Default
or Event of Default, (4) Lenders are able to determine the LIBOR Rate in
respect of the requested LIBOR Period and Lenders are able to obtain
deposits of U.S. dollars in the London interbank foreign currency deposits
market in the applicable amounts and for the requested LIBOR Period, and
(5) as of the first date of the LIBOR
5
<PAGE>
Period, there are no more than six (6) outstanding LIBOR Revolving Credit
Portions including the LIBOR Revolving Credit Portion being requested, then
interest on the LIBOR Revolving Credit Portion requested during the LIBOR
Period requested will be based on the applicable LIBOR Rate.
(ii) Each LIBOR Request shall be irrevocable and binding on
the requesting Borrower. Borrowers shall indemnify Lenders for any loss,
penalty or expense incurred by Lenders due to failure on the part of
Borrowers to fulfill, on or before the date specified in any LIBOR Request,
the applicable conditions set forth in this Agreement or due to the
prepayment of the applicable LIBOR Revolving Credit Portion prior to the
last day of the applicable LIBOR Period, including, without limitation, any
loss or expense incurred by reason of the liquidation or redeployment of
deposits or other funds acquired by Lenders to fund or maintain the
requested LIBOR Revolving Credit Portion.
(iii) If any Legal Requirement shall (1) make it unlawful for
Lenders to fund through the purchase of U.S. dollar deposits any LIBOR
Revolving Credit Portion or otherwise give effect to its obligations as
contemplated under this Section 2.3, or (2) shall impose on Lenders any
costs based on or measured by the excess above a specified level of the
amount of a category of deposits or other liabilities of Lenders which
includes deposits by reference to which the LIBOR Rate is determined as
provided herein or a category of extension of credit or other assets of
Lenders which includes any LIBOR Revolving Credit Portion or (3) shall
impose on Lenders any restrictions on the amount of such a category of
liabilities or assets which Lenders may hold, then, in each such case,
Agent may, by notice thereof to Borrowers, terminate the LIBOR Option. Any
LIBOR Revolving Credit Portion subject thereto shall immediately bear
interest thereafter at the rate and in the manner provided for the Base
Rate Revolving Credit Portion pursuant to subsection 2.1.1. Borrowers
shall indemnify Lenders against any loss, penalty or expense incurred by
Lenders due to liquidation or redeployment of deposits or other funds
acquired by Lender to fund or maintain any LIBOR Revolving Credit Portion
that is terminated hereunder.
(iv) Lenders shall receive payments of amounts of principal
of and interest on the Loans with respect to the LIBOR Revolving Credit
Portions free and clear of, and without deduction for, any Taxes. If (1)
Lenders shall be subject to any Tax in respect of any LIBOR Revolving
Credit Portion or any part thereof or, (2) Borrowers shall be required to
withhold or deduct any Tax from any such amount, the LIBOR Rate applicable
to such LIBOR Revolving Credit Portion shall be adjusted by Lenders to
reflect all additional costs incurred by Lenders in connection with the
payment by Lenders or the withholding by Borrowers of such Tax and
Borrowers shall provide Lenders with a statement detailing the amount of
any such Tax actually paid by Borrowers. Determination by Lenders of the
amount of such costs shall, in the absence of manifest error, be
conclusive. If after any such adjustment any part of any Tax paid by
Lenders is subsequently recovered by Lenders, Lenders shall reimburse
Borrowers to the extent of the amount so recovered. A certificate of an
officer of Agent setting forth the
6
<PAGE>
amount of such recovery and the basis therefor shall, in the absence of
manifest error, be conclusive.
(v) Prior to the date of the initial Borrowing in the case
of the Agent and each Lender listed on the signature pages hereof, and on
the date of any assignment pursuant to which it became a Lender in the case
of each other Lender, organized under the laws of a jurisdiction outside
the United States, shall provide the Agent and the Borrowers with the forms
prescribed by the Internal Revenue Service of the United States certifying
as to such Lender's or the Agent's status for purposes of determining
exemption from United States withholding taxes with respect to all payments
to be made to such Lender or the Agent hereunder or other documents
satisfactory to the Agent indicating that all payments to be made to such
Lender or the Agent, as the case may be, hereunder are subject to such
taxes at a rate reduced by an applicable tax treaty. Notwithstanding
paragraph (iv) above, unless the Borrowers and the Agent have received
forms or other documents satisfactory to them indicating that payments
hereunder are not subject to United States withholding tax, the Borrowers
or the Agent shall withhold taxes from such payments at the applicable
statutory rate or such lower rate as provided in an applicable tax treaty
(if such Lender or the Agent, if applicable, has provided the required
forms entitling it to such reduced withholding rate) in the case of
payments to or for any Lender or an Agent organized under the laws of a
jurisdiction outside the United States.
(vi) Any Lender claiming any additional amounts payable
pursuant to this Section 2.3 shall use its reasonable efforts (consistent
with its internal policy and legal and regulatory restrictions) to change
the jurisdiction of the office or branch in which it books the Loans if the
making of such a change would avoid the need for, or reduce the amount of,
any such additional amounts which may thereafter accrue and would not, in
the reasonable judgment of such Lender, be otherwise disadvantageous to
such Lender.
2.4 Closing Fee. Borrowers shall pay to Agent, on the Closing Date, a
-----------
Closing Fee as set forth in the Fee Letter, which fee shall be fully earned and
nonrefundable and shall be paid concurrently with the making of the initial
Loans hereunder as set forth in Section 1.1 hereof.
2.5 Unused Line Fee.
---------------
2.5.1 Restoration. Restoration shall pay to Agent, for the pro rata
-----------
benefit of the Lenders, a fee equal to 0.25% per annum of the amount by which
(x) the average amount obtained during any month pursuant to clause (ii)(a) of
the definition of Restoration Borrowing Base exceeds (y) the sum of the average
outstanding principal balance of Restoration's Revolving Credit Loans plus the
average LC Amount during such month. Such unused line fee shall be payable
monthly in arrears on the first day of each calendar month hereafter.
2.5.2 Michael's. Michael's shall pay to Agent, for the pro rata
---------
benefit of the Lenders, a fee equal to 0.25% per annum of the amount by which
(x) the average Michael's Borrowing Base during any month exceeds (y) the
average outstanding principal balance of
7
<PAGE>
Michael's Revolving Credit Loans during such month. Such unused line fee shall
be payable monthly in arrears on the first day of each calendar month hereafter.
2.6 Reimbursement of Expenses. If, at any time or times regardless of
-------------------------
whether or not an Event of Default then exists, Agent incurs legal or accounting
expenses or any other out-of-pocket costs or expenses in connection with (i) the
negotiation and preparation of this Agreement or any of the other Loan
Documents, including all search, recording, filing, title search, title policy
fees and the like, any amendment of or modification of this Agreement or any of
the other Loan Documents; (ii) the administration of this Agreement or any of
the other Loan Documents and the transactions contemplated hereby and thereby;
(iii) any litigation, contest, dispute, suit, proceeding or action (whether
instituted by Agent, any Lender, any Borrower or any other Person) in any way
relating to the Collateral, this Agreement or any of the other Loan Documents;
(iv) any attempt to enforce any rights of Agent, any Lender, or any
Participating Lender against any Borrower or any other Person which may be
obligated to Agent or any Lender by virtue of this Agreement or any of the other
Loan Documents, including, without limitation, the Account Debtors; (v) any
attempt to inspect (including audits and appraisals), verify, protect, preserve,
restore, collect, sell, liquidate or otherwise dispose of or realize upon the
Collateral or (vi) any Default or Event of Default and any enforcement or
collection proceedings (including any bankruptcy, reorganization, workout or
other similar proceeding) resulting from such Default or Event of Default or in
connection with the negotiation of any restructuring or "work-out" (whether or
not consummated) of the obligations of Borrowers under the Loan Documents; then
all such reasonable legal and other actual out of pocket costs and expenses
(collectively, "Lenders' Costs") shall, to the extent incurred, be charged to
Borrowers; provided, however, that Borrowers shall not be charged in excess of
-------- -------
$10,000 in the aggregate under clauses (ii) and (v) of this Section 2.6 during
any calendar year in which no Event of Default has occurred or existed. All
amounts chargeable to Borrowers under this Section 2.6 shall be charged to the
Loan Account of the Borrower who incurred such charge to the extent
identifiable, and if not identifiable, at Agent's option, charged to each
Borrower's Loan Account in proportion to each Borrower's then outstanding
balance, in each case as Revolving Credit Loans, or otherwise be payable on
demand to Agent (for the account of the Person to whom such amount is payable),
shall be Obligations secured by all of the Collateral and shall bear interest
from the date charged to the Loan Account (or from the date following the date
demand is made, if not so charged) until paid in full at the rate applicable to
Base Rate Revolving Credit Loans from time to time (unless and until converted
in accordance with the terms of this Agreement). Borrowers shall also reimburse
Agent for expenses incurred by Agent in its administration of the Collateral to
the extent and in the manner provided in Section 6 hereof.
2.7 Bank Charges. Each Borrower shall pay to Agent, on demand, any and
------------
all fees, costs or expenses which Agent pays to a bank or other similar
institution arising out of or in connection with (i) the forwarding to such
Borrower or any other Person on behalf of such Borrower, by Agent, of proceeds
of loans made by Lenders to such Borrower pursuant to this Agreement and (ii)
the depositing for collection by Agent of any check or item of payment received
or delivered to Agent on account of the Obligations. Notwithstanding the
foregoing however, Borrowers shall not be responsible for fees, costs or
expenses incurred by Agent or Lenders in transferring funds between or among
Agent and Lenders.
8
<PAGE>
SECTION 3. LOAN ADMINISTRATION
3.1 Manner of Borrowing Loans. Borrowings under the credit facility
-------------------------
established pursuant to Section 1 hereof shall be as follows:
3.1.1 Loan Requests.
-------------
(i) A request for Revolving Credit Loans shall be made, or
shall be deemed to be made, in the following manner: (a) a Borrower may
give Agent notice of its intention to borrow, in which notice such Borrower
shall specify the amount of the proposed borrowing and the proposed
borrowing date (which shall be a Business Day), no later than 10:00 a.m.
Pacific time on the proposed borrowing date (subject to such additional
requirements as are set forth in Section 2.3 for the LIBOR Option),
provided, however, that Agent may, or, if so directed in writing by
--------
Required Lenders, shall (subject to Agent's right to make Discretionary
Extensions as provided in subsection 3.1.4 hereof) refuse such request at a
time when there exists a Default or an Event of Default; and (b) the
failure of any Borrower to pay when due any amount required to be paid
under this Agreement, whether as interest or for any other Obligation,
shall be deemed irrevocably to be a request by such Borrower for a Base
Rate Revolving Credit Loan on the due date in the amount required to pay
such interest or other Obligation and the advance of such Revolving Credit
Loan shall discharge such Obligation.
(ii) Restoration shall request a Seasonal Loan by giving
Agent notice of its intention to borrow, in which notice Restoration shall
specify the amount of the proposed borrowing and the proposed borrowing
date (which shall be a Business Day), no later than 10:00 a.m. Pacific time
on the proposed borrowing date, provided, however, that Agent may refuse,
or, if so directed in writing by Required Lenders, shall refuse, such
request at a time when there exists a Default or an Event of Default. Each
such request for a Seasonal Loan shall be accompanied by a Borrowing
Request Certificate in the form of Exhibit 3.1.1 hereto and such
-------------
documentation relating to the store opening to be financed as Agent shall
reasonably require.
(iii) As an accommodation to Borrowers, Agent may, but shall
not be obligated to, permit telephonic requests for loans and electronic
transmittal of instructions, authorizations, agreements or reports to Agent
by Borrowers. Unless a Borrower or Required Lenders specifically directs
Agent in writing not to accept or act upon telephonic or electronic
communications from such Borrower, Agent shall have no liability to such
Borrower or Lenders for any loss or damage suffered by such Borrower or
Lenders as a result of Agent's honoring of any requests, execution of any
instructions, authorizations or agreements or reliance on any reports
communicated to it telephonically or electronically and purporting to have
been sent to Agent by such Borrower, and Agent shall have no duty to verify
the origin of any such communication or the authority of the person sending
it.
9
<PAGE>
3.1.2 Funding by Lenders. Agent shall from time to time, but no less
------------------
frequently than weekly, notify each Lender of the date such Lender is to fund
its Loans and the amount to be made available by it. At the discretion of
Agent, the amount to be made available by a Lender on any date may be netted
against any amount owing to such Lender and otherwise payable by Agent on
account of payments received by it from Borrowers on such date. The amount to
be made available by each Lender on any date shall be made available by it on
such date to Agent, at account number [937-001-4304, ABA #011900445] (or such
other account as Agent shall have designated in writing to Lenders) maintained
by Agent with Bank at its office located at 777 Main Street, Hartford,
Connecticut 06115-2000, in immediately available funds, not later than 1:00 p.m.
Pacific time on any day in the case of fundings of which Lenders have received
notice not later than 10:30 a.m. Pacific time on such day (or, if notice is
received after such time, not later than 10:00 a.m. Pacific time on the next
succeeding Business Day). Except as otherwise specifically set forth herein,
the obligation of each Lender to fund its Loans on the date specified by Agent
(even if made available by Agent to a Borrower prior to requiring the funding by
such Lender) is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including (i) any set-off, counterclaim, recoupment,
defense or other right which such Lender may have against Agent, Borrowers or
any other Person for any reason whatsoever, (ii) the occurrence or continuation
of a Default or Event of Default, whether the same shall occur before or after
Agent shall have made the Loans available to Borrowers, (iii) the financial
condition or prospects of Borrowers, (iv) the failure of any other Lender to
make its Loans available to Agent, or (v) any other circumstance, happening or
event whatsoever, whether or not similar to any of the foregoing.
Notwithstanding the foregoing, any Lender may notify Agent during the
continuation of an Event of Default that such Lender will not fund future Loans
and, after receipt of such notice by Agent and until such notice is revoked or
such Event of Default is cured or waived as provided herein, such Lender shall
not be obligated to fund any Loans.
3.1.3 Disbursement by Agent. Borrowers and each Lender hereby
---------------------
irrevocably authorize Agent to disburse the proceeds of Loans requested, or
deemed to be requested, pursuant to this Agreement as follows: (i) the proceeds
of Revolving Credit Loans requested under subsection 3.1.1(i)(a) and Seasonal
Loans requested pursuant to subsection 3.1.1(ii), shall (subject, if applicable,
to receipt by Agent of funds from Lenders) be disbursed by Agent in lawful money
of the United States of America in immediately available funds, in the case of
the initial borrowing, in accordance with the terms of the written disbursement
letter from a Borrower, and in the case of each subsequent borrowing, by wire
transfer to such bank account as may be specified by each Borrower to Agent from
time to time; and (ii) the proceeds of Revolving Credit Loans deemed requested
under subsection 3.1.1(i)(b) shall (subject, if applicable, to receipt by Agent
of funds from Lenders) be disbursed by Agent by way of direct payment of the
relevant interest or other Obligation or, if applicable, retained by Lenders and
applied as set forth in Section 3.3.
3.1.4 Funding of Overadvances. Agent may, with the consent of all
-----------------------
Lenders, make Revolving Credit Loans or issue Letters of Credit on behalf of
Lenders as requested by Borrowers pursuant to subsection 3.1.1 or Section 1.3
hereof in excess of the Restoration Borrowing Base or the Michael's Borrowing
Base (as applicable, a "Discretionary Extension"). Any such Discretionary
Extensions shall be due on demand of Agent, and the making of any
10
<PAGE>
such Discretionary Extensions at any time shall not be deemed to constitute a
waiver of any condition applicable to any future borrowing nor a waiver of any
Default or Event of Default, and Agent and Lenders reserve all of their rights
with respect thereto.
3.1.5 Authorization. Borrowers hereby irrevocably authorize Lenders,
-------------
in the sole discretion of Agent (should Borrowers not discharge such
obligation), to advance to Borrowers, and to charge to the applicable Borrower's
Loan Account hereunder as a Base Rate Revolving Credit Loan, a sum sufficient to
pay all interest accrued on such Borrower's Obligations during any calendar
month and to pay all costs, fees and expenses at any time owed by such Borrower
to Lenders or Agent hereunder. Amounts advanced pursuant to this subsection
3.1.5 shall be deemed to have been requested by Borrowers pursuant to subsection
3.1.1(i)(b), and the provisions of subsections 3.1.2 and 3.1.3 shall be
applicable to each such advance. Agent may, in its sole discretion, make
Discretionary Extensions of $2,000,000 in the aggregate, for a period not to
exceed 45 days (with respect to Michaels, not to exceed the lesser of (i)
$300,000 or (ii) 10% of the Borrowing Base).
3.1.6 Non-Receipt of Funds by Agent. Unless Agent shall have been
-----------------------------
notified by a Lender prior to the date on which such Lender is to make payment
to Agent of the proceeds of a Loan to be made by such Lender under this
Agreement (the "Required Payment"), which notice shall be effective upon
receipt, that such Lender does not intend to make the Required Payment to Agent,
Agent may assume that the Required Payment has been made and may, in reliance
upon such assumption (but shall not be required to), make the amount of such
payment available to a Borrower on such date. If for any reason such Lender has
not in fact made the Required Payment to Agent, Agent shall be entitled to
recover such amount on demand from such Lender, together with interest on such
amount in respect of each day during the period commencing on the date such
amount was so made available by Agent until the date Agent recovers such amount,
at a rate per annum equal to Agent's cost of funds as determined by Agent and
notified to such Lender.
3.1.7 Several Obligations; Remedies Independent. The failure of any
-----------------------------------------
Lender to make any Loan to be made by it on the date specified for such Loan
shall not relieve any other Lender of its obligation to make its Loan on such
date, but neither any Lender nor Agent shall be responsible for the failure of
any other Lender to make a Loan to be made by such other Lender, and no Lender
shall have any obligation to Agent or any other Lender for the failure by such
Lender to make any Loan required to be made by such Lender. The amounts payable
by Borrowers at any time under this Agreement and the other Loan Documents to
each Lender shall be separate and independent debts and each Lender shall be
entitled to protect and enforce its rights arising out of this Agreement and the
other Loan Documents (except that Agent shall be exclusively charged with the
enforcement of the Collateral on behalf of Lenders), and it shall not be
necessary for any other Lender or the Agent to consent to, or be joined as an
additional party in, any proceedings for such purposes.
3.2 Payments. Except where evidenced by notes or other instruments issued
--------
or made by a Borrower to Agent or any Lender specifically containing payment
provisions which are in
11
<PAGE>
conflict with this Section 3.2 (in which event the conflicting provisions of
said notes or other instruments shall govern and control), the Obligations shall
be payable as follows:
3.2.1 Principal. Principal payable on account of Revolving Credit
---------
Loans shall be payable by Borrowers to Agent for the account of Lenders
immediately upon the earliest of (i) the receipt by Agent or Borrowers of any
proceeds in excess of $100,000 for any single transaction or event concerning
any of the Collateral (other than sales in the ordinary course of each
Borrower's business and collection by Restoration of TI Accounts), to the extent
of said proceeds, (ii) the occurrence of an Event of Default in consequence of
which Agent or Required Lenders elect to accelerate the maturity and payment of
the Obligations, or (iii) termination of this Agreement pursuant to Section 4
hereof; provided, however, that if an Overadvance shall exist at any time,
Borrowers shall, on demand of Agent, repay the Overadvance. Principal on
account of Seasonal Loans and Term Loan shall be payable in the manner set forth
in Sections 1.2 and 1.4, respectively.
3.2.2 Interest. Interest accrued on the Loans shall be due on the
--------
earliest of (i) the first calendar day of each calendar month (for the
immediately preceding calendar month), computed through the last calendar day of
the preceding calendar month, (ii) the occurrence of an Event of Default in
consequence of which Agent or Required Lenders elect to accelerate the maturity
and payment of the Obligations or (iii) termination of this Agreement pursuant
to Section 4 hereof.
3.2.3 Costs, Fees and Charges. Costs, fees and charges payable
-----------------------
pursuant to this Agreement shall be payable by Borrowers as and when provided in
Section 2 hereof.
3.2.4 Other Obligations. The balance of the Obligations requiring
-----------------
the payment of money, if any, shall be payable by Borrowers to Agent as and when
provided in this Agreement and the other Loan Documents, or on demand of Agent
if no date for payment is specified.
3.3 Application of Payments and Collections. All items of payment
---------------------------------------
received by Agent shall be deemed to be payments under this Agreement and
applied for purposes of computing interest (subject to Section 2.2 hereof) on
the day such payment is received. Borrowers irrevocably waive the right to
direct the application of any and all payments and collections at any time or
times hereafter received by Agent or any Lender from or on behalf of Borrowers,
and Borrowers do hereby irrevocably agree that Agent shall have the continuing
exclusive right to apply and reapply any and all such payments and collections
received at any time or times hereafter by Agent or Lenders (or their respective
agents) against the Obligations, in such manner as Agent may deem advisable,
notwithstanding any entry by Agent or any Lender upon any of its books and
records. If the amount in the Loan Account of a Borrower at any time exceeds
the outstanding Obligations of that Borrower, Agent will promptly transfer such
surplus funds to such Borrower's bank account, as identified to Agent in
accordance with this Agreement.
12
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3.4 All Loans to Constitute One Obligation. The Loans shall constitute
--------------------------------------
one general joint and several Obligation of Borrowers, and shall be secured by
the Lien of Agent and Lenders upon all of the Collateral.
3.5 Loan Account. Agent shall enter all Loans by a Borrower as debits to
------------
such Borrower's Loan Account and shall also record in the Loan Account all
payments made by such Borrower on any Obligations and all proceeds of Collateral
which are finally paid to Agent and Lenders, and may record therein, in
accordance with customary accounting practice, other debits and credits,
including interest and all charges and expenses properly chargeable to such
Borrower.
3.6 Statements of Account. Agent will account to Borrowers and each
---------------------
Lender monthly with a statement of Loans, charges and payments made pursuant to
this Agreement, and any such account rendered by Agent shall be deemed final,
binding and conclusive upon each Borrower in the absence of manifest error
unless Agent is notified by a Borrower in writing to the contrary within 30 days
of the date such accounting is mailed to Borrowers. Such notice shall only be
deemed an objection to those items specifically objected to therein.
3.7 General Provisions.
------------------
3.7.1 Except to the extent otherwise provided in this Agreement or
any other Loan Document, all payments of any Obligations shall be made in U.S.
dollars, in immediately available funds, without deduction, set-off or
counterclaim, to Agent at account number 937-001-4304, ABA #011900445 (or such
other account as Agent shall have designated in writing to Borrower) maintained
by Agent with Bank at its office located at 777 Main Street, Hartford,
Connecticut 06115-2000 (or such other account as Agent shall have designated in
writing to Borrower), not later than 10:00 a.m. Pacific time on the date on
which such payment shall become due (each such payment made after such time on
such due date to be deemed to have been made on the next succeeding Business
Day).
3.7.2 Each payment received by Agent under this Agreement of any
Obligation for the account of any Lender shall (subject to subsection 3.1.2
hereof) be paid by Agent promptly to such Lender, in immediately available
funds, to the account of such Lender specified in Annex 1 hereto (or to such
other account specified by such Lender in a written notice to Agent).
3.7.3 If the due date of any payment of any Obligation would
otherwise fall on a day that is not a Business Day, such date shall be extended
to the next succeeding Business Day, and interest shall be payable for any
principal so extended for the period of such extension.
3.8 Pro Rata Treatment. Except to the extent otherwise provided in this
------------------
Agreement: (a) the making and conversion of Loans shall be made pro rata among
the Lenders according to the amounts of their respective Commitments (in the
case of making of Loans) or their respective Loans (in the case of conversions
of Loans); and (b) each payment on account of any Obligations to or for the
account of one or more of the Lenders in respect of any Obligations due on a
13
<PAGE>
particular day (or, if such day is not a Business Day, the next succeeding
Business Day) shall be entitled to priority over payments in respect of
Obligations not then due and shall be allocated among Lenders entitled to such
payments pro rata in accordance with the respective amounts due and payable to
such Lenders on such day (or Business Day) and shall be distributed accordingly.
Nothing in this Section 3.8 shall be deemed to prevent, except in the case of
shortfall, the differential indemnity and other amounts owing to or for the
account of a particular Lender or Lenders pursuant to any provisions of any Loan
Document which, by its terms, requires differential payments.
3.9 Sharing of Payments, Etc.
------------------------
3.9.1 Borrowers agree that, in addition to (and without limitation
of) any right of set-off, banker's lien or counterclaim any Lender may otherwise
have, each Lender shall be entitled during the continuation of an Event of
Default, at its option but only with the prior consent of Agent, to offset
balances held by it for the account of any Borrower at any of its offices, in
U.S. dollars or in any other currency, against any Obligations of such Borrower
to such Lender that are not paid when due (regardless of whether such balances
are then due to Borrower). Any Lender so entitled shall promptly notify such
Borrower and Agent of any offset effected by it, provided that such Lender's
failure to give such notice shall not affect the validity of such offset.
3.9.2 If any Lender shall obtain from a Borrower payment of any
Obligation through the exercise of any right of set-off, banker's lien or
counterclaim or similar right or otherwise (other than from Agent as provided in
this Agreement), and, as a result of such payment, such Lender shall have
received a greater amount of the Obligations than the amount allocable to such
Lender under Section 3.8 hereof, it shall promptly purchase from such other
Lenders participations in (or, if and to the extent specified by such Lender,
direct interests in) such Obligations owing to such other Lenders in such
amounts, and make such other adjustments from time to time as shall be
equitable, to the end that all Lenders shall share the benefit of such excess
payment (net of any expenses that may be incurred by such Lender in obtaining or
preserving such excess payment) pro rata in accordance with the unpaid
Obligations owing to each Lender. To such end all Lenders shall make
appropriate adjustments among themselves (by the resale of participations sold
or otherwise) if such payment is rescinded or must otherwise be restored.
3.9.3 Borrowers agree that any Lender so purchasing such a
participation (or direct interest) may during the continuation of an Event of
Default exercise all rights of set-off, banker's lien, counterclaim or similar
rights with respect to such participation as fully as if such Lender were a
direct holder of Loans or other amounts (as the case may be) owing to such
Lender in the amount of such participation.
3.9.4 Nothing contained in this Section 3.9 shall require any Lender
to exercise any such right or shall affect the right of any Lender to exercise,
and retain the benefits of exercising, any such right with respect to any other
indebtedness or obligation of Borrowers. If, under any applicable bankruptcy,
insolvency or other similar law, any Lender receives a secured
14
<PAGE>
claim in lieu of a set-off to which this Section 3.9 applies, such Lender shall,
to the extent practicable, exercise its rights in respect of such secured claim
in a manner consistent with the rights of Lenders entitled under this Section
3.9 to share in the benefits of any recovery on such secured claim.
SECTION 4. TERM AND TERMINATION
4.1 Term of Agreement. Subject to the right of Lenders to cease making
-----------------
Loans and other credit accommodations to Borrowers in accordance with the
provisions of this Agreement upon or after the occurrence of any Default or
Event of Default, this Agreement shall be in effect until December 22, 1999 (the
"Original Term") and shall automatically terminate without notice by any party
at the end of the Original Term, unless earlier terminated as provided in
Section 4.2 hereof. This Agreement may be renewed or extended only by mutual
agreement of all of the parties hereto (each, a "Renewal Term").
4.2 Termination.
-----------
4.2.1 Termination by Required Lenders. Agent (upon direction of
-------------------------------
Required Lenders) may terminate the Commitments without notice upon or after the
occurrence of an Event of Default.
4.2.2 Termination by Borrowers. Upon at least 90 days prior written
------------------------
notice to Agent, Borrowers may, at their option, collectively and not
individually, terminate this Agreement; provided, however, no such termination
-------- -------
shall be effective until Borrowers have paid all of the Obligations (including
any applicable termination charges) then due in immediately available funds (and
made provision for identified contingent Obligations, including without
limitation, outstanding Letters of Credit, in form and substance acceptable to
Agent). Any notice of termination given by Borrowers shall be irrevocable
unless Agent otherwise agrees in writing, and Lenders shall have no obligation
to make any Loans on or after the termination date stated in such notice.
Borrowers may elect to terminate this Agreement in its entirety only. No
section of this Agreement or type of Loan available hereunder may be terminated
singly or by any Borrower acting on its own behalf.
4.2.3 Termination Charges. At the effective date of termination of
-------------------
this Agreement by Agent after an Event of Default or by Borrowers for any
reason, Borrowers shall pay to Agent for the account of Lenders (in addition to
the then outstanding principal, accrued interest and other charges owing under
the terms of this Agreement and any of the other Loan Documents) as liquidated
damages for the loss of the bargain and not as a penalty, an amount equal to the
following percentages of the average outstanding Loan balance (including the LC
Amount) during the 12 months preceding termination: (i) 0.5% if termination
occurs prior to December 22, 1998, and (ii) 0.25% if termination occurs
thereafter but prior to the end of the Original Term. If termination occurs on
the last day of the Original Term or any Renewal Term, no termination charge
shall be payable. If the Agreement is terminated and the Loans are paid in full
with the proceeds of an initial public offering of Restoration's stock
(substantially
15
<PAGE>
concurrently with such offering), no termination charge under this subsection
4.2.3 shall be payable.
4.2.4 Effect of Termination. The Commitments shall terminate and all
---------------------
of the Obligations shall be immediately due and payable upon the maturity date
(including any termination date stated in any notice of termination of this
Agreement). All undertakings, agreements, covenants, warranties and
representations of Borrowers contained in the Loan Documents shall survive any
such termination and Agent and Lenders shall retain its and their Liens in the
Collateral and all of its and their rights and remedies under the Loan Documents
notwithstanding such termination until Borrowers have paid the Obligations then
due (and made provision for identified contingent Obligations, including without
limitation, outstanding Letters of Credit, in form and substance acceptable to
Agent) to Agent and Lenders, in full, in immediately available funds, together
with the applicable termination charge, if any. Notwithstanding the payment in
full of the Obligations then due (and the provision for contingent Obligations
as provided above), neither Agent nor Lenders shall be required to terminate its
or their security interests in the Collateral unless, with respect to any loss
or damage such Person may incur as a result of dishonored checks or other items
of payment received by Agent or Lenders from Borrowers or any Account Debtor and
applied to the Obligations, Agent shall, at its option, (i) have received a
written agreement, executed by Borrowers and by any Person whose loans or other
advances to Borrowers are used in whole or in part to satisfy the Obligations,
indemnifying Agent and Lenders from any such loss or damage; or (ii) have
retained such monetary reserves and Liens on the Collateral for such period of
time as Agent, in its reasonable discretion, may deem necessary to protect Agent
and Lenders from any such loss or damage. Subject to the foregoing, upon
payment in full of the Obligations then due (and provision for identified
contingent Obligations, including without limitation, outstanding Letters of
Credit, in form and substance acceptable to Agent) and termination of the
Commitments and this Agreement, Agent shall promptly cause to be assigned,
transferred and delivered, against receipt but without any recourse, warranty or
representation whatsoever, any remaining Collateral, to or on the order of
Borrowers, and Agent shall execute and deliver to Borrowers upon such
termination such Uniform Commercial Code termination statements and such other
documentation as shall be reasonably requested by Borrowers to effect the
termination and release of the Liens granted by this Agreement on the
Collateral, all at the cost and expense of Borrowers.
SECTION 5. SECURITY INTERESTS
5.1 Security Interest in Collateral. To secure the prompt payment and
-------------------------------
performance to Agent and Lenders of the Obligations, each Borrower hereby grants
to Agent, for the benefit of Agent and Lenders, a continuing Lien upon all of
such Borrower's now owned and hereafter acquired tangible and intangible
personal property, including all of the following Property and interests in
Property of each Borrower, whether now owned or existing or hereafter created,
acquired or arising and wheresoever located:
(i) Accounts;
16
<PAGE>
(ii) Inventory;
(iii) Equipment;
(iv) General Intangibles;
(v) Deposit accounts;
(vi) All monies and other Property of any kind now or at any
time or times hereafter in the possession or under the control of Agent or
any Lender or a bailee or Affiliate of Agent or any Lender;
(vii) All investment property (as defined in the Code),
including, but not limited to, securities and security entitlements;
(viii) All accessions to, substitutions for and all
replacements, products and cash and non-cash proceeds of (i) through (vii)
above, including, without limitation, proceeds of and unearned premiums
with respect to insurance policies insuring any of the Collateral; and
(ix) All books and records (including, without limitation,
customer lists, credit files, computer programs, print-outs, and other
computer materials and records, copies of which may be retained by Borrower
if originals are required to be delivered to Agent in order to perfect any
security interest granted hereunder) of Borrowers pertaining to any of (i)
through (viii) above.
Notwithstanding the foregoing provisions of this Section 5.1, the grant of
a security interest as provided herein shall not extend to, and the term
"Collateral" shall not include, any Accounts or General Intangibles of any
Borrower relating to leases to the extent that (i) such Accounts or General
Intangibles are not assignable or capable of being encumbered under the terms of
any such lease or other agreement applicable thereto (but solely to the extent
that any such restriction shall be enforceable under applicable law), without
the consent of the lessor thereof or other applicable party thereto and (ii)
such consent has not been obtained; provided, however, that upon obtaining the
-------- -------
consent of any such lessor or other applicable party such Accounts or General
Intangibles as well as any and all proceeds thereof that might theretofore have
been excluded from such grant shall thenceforth be included within the security
interest granted by this Section 5.1 and the term "Collateral."
5.2 Lien Perfection; Further Assurances. Each Borrower shall execute such
-----------------------------------
UCC-1 financing statements and such other instruments, assignments or documents
as may be requested by Agent and as are necessary to perfect the Lien of Agent
and Lenders upon any of the Collateral and shall take such other action as may
be necessary to perfect or to continue the perfection of the Lien of Agent and
Lenders upon the Collateral. Unless prohibited by applicable law, each Borrower
hereby authorizes Agent to execute and file any such financing statement on such
Borrower's behalf. The parties agree that a carbon, photographic or other
reproduction of this Agreement shall be sufficient as a financing statement and
may be filed in any appropriate
17
<PAGE>
office in lieu thereof. At Agent's request, Borrowers shall also promptly
execute or cause to be executed and shall deliver to Agent any and all
documents, instruments and agreements deemed reasonably necessary by Agent to
give effect to or carry out the terms or intent of the Loan Documents.
SECTION 6. COLLATERAL ADMINISTRATION
6.1 General
-------
6.1.1 Location of Collateral. All Collateral (except for deposit
----------------------
accounts and investment property), other than Inventory outside the United
States or in transit and motor vehicles, will at all times be kept by each
Borrower and its Subsidiaries, if any, at one or more of the respective business
locations set forth in Exhibit 6.1.1 hereto or other business location acquired
-------------
after the date hereof and for which notice has been given to Agent as provided
herein and shall not, without the prior written approval of Agent, be moved
therefrom (other than movements among the business locations of and for each
Borrower) except, prior to an Event of Default and acceleration of the maturity
of the Obligations in consequence thereof, for (i) sales of Inventory in the
ordinary course of business; and (ii) removals in connection with dispositions
of Equipment that are authorized by subsection 6.4.2 hereof.
6.1.2 Insurance of Collateral. Borrowers shall maintain and pay for
-----------------------
insurance upon all Collateral wherever located and with respect to Borrowers'
business, covering casualty, hazard, public liability and such other risks in
such amounts and with such insurance companies as are reasonably satisfactory to
Agent. Borrowers shall deliver copies of such policies to Agent with
satisfactory lender's loss payable endorsements, naming Agent, for the benefit
of Agent and Lenders, as sole loss payee, assignee or additional insured, as
appropriate; provided that the lessors of Restoration's leased locations may be
--------
named as additional loss payees, assignees or additional insureds with respect
to Restoration's tenant improvements at such locations. Each policy of
insurance or endorsement shall contain a clause requiring the insurer to give
not less than 30 days prior written notice to Agent in the event of cancellation
of the policy for any reason whatsoever and a clause specifying that the
interest of Agent and Lenders shall not be impaired or invalidated by any act or
neglect of a Borrower or the owner of the Property or by the use or occupancy
of the premises for purposes more hazardous than are permitted by said policy.
If either Borrower fails to provide and pay for such insurance, Agent may, at
its option, but shall not be required to, procure the same and charge such
Borrower therefor. Borrowers agree to deliver to Agent, promptly as rendered,
true copies of all reports made in any reporting forms to insurance companies.
6.1.3 Protection of Collateral. All expenses of protecting, storing,
------------------------
warehousing, insuring, handling, maintaining and shipping the Collateral, and
any and all excise, property, sales, and use taxes imposed by any state,
federal, or local authority on any of the Collateral or in respect of the sale
thereof shall be borne and paid by the respective Borrower. If such Borrower
fails promptly to pay any portion thereof when due, Agent may, at its option,
but shall not be required to, pay the same and charge such Borrower therefor.
Neither Agent nor any Lender shall be liable or responsible in any way for the
safekeeping of any of the Collateral or for any
18
<PAGE>
loss or damage thereto (except for reasonable care in the custody thereof while
any Collateral is in Agent's or such Lender's actual possession) or for any
diminution in the value thereof, or for any act or default of any warehouseman,
carrier, forwarding agency, or other person whomsoever, but the same shall be at
Borrower's sole risk.
6.2 Administration of Accounts.
--------------------------
6.2.1 Records, Schedules and Assignments of Accounts. Restoration
----------------------------------------------
shall keep accurate and complete records of its TI Accounts and all payments and
collections thereon and shall submit to Agent on such periodic basis as Agent
shall reasonably request a report with respect thereto for the preceding period,
in form reasonably satisfactory to Agent. Michael's shall keep accurate and
complete records of its Accounts and all payments and collections thereon and
shall submit to Agent on such periodic basis as Agent shall request a sales and
collections report for the preceding period, in form satisfactory to Agent. On
or before the fifteenth day of each month from and after the date hereof,
Michael's shall deliver to Agent, in form acceptable to Agent, a detailed aged
trial balance of all Accounts existing as of the last day of the preceding
month, specifying the names, addresses, face value, dates of invoices and due
dates for each Account Debtor obligated on an Account so listed ("Schedule of
Accounts"), and, upon Agent's request therefor, copies of proof of delivery and
the original copy of all documents, including, without limitation, repayment
histories and present status reports relating to the Accounts so scheduled and
such other matters and information relating to the status of then existing
Accounts as Agent shall reasonably request. In addition, if Accounts in an
aggregate face amount in excess of $50,000 included in the Michael's Borrowing
Base become ineligible because they fall within one of the specified categories
of ineligibility set forth in the definition of Eligible Accounts or otherwise
established by Agent, Michael's shall notify Agent of such occurrence within one
week following such occurrence and the Michael's Borrowing Base shall thereupon
be adjusted to reflect such occurrence. If requested by Agent, Michael's shall
execute and deliver to Agent formal written assignments of all of its Accounts
weekly or daily, which shall include all Accounts that have been created since
the date of the last assignment, together with copies of invoices or invoice
registers related thereto.
6.2.2 Discounts, Allowances, Disputes. If Michael's grants any
-------------------------------
discounts, allowances or credits that are not shown on the face of the invoice
for the Account involved, Michael's shall report such discounts, allowances or
credits, as the case may be, to Agent as part of the next required Schedule of
Accounts. If any amounts due and owing in excess of $5,000 are in dispute
between Michael's and any Account Debtor, Michael's shall provide Agent with
written notice thereof at the time of submission of the next Schedule of
Accounts, explaining in detail the reason for the dispute, all claims related
thereto and the amount in controversy. Upon and after the occurrence of an Event
of Default, Agent shall have the right to settle or adjust all disputes and
claims directly with Account Debtors, including obligors on the TI Accounts, and
to compromise the amount or extend the time for payment thereof upon such terms
and conditions as Agent may deem advisable, and to charge the deficiencies,
costs and expenses thereof, including reasonable attorneys' fees, to the
respective Borrower.
19
<PAGE>
6.2.3 Taxes. If an Account includes a charge for any tax payable to
-----
any governmental taxing authority, Agent is authorized, in its sole discretion,
to pay the amount thereof to the proper taxing authority for the account of the
applicable Borrower (with respect to Restoration, only upon and during the
continuation of an Event of Default, and with respect to Michaels, unless
Michaels is contesting such tax in good faith and appropriate reserves have been
established therefor) and to charge such Borrower therefor, provided, however,
-------- -------
that neither Agent nor any Lender shall be liable for any taxes to any
governmental taxing authority that may be due by such Borrower and, provided
--------
further, that any reserve established by Agent on account of any such tax shall
- -------
be released upon payment of such tax.
6.2.4 Account Verification. Whether or not a Default or an Event of
--------------------
Default has occurred, Agent's officers, employees and agents shall have the
right, at any time or times, in the name of Agent and Lenders, any designee of
Agent or Lenders, or Borrowers, to verify the validity and amount of any
Accounts (with respect to Restoration, only TI Accounts) by mail, telephone,
telegraph or otherwise. Borrowers shall cooperate fully with Agent in an effort
to facilitate and promptly conclude any such verification process.
6.2.5 Maintenance of Dominion Account. Each Borrower shall maintain
-------------------------------
a Dominion Account acceptable to Agent with such bank or banks as may be
selected by such Borrower and be acceptable to Agent; provided, however, that
-------- -------
the Dominion Account of Restoration shall only be utilized, if Agent so elects
in its reasonable credit judgment, during the continuance of an Event of
Default; provided, that, if such Event of Default shall be cured Agent shall be
--------
entitled, in the exercise of its reasonable credit judgment, to maintain such
account for up to 60 days following such cure. Agent shall at all times have a
perfected security interest in such Dominion Accounts. Restoration shall issue
to any such bank or banks an irrevocable letter of instruction directing such
bank or banks, upon notice from Agent that an Event of Default has occurred and
is then continuing (or during such 60 day period), to deposit all payments or
other remittances to its Dominion Account for application on account of the
Obligations. As of the Closing Date, and at all times prior to the use of the
Dominion Account of Restoration, Restoration shall have control over its cash.
Once in effect (if ever), until released, all funds deposited in the Restoration
Dominion Account shall immediately become the property of Agent, for the account
of Lenders, and Restoration shall obtain the agreement by such bank or banks in
favor of Agent, for the benefit of Agent and Lenders, to waive any offset rights
against the funds so deposited. Michael's shall issue to any such bank or banks
an irrevocable letter of instruction directing such bank or banks to deposit all
payments or other remittances to its Dominion Account for application on account
of the Obligations. All funds deposited in the Michael's Dominion Account shall
immediately become the property of Agent, for the account of Lenders, and
Michael's shall obtain the agreement by such bank or banks in favor of Agent,
for the benefit of Agent and Lenders, to waive any offset rights against the
funds so deposited. Neither Agent nor any Lender assumes any responsibility for
any such arrangement, including, without limitation, any claim of accord and
satisfaction or release with respect to deposits accepted by any bank or banks
thereunder. No waiver or forbearance with respect to any Event of Default shall
act as a cure thereof for purposes of this subsection 6.2.5.
20
<PAGE>
6.3 Administration of Inventory.
---------------------------
6.3.1 Records and Reports of Inventory. Each Borrower shall keep
--------------------------------
accurate and complete records of its Inventory. Each Borrower shall furnish to
Agent (who shall furnish to Lenders) Inventory reports in form and detail
satisfactory to Agent at such times as Agent may request, but at least once each
month, not later than the tenth Business Day of such month. Each Borrower shall
conduct a physical inventory no less frequently than annually and shall provide
to Agent (who shall furnish to Lenders) a report based on each such physical
inventory promptly thereafter, together with such supporting information as
Agent or any Lender shall reasonably request.
6.3.2 Returns of Inventory. If on any occasion hereafter Restoration
--------------------
returns Inventory to any vendor valued in excess of $100,000 in the aggregate
per occurrence, Restoration shall within two weeks notify Agent of the same,
specifying the reason for such return. If on any occasion hereafter any Account
Debtor returns Inventory to Michael's in excess of $25,000 the shipment of which
generated an Account, Michael's shall immediately notify Agent of the same,
specifying the reason for such return and the location, condition and intended
disposition of the returned Inventory.
6.4 Administration of Equipment.
---------------------------
6.4.1 Records and Schedules of Equipment. Each Borrower shall keep
----------------------------------
accurate records itemizing and describing the kind, type, quantity and value of
its Equipment and all dispositions made in accordance with subsection 6.4.2
hereof, and shall furnish Agent with a current schedule containing the foregoing
information on request by Agent. Promptly following request therefor by Agent,
Borrowers shall deliver to Agent any and all evidence of ownership, if any, of
any of the Equipment.
6.4.2 Dispositions of Equipment. Borrowers will not sell, lease or
-------------------------
otherwise dispose of or transfer any Equipment or any part thereof without the
prior written consent of Required Lenders; provided, however, that the foregoing
-------- -------
restriction shall not apply, for so long as no Default or Event of Default
exists, to (i) dispositions of Equipment which, in the aggregate during any
fiscal year of a Borrower, has a fair market value or book value, whichever is
less, of $100,000 (in the case of Restoration) or $50,000 (in the case of
Michael's) or less, provided that all proceeds thereof are remitted to Agent for
--------
application to the Loans in such order as Agent shall determine, (ii)
dispositions of Equipment in connection with sale-lease back transactions, or
(iii) replacements of Equipment that is substantially worn, damaged or obsolete,
provided that the replacement Equipment shall be acquired prior to or
substantially concurrently with any disposition of the Equipment that is to be
replaced, the replacement Equipment shall be free and clear of Liens other than
Permitted Liens.
6.5 Payment of Charges. All amounts chargeable to a Borrower under
------------------
Section 6 hereof shall be Obligations secured by all of the Collateral, shall be
payable on demand and shall bear interest from the date such advance was made
until paid in full at the rate applicable to Base Rate Revolving Credit Loans
from time to time.
21
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SECTION 7. REPRESENTATIONS AND WARRANTIES
7.1 General Representations and Warranties. To induce Agent and Lenders
--------------------------------------
to enter into this Agreement and to make advances hereunder, each Borrower
warrants, represents and covenants to Agent and Lenders that:
7.1.1 Organization and Qualification. Each Borrower and its
------------------------------
Subsidiaries, if any, is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation. Each
Borrower and its Subsidiaries are duly qualified and are authorized to do
business and in good standing, respectively, as a foreign corporation (i) as of
the Closing Date, in each state or jurisdiction listed on Exhibit 7.1.1 hereto
-------------
and (ii) at all times in all other states and jurisdictions where the character
of its respective Properties or the nature of its respective activities make
such qualification necessary and in which the failure of such Borrower or any of
its Subsidiaries, if any, to be so qualified could have a material adverse
effect on the financial condition, business or Properties of such Borrower or
any of its Subsidiaries.
7.1.2 Corporate Power and Authority. Each Borrower is duly
-----------------------------
authorized and empowered to enter into, execute, deliver and perform this
Agreement and each of the other Loan Documents to which it is a party. The
execution, delivery and performance of this Agreement and each of the other Loan
Documents have been duly authorized by all necessary corporate action and do not
and will not (i) require any consent or approval of the shareholders of either
Borrower or its Subsidiaries; (ii) contravene either Borrower's or its
Subsidiaries' charter, articles or certificate of incorporation or by-laws;
(iii) violate, or cause either Borrower or its Subsidiaries to be in default
under, any provision of any material law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award in effect having
applicability to such Borrower or its Subsidiaries; (iv) result in a breach of
or constitute a default under any material indenture or loan or credit agreement
or any other material agreement, lease or instrument to which either Borrower or
its Subsidiaries is a party or by which it or its Properties may be bound or
affected (except (x) to the extent that restrictions upon the payment of the
Cash Earn-Out (as defined in the Stock Purchase Agreement) under this Agreement
may be more restrictive than those in the Stock Purchase Agreement and (y) for
the breach of any such agreements which will be cured by payment in full on the
Closing Date); or (v) result in, or require, the creation or imposition of any
Lien (other than Permitted Liens) upon or with respect to any of the Properties
now owned or hereafter acquired by either Borrower or its Subsidiaries.
7.1.3 Legally Enforceable Agreement. This Agreement is, and each of
-----------------------------
the other Loan Documents when delivered under this Agreement will be, a legal,
valid and binding obligation of each Borrower enforceable against it in
accordance with its respective terms.
7.1.4 Capital Structure. Exhibit 7.1.4 hereto states as at the date
----------------- -------------
of this Agreement (i) the correct name of each Subsidiary of Borrowers, if any,
its jurisdiction of incorporation and the percentage of its Voting Stock owned
by such Borrower, (ii) the name of each Borrower's corporate or joint venture
Affiliates and the nature of the affiliation, (iii) the number, nature and
holder of all outstanding Securities of Borrowers and each Subsidiary of
Borrowers and (iv) the number of authorized, issued and treasury shares of each
Borrower and
22
<PAGE>
each Subsidiary of Borrowers. Each Borrower has good title to all of the shares
it purports to own of the stock of its Subsidiaries free and clear in each case
of any Lien other than Permitted Liens. All such shares have been duly issued
and are fully paid and non-assessable. Except as set forth on Exhibit 7.1.4,
-------------
there are no outstanding options to purchase, or any rights or warrants to
subscribe for, or any commitments or agreements to issue or sell, or any
Securities or obligations convertible into, or any powers of attorney relating
to, shares of the capital stock of a Borrower or its Subsidiaries. Except as set
forth on Exhibit 7.1.4, there are no outstanding agreements or instruments
-------------
binding upon any of Borrowers' shareholders relating to the voting by them of
shares of capital stock of any Borrower.
7.1.5 Corporate Names. Neither Borrower nor any Subsidiary of such
---------------
Borrower has been known as or used any corporate, fictitious or trade names
except those listed on Exhibit 7.1.5 hereto. Except as set forth on Exhibit
------------- -------
7.1.5, neither Borrower nor any Subsidiary of such Borrower, has been the
- -----
surviving corporation of a merger or consolidation or acquired all or
substantially all of the assets of any Person.
7.1.6 Business Locations; Agent for Process. Each of Borrowers' and
-------------------------------------
its Subsidiaries' chief executive office and other places of business as at the
date of this Agreement are as listed on Exhibit 6.1.1 hereto. During the
-------------
preceding one-year period, neither Borrowers nor any of their Subsidiaries has
had an office, place of business or agent for service of process other than as
listed on Exhibit 6.1.1. Except as shown on Exhibit 6.1.1, no Inventory is
------------- -------------
stored with a bailee, warehouseman or similar party, nor is any Inventory
consigned to any Person.
7.1.7 Title to Properties; Priority of Liens. Each of Borrower and
--------------------------------------
its Subsidiaries has good, indefeasible and marketable title to and fee simple
ownership of, or valid and subsisting leasehold interests in, all of its
respective real Property, and good title to all of the Collateral and all of its
other Property, in each case, free and clear of all Liens except Permitted
Liens. Borrowers have paid or discharged all lawful claims which, if unpaid,
might become a Lien against any of Borrowers' Properties that is not a Permitted
Lien. The Liens granted to Agent and Lenders under Section 5 hereof are first
priority Liens, subject only to Permitted Liens.
7.1.8 Intentionally Omitted.
---------------------
7.1.9 Equipment. The Equipment is in good operating condition and
---------
repair, and all necessary replacements of and repairs thereto shall be made so
that the value and operating efficiency of the Equipment shall be maintained and
preserved, reasonable wear and tear excepted.
7.1.10 Financial Statements; Fiscal Year. The balance sheets of
---------------------------------
Borrowers as of their respective audited 1997 fiscal year end financial
statements, and the related statements of income, changes in stockholder's
equity, and changes in financial position for the period ended on such date,
have been prepared in accordance with GAAP, and present fairly the financial
positions of Borrowers at such date and the results of Borrowers' operations for
such period. From January 31, 1998, to the date hereof, there has been no
material change in the condition,
23
<PAGE>
financial or otherwise, of Borrowers as shown on their respective balance sheet
as of such date and no change in the aggregate value of Equipment and real
Property owned by Borrowers, except changes in the ordinary course of business,
none of which individually or in the aggregate has been materially adverse. The
fiscal year of Borrower and each of its Subsidiaries ends on the Saturday
nearest the last day of January of each year.
7.1.11 Full Disclosure. Neither this Agreement nor any other written
---------------
statement of Borrowers to Agent or Lenders, contain any untrue statement of a
material fact or omit a material fact necessary to make the statements contained
therein or herein not misleading. There is no fact which Borrowers have failed
to disclose to Agent and Lenders in writing which materially affects adversely
or, so far as Borrowers can now foresee, will materially affect adversely the
Properties, business, prospects, profits or condition (financial or otherwise)
of a Borrower or its Subsidiaries or the ability of a Borrower or its
Subsidiaries to perform this Agreement or the other Loan Documents.
7.1.12 Solvent Financial Condition. Each of Borrower and its
---------------------------
Subsidiaries is now and, after giving effect to the Loans to be made hereunder,
at all times will be, Solvent.
7.1.13 Surety Obligations. Neither Borrower nor any of its
------------------
Subsidiaries is, as of the Closing Date, obligated as surety or indemnitor under
any surety or similar bond or other contract or has issued or entered into any
agreement to assure payment, performance or completion of performance of any
undertaking or obligation of any Person.
7.1.14 Taxes. Restoration's federal tax identification number is 68-
-----
0140361. The federal tax identification number of Michael's is 94-2696491.
Borrowers and each of its Subsidiaries have filed all federal, state and local
tax returns and other reports it is required by law to file and has paid, or
made provision for the payment of, all taxes, assessments, fees, levies and
other governmental charges upon it, its income and Properties as and when such
taxes, assessments, fees, levies and charges are due and payable, unless and to
the extent any thereof are being actively contested in good faith and by
appropriate proceedings and Borrowers maintain reasonable reserves on its books
therefor. The provision for taxes on the books of Borrowers and its
Subsidiaries is adequate for all years not closed by applicable statutes, and
for its current fiscal year.
7.1.15 Brokers. There are no brokerage commissions, finder's fees or
-------
investment banking fees payable or agreed to by Borrowers in connection with the
transactions contemplated by this Agreement.
7.1.16 Patents, Trademarks, Copyrights and Licenses. Each Borrower
--------------------------------------------
and its Subsidiaries owns or possesses all the patents, trademarks, service
marks, trade names, copyrights and licenses necessary for the present and
planned future conduct of its business without any known conflict with the
rights of others. All such patents, trademarks, service marks, tradenames,
copyrights, licenses and other similar rights in effect for each Borrower as of
the Closing Date are listed on Exhibit 7.1.16 hereto.
--------------
24
<PAGE>
7.1.17 Governmental Consents. Each Borrower and its Subsidiaries
---------------------
have, and are in good standing with respect to, all governmental consents,
approvals, licenses, authorizations, permits, certificates, inspections and
franchises necessary to continue to conduct its business as heretofore or
proposed to be conducted by it and to own or lease and operate its Properties as
now owned or leased by it, except where the failure to be so qualified would not
have a Material Adverse Effect.
7.1.18 Compliance with Laws. Each Borrower and its Subsidiaries have
--------------------
duly complied with, and their Properties, business operations and leaseholds are
in compliance in all material respects with, the provisions of all federal,
state and local laws, rules and regulations applicable to Borrower or such
Subsidiary, as applicable, its Properties or the conduct of its business and
there have been no citations, notices or orders of noncompliance issued to a
Borrower or any of its Subsidiaries under any such law, rule or regulation,
except where such failure or non-compliance would not, individually or in the
aggregate, have a Material Adverse Effect. Each Borrower and its Subsidiaries
have established and maintain an adequate monitoring system to insure that it
remains in compliance with all federal, state and local laws, rules and
regulations applicable to it. To the best of each Borrower's knowledge, no
Inventory has been produced or sold in violation of the Fair Labor Standards Act
(29 U.S.C. (S) 201 et seq.), as amended.
7.1.19 Restrictions. Neither Borrower nor any Subsidiary of a
------------
Borrower is a party or subject to any contract, agreement, or charter or other
corporate restriction, which materially and adversely affects its business or
the use or ownership of any of its Properties. Neither Borrower nor any
Subsidiary of a Borrower is a party or subject to any contract or agreement
which restricts its right or ability to incur Indebtedness, other than as set
forth on Exhibit 7.1.19 hereto, none of which prohibit the execution of or
--------------
compliance with this Agreement or the other Loan Documents by each Borrower or
its Subsidiaries as applicable.
7.1.20 Litigation. Except as set forth on Exhibit 7.1.20 hereto,
---------- --------------
there are no actions, suits, proceedings or investigations pending, or to the
knowledge of a Borrower, threatened, against or affecting a Borrower or any
Subsidiary of a Borrower or the business, operations, Properties, prospects,
profits or condition of a Borrower or any Subsidiary of a Borrower which if
adversely determined could reasonably be expected to have a Material Adverse
Effect. Neither Borrower nor any Subsidiary of Borrower is in default with
respect to any order, writ, injunction, judgment, decree or rule of any court,
governmental authority or arbitration board or tribunal.
7.1.21 No Defaults. No event has occurred and no condition exists
-----------
which would, upon or after the execution and delivery of this Agreement or a
Borrower's performance hereunder, constitute a Default or an Event of Default
(except as disclosed in clause (iv)(y) of Section 7.1.2 hereof). As of the
Closing Date, neither a Borrower nor any Subsidiary of a Borrower is in default,
and no event has occurred and no condition exists which constitutes, or which
with the passage of time or the giving of notice or both would constitute, a
default in the payment of any Indebtedness to any Person for Money Borrowed.
25
<PAGE>
7.1.22 Leases. Exhibit 7.1.22(a) hereto is a complete listing of all
------ -----------------
capitalized leases of each Borrower and its Subsidiaries as of the Closing Date,
and Exhibit 7.1.22(b) hereto is a complete listing of all operating leases of
-----------------
each Borrower and its Subsidiaries, if any, as of the Closing Date. Each
Borrower and its Subsidiaries is in compliance in all material respects with all
of the terms of each of its respective capitalized and operating leases.
7.1.23 Pension Plans. Except as disclosed on Exhibit 7.1.23 hereto,
------------- --------------
no Borrower nor its Subsidiaries has at the Closing Date any Plan. Each
Borrower and its Subsidiaries is in full compliance with any applicable
requirements of ERISA and the regulations promulgated thereunder with respect to
each Plan. No fact or situation that could result in a material adverse change
in the financial condition of a Borrower or its Subsidiaries, if any, exists in
connection with any Plan. Neither Borrower nor its Subsidiaries has any
withdrawal liability in connection with a Multi-employer Plan.
7.1.24 Trade Relations. There exists no actual or threatened
---------------
termination, cancellation or limitation of, or any modification or change in,
the business relationship between a Borrower or any of its Subsidiaries and any
customer or any group of customers whose purchases individually or in the
aggregate are material to the business of a Borrower or any of its Subsidiaries
or with any material supplier, and there exists no present condition or state of
facts or circumstances which would materially affect adversely a Borrower or its
Subsidiaries or prevent a Borrower or its Subsidiaries from conducting such
business after the consummation of the transaction contemplated by this
Agreement in substantially the same manner in which it has heretofore been
conducted.
7.1.25 Labor Relations. Except as described on Exhibit 7.1.25
--------------- --------------
hereto, no Borrower nor its Subsidiaries is a party to any collective bargaining
agreement. There are no material grievances, disputes or controversies with any
union or any other organization of a Borrower's or its Subsidiaries' employees,
or threats of strikes, work stoppages or any asserted pending demands for
collective bargaining by any union or organization.
7.1.26 December 1997 Agreement. No Event of Default exists under and
-----------------------
as defined in the December 1997 Agreement.
7.2 Continuous Nature of Representations and Warranties. Each
---------------------------------------------------
representation and warranty contained in this Agreement and the other Loan
Documents shall be continuous in nature and shall remain accurate and complete
in all material respects and not materially misleading at all times during the
term of this Agreement (except to the extent that such representations and
warranties expressly relate to a specific date) and except for (i) such changes
as are the result of facts or events which would not constitute a material
adverse change in the business, property, financial condition or results of
operations of a Borrower and its Subsidiaries, taken as a whole, or (ii) changes
in the nature of a Borrower's or its Subsidiaries' business or operations that
would render the information in any exhibit attached hereto either inaccurate,
incomplete or misleading, so long as (x) such exhibit is updated no less often
than quarterly to reflect changes in a Borrower's business, provided, however, a
Borrower shall give prompt
26
<PAGE>
notice of any event under subsections 7.1.20 or 7.1.21, or (y) Agent has
consented in writing to such changes, or (z) such changes are expressly
permitted by this Agreement.
7.3 Survival of Representations and Warranties. All representations and
------------------------------------------
warranties of a Borrower contained in this Agreement or any of the other Loan
Documents shall survive the execution, delivery and acceptance hereof and
thereof by Agent and Lenders and the parties hereto and thereto and the closing
of the transactions described herein or therein or related hereto or thereto.
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS
8.1 Affirmative Covenants. During the term of this Agreement and
---------------------
thereafter, for so long as there are any outstanding Obligations, Borrowers'
covenant that, unless otherwise consented to by Agent in writing, they shall:
8.1.1 Visits and Inspections. Permit representatives of Agent and
----------------------
each Lender, from time to time, as often as may be reasonably requested, but
only during normal business hours (unless an Event of Default exists), to visit
and inspect the Properties of a Borrower and its Subsidiaries inspect, audit and
make extracts from its books and records, and discuss with its officers, its
employees and its independent accountants, a Borrower's and its Subsidiaries'
business, assets, liabilities, financial condition, business prospects and
results of operations.
8.1.2 Notices. Comply with the information update covenant set forth
-------
in Section 7.2 hereof and promptly notify Agent in writing of the occurrence of
any event or the existence of any fact which renders any representation or
warranty in this Agreement or any of the other Loan Documents materially
inaccurate or misleading, except as otherwise accepted in Section 7.2.
8.1.3 Financial Statements. Keep, and cause each Subsidiary of a
--------------------
Borrower to keep, adequate records and books of account with respect to its
business activities in which proper entries are made in accordance with GAAP
reflecting all its financial transactions; and cause to be prepared and
furnished to Agent and each Lender the following (all to be prepared in
accordance with GAAP applied on a consistent basis, unless Borrowers' certified
public accountants concur in any change therein and such change is disclosed to
Agent and each Lender and is consistent with GAAP):
(i) not later than 90 days after the close of each fiscal
year of a Borrower, unqualified audited financial statements of such
Borrower and its Subsidiaries as of the end of such fiscal year, on a
Consolidated and consolidating basis, certified by a firm of independent
certified public accountants of recognized standing selected by Borrower
and acceptable to Agent (except for a qualification for a change in
accounting principles with which the accountant concurs);
(ii) not later than 30 days after the end of each fiscal
month hereafter, including the last month of Borrowers' fiscal year, (a)
unaudited interim financial statements of Borrowers and its Subsidiaries as
of the end of such month and of the
27
<PAGE>
portion of Borrower's fiscal year then elapsed, on a Consolidated and
consolidating basis, certified by the principal financial officer of each
Borrower as prepared in accordance with GAAP and fairly presenting the
Consolidated and consolidating financial position and results of operations
of Borrowers and its Subsidiaries for such month and period subject only to
changes from audit and year-end adjustments and except that such statements
need not contain notes, and (b) income statements for such month, on a
store-by-store basis;
(iii) promptly after the sending or filing thereof, as the
case may be, copies of any proxy statements, financial statements or
reports which Borrowers have made available to its shareholders and copies
of any regular, periodic and special reports or registration statements
which Borrowers file with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or any national
securities exchange;
(iv) promptly after the filing thereof, copies of any annual
report to be filed with ERISA in connection with each Plan; and
(v) such other data and information (financial and
otherwise) as Agent or any Lender (through the Agent), from time to time,
may reasonably request, bearing upon or related to the Collateral or
Borrowers' and each of its Subsidiaries' financial condition or results of
operations.
Concurrently with the delivery of the financial statements described in
clause (i) of this subsection 8.1.3, Borrowers shall forward to Agent and each
Lender a copy of the accountants' letter to Borrowers' management (if any) that
is prepared in connection with such financial statements. Concurrently with the
delivery of the financial statements described in clauses (i) and (ii) of this
subsection 8.1.3, or more frequently if requested by Agent, Borrowers shall
cause to be prepared and furnished to Agent and each Lender a Compliance
Certificate in the form of Exhibit 8.1.3 hereto executed by the respective
-------------
principal financial officer of each Borrower.
8.1.4 Landlord and Storage Agreements. Provide Agent, upon request,
-------------------------------
with copies of all material agreements between a Borrower or any of its
Subsidiaries and any landlord or warehouseman which owns any premises at which
any Inventory may, from time to time, be kept, including copies of all leases
and landlord waivers currently in effect.
8.1.5 Projections. No later than 30 days prior to the end of each
-----------
fiscal year of Borrowers, deliver to Agent and each Lender Projections of
Borrowers for the forthcoming 2 years, year by year, and for the forthcoming
fiscal year, month by month. Lenders and Agent recognize that, once either of
the Borrowers becomes a public company within the meaning of the Securities Act
of 1933 (if ever), any projections provided to Agent and Lenders could be
insider information and agree that in such cases they shall keep such
information confidential in accordance with their usual business practices.
Borrowers' most recently prepared Projections shall be provided to Agent and
Lenders prior to the Closing Date.
28
<PAGE>
8.1.6 Environmental Law Compliance. At all times comply and cause
----------------------------
its Subsidiaries, if any, to comply, in all material respects, with all
Environmental Laws; and promptly provide Agent with a copy of any notice
received by a Borrower or any Subsidiary from any governmental agency stating
that such Borrower or such Subsidiary has violated any Environmental Law or is
subject to a cleanup order or decree.
8.1.7 Warehouse Agreements. No later than 30 days after the Closing
--------------------
Date, Agent shall have received warehouse waivers, in form and substance
satisfactory to Agent and its counsel, with respect to a Borrower's public
warehouses, together with copies of the warehouse agreements relating thereto.
8.2 Negative Covenants. During the term of this Agreement and thereafter,
------------------
for so long as there are any Loans, any interest, fees or other charges with
respect thereto or any other Obligations for the payment of money outstanding,
each Borrower covenants that (as applicable), unless all Lenders have first
consented thereto in writing, it will not:
8.2.1 Mergers; Consolidations; Acquisitions. Merge or consolidate,
-------------------------------------
or permit any Subsidiary of Borrower, if any, to merge or consolidate, with any
Person; nor acquire, nor permit any Subsidiary of Borrower, if any, to acquire,
all or any substantial part of the Properties of any Person; provided, that, so
-------- ----
long as no Event of Default exists or would result therefrom, any Subsidiary of
Borrower may merge or consolidate with Borrower (as long as Borrower is the
surviving entity) or any Subsidiary of Borrower.
8.2.2 Loans. Make, or permit any Subsidiary of such Borrower, if
-----
any, to make, any loans or other advances of money (other than for reasonable
salary, travel advances, advances against commissions and other similar
reasonable advances in the ordinary course of such Borrower's business) to any
Person.
8.2.3 Total Indebtedness. Create, incur, assume, or suffer to exist,
------------------
or permit any Subsidiary of Borrower, if any, to create, incur or suffer to
exist, any Indebtedness, except:
(i) the Obligations;
(ii) Indebtedness of any Subsidiary of Borrower, if any, to
Borrower (except to the extent eliminated in consolidation) or to another
Subsidiary of Borrower;
(iii) accounts payable to trade creditors and current
operating expenses (other than for Money Borrowed) which on average are not
aged more than 90 days from billing date or more than 30 days from the due
date, in each case incurred in the ordinary course of Borrower's business
and paid within such time period, unless the same are being contested in
good faith; and Borrower or such Subsidiary shall have set aside such
reserves, if any, with respect thereto as are required by GAAP and deemed
adequate by Borrower or such Subsidiary and its independent accountants;
provided, however, that not more than 20% in dollar value of all accounts
-------- -------
payable and current operating expenses (other than for Money Borrowed) of
the Borrowers and their Subsidiaries may be aged more than 90 days from
billing date or more than 30 days from due date;
29
<PAGE>
(iv) Obligations to pay rent permitted by subsection 8.2.13;
(v) Permitted Purchase Money Indebtedness;
(vi) contingent liabilities arising out of endorsements of
checks and other negotiable instruments for deposit or collection in the
ordinary course of business;
(vii) Indebtedness not included in paragraphs (i) through (vi)
above which does not exceed at any time, in the aggregate, the sum of
$500,000 with respect to Restoration and $125,000 with respect to
Michael's;
(viii) contingent liabilities with respect to Cash Earn-Out
payments and retentions in respect of SBA loans of Michael Vermillion;
(ix) contingent liabilities arising from Restoration's
unsecured guaranty, which guaranty shall not exceed the amount of $750,000,
of certain obligations of Michaels owing to Hardwoods, Inc.
(x) Indebtedness paid in full on the Closing Date, provided
that any related liens or security interests are also terminated (or
arrangements acceptable to Agent for such termination are made) on the
Closing Date.
8.2.4 Affiliate Transactions. Enter into, or be a party to, or
----------------------
permit any Subsidiary of Borrower, if any, to enter into or be a party to, any
transaction with any Affiliate or stockholder of Borrower, except in the
ordinary course of and pursuant to the reasonable requirements of Borrower's or
such Subsidiary's business (other than as necessary in connection with an
initial public offering of Borrower's stock or the provision of professional
services in connection therewith) and upon fair and reasonable terms which are
disclosed to Agent and are no less favorable to Borrower than would obtain in a
comparable arm's length transaction with a Person not an Affiliate or
stockholder of Borrower or such Subsidiary. Notwithstanding anything to the
contrary herein, Restoration may make the Cash Earn-Out payments under and as
defined in the Stock Purchase Agreement, as and when the same are due; provided,
--------
in each case that (i) no Event of Default then exists or would result as a
consequence of such payment, and (ii) Restoration's Availability is not less
than $4,000,000 immediately before and immediately after making such payment.
8.2.5 Limitation on Liens. Create or suffer to exist, or permit any
-------------------
Subsidiary of Borrower, if any, to create or suffer to exist, any Lien upon any
of its Property, income or profits, whether now owned or hereafter acquired,
except:
(i) Liens at any time granted in favor of Agent and Lenders
to secure the Obligations;
(ii) Liens for taxes (excluding any Lien imposed pursuant to
any of the provisions of ERISA) not yet due, or being contested in the
manner described in subsection 7.1.14 hereof, but only if in Agent's
reasonable judgment such Lien does not
30
<PAGE>
materially adversely affect Agent's or any Lender's rights or the priority
of Agent's or any Lender's Lien in the Collateral;
(iii) Liens arising in the ordinary course of Borrower's
business by operation of law or regulation but only if payment in respect
of any such Lien is not at the time required or is being contested in good
faith (but only if in Agent's reasonable judgment such Lien does not
materially adversely affect Agent's or any Lender's rights or the priority
of Agent's or any Lender's Lien in the Collateral) and such Liens do not,
in the aggregate, materially detract from the value of the Property of
Borrower or materially impair the use thereof in the operation of
Borrower's business;
(iv) Purchase Money Liens securing Permitted Purchase Money
Indebtedness and Capitalized Lease Obligations permitted pursuant to
subsection 8.2.3;
(v) Liens against a Subsidiary of Borrower, if any, securing
Indebtedness of such Subsidiary to Borrower or another such Subsidiary;
(vi) such other Liens as appear on Exhibit 8.2.5 hereto;
-------------
(vii) such other Liens as all Lenders may hereafter approve in
writing.
8.2.6 Subordinated Debt. Make, or permit any Subsidiary of Borrower,
-----------------
if any, to make, any payment of any part or all of any Subordinated Debt or take
any other action or omit to take any other action in respect of any Subordinated
Debt, except in accordance with the Subordination Agreement related thereto.
8.2.7 Distributions. Declare or make, or permit any Subsidiary of
Borrower to declare or make, any Distributions.
8.2.8 Capital Expenditures. With respect to Restoration, make
--------------------
Capital Expenditures gross of landlord allowances (including, without
limitation, by way of capitalized leases) which, in the aggregate, as to
Restoration exceed the amounts set forth below as of the end of the
corresponding period, measured on a fiscal year to date basis:
Fiscal Quarter Amount
-------------- ------
Fiscal Quarter ended 04/30/98 7,400,000
Fiscal Quarter ended 07/31/98 23,500,000
Fiscal Quarter ended 10/31/98 33,700,000
Fiscal Quarter ended 01/31/99 36,000,000
8.2.9 Disposition of Assets. Sell, lease or otherwise dispose of
---------------------
any of, or permit any Subsidiary of Borrower, if any, to sell, lease or
otherwise dispose of any of, its Properties, including any disposition of
Property as part of a sale and leaseback transaction, to or in favor of any
Person, except (i) sales of Inventory in the ordinary course of Borrower's
business unless
31
<PAGE>
otherwise directed by Agent after the occurrence and during the continuance of
any Event of Default, (ii) transfers of Property to Borrower by a Subsidiary of
Borrower, if any, (iii) transfers by Restoration to Michael's in any fiscal year
of Property with an aggregate book value not in excess of $125,000, or (iv)
other sales, leases or dispositions expressly permitted by this Agreement.
8.2.10 Stock of Subsidiaries. Permit any Subsidiary of Borrower, if
any, to issue any additional shares of its capital stock except director's
qualifying shares.
8.2.11 Intentionally Omitted.
---------------------
8.2.12 Restricted Investment. Make or have, or permit any Subsidiary
---------------------
of Borrower, if any, to make or have, any Restricted Investment.
8.2.13 Operating Leases. With respect to Restoration, commit to, or
----------------
permit any Subsidiary of Restoration to commit to, as of December 31, 1998, more
than 20 leases for new stores to be opened after such date.
8.2.14 Tax Consolidation. File or consent to the filing of any
-----------------
consolidated income tax return with any Person other than a Subsidiary of
Borrower, if any.
8.2.15 Store Openings. With respect to Restoration, open stores
--------------
which, in the aggregate with all other stores of Restoration, would cause the
total number of stores to exceed the number set forth below as of the end of (or
at any time during) the corresponding fiscal quarters:
Fiscal Quarter Stores
-------------- ------
Fiscal Quarter ended 04/30/98 45
Fiscal Quarter ended 07/31/98 51
Fiscal Quarter ended 10/31/98 62
Fiscal Quarter ended 01/31/99 68
For purposes of this covenant, stores at any time opened by Restoration shall be
counted, whether or not such store remains open at the time of calculating this
covenant.
8.3 Financial Covenants. During the term of this Agreement, and
-------------------
thereafter for so long as there are any outstanding Obligations, each Borrower
as appropriate covenants that, unless otherwise consented to by all Lenders in
writing, it shall:
8.3.1 EBITDA. With respect to Restoration, achieve EBITDA, measured
------
on a trailing three month basis, of not less than the following respective
amounts as of the end of the following respective fiscal months:
32
<PAGE>
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
March 1998 $ (125,000.00)
April 1998 $ (525,000.00)
May 1998 $ (475,000.00)
June 1998 $ (350,000.00)
July 1998 $ (800,000.00)
August 1998 $ (425,000.00)
September 1998 $ (225,000.00)
October 1998 $ 1,025,000.00
November 1998 $ 2,300,000.00
December 1998 $12,075,000.00
January 1999 and thereafter $11,650,000.00
</TABLE>
8.3.2 Inventory Turnover. With respect to Restoration, maintain an
------------------
Inventory Turnover Ratio of not less than the following respective amounts as of
the end of the following respective fiscal months (determined as of the last day
of each such month on a trailing 12-month basis):
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C>
March 1998 1.95
April 1998 1.85
May 1998 1.76
June 1998 1.72
July 1998 1.67
August 1998 1.62
September 1998 1.62
October 1998 1.58
November 1998 1.59
December 1998 1.71
January 1999 and thereafter 1.73
</TABLE>
8.3.3 Intentionally Deleted.
------------------------
8.3.4 Operating Cash Flow. With respect to Michael's, achieve
-------------------
Operating Cash Flow, on a cumulative basis for the first twelve months and
thereafter determined as of the last day of each such month on a trailing 12-
month basis:
33
<PAGE>
<TABLE>
<CAPTION>
Month Amount
----- ------
<S> <C>
April 1998 $ 110,000.00
May 1998 $ 220,000.00
June 1998 $ 350,000.00
July 1998 $ 535,000.00
August 1998 $ 720,000.00
September 1998 $ 950,000.00
October 1998 $1,105,000.00
November 1998 $1,305,000.00
December 1998 $1,505,000.00
January 1999 $1,730,000.00
February 1999 $1,955,000.00
March 1999 and thereafter $2,200,000.00
</TABLE>
8.3.5 Fixed Charge Coverage Ratio. With respect to Michael's,
---------------------------
maintain a Fixed Charge Coverage Ratio of not less than the following respective
amounts as of the end of each fiscal quarter on a cumulative basis for the first
four quarters and thereafter determined as of the last day of each such quarter
on a trailing 12-month basis:
Fiscal Quarter Ratio
-------------- -----
Fiscal Quarter ended 07/31/98 1.00:1.00
and thereafter
For future periods during the term of this Agreement, Agent shall
establish financial covenants in its reasonable credit judgment (based upon
similar criteria to those used by Agent for the existing covenants) under
subsections 8.2.8, 8.2.15, 8.3.1, 8.3.2, 8.3.4 and 8.3.5.
SECTION 9. CONDITIONS PRECEDENT
9.1 Conditions to Initial Advance. Notwithstanding any other provision of
-----------------------------
this Agreement or any of the other Loan Documents, and without affecting in any
manner the rights of Agent or any Lender under the other provisions of this
Agreement, this Agreement shall not become effective unless and until each of
the following conditions has been satisfied (and until such time, the December
1997 Agreement shall remain in full force and effect):
9.1.1 Documentation. Agent and Lenders shall have received, in form
-------------
and substance satisfactory to Agent, Lenders and their respective counsel, a
duly executed copy of this Agreement and the other Loan Documents, together with
such additional documents, instruments and certificates as Agent and its counsel
may request in connection therewith from time to time, all in form and substance
reasonably satisfactory to Agent and its counsel.
34
<PAGE>
9.1.2 No Default. No Default or Event of Default shall exist
----------
hereunder or under the December 1997 Agreement.
9.1.3 Availability. Agent shall have determined that immediately
------------
after Lenders have made the initial Revolving Credit Loans contemplated hereby,
and paid all closing costs incurred in connection with the transactions
contemplated hereby, on the Closing Date, Availability under the Restoration
Borrowing Base shall not be less than $2,000,000 and Availability under the
Michael's Borrowing Base shall be not less than $400,000.
9.1.4 No Litigation. No action, proceeding, investigation,
-------------
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain or
prohibit, or to obtain damages in respect of, or which is related to or arises
out of this Agreement or the consummation of the transactions contemplated
hereby.
9.1.5 Dominion Account. One or more Dominion Accounts and all
----------------
lockbox arrangements shall have been established pursuant to agreement(s) in
form and substance satisfactory to Agent; provided that such arrangements shall
--------
be as described in subsection 6.2.5.
9.1.6 Adverse Change. No material adverse change shall have occurred
--------------
in Borrowers' financial condition since February 28, 1998.
9.1.7 Consents. All consents necessary to permit the secured
--------
financing transaction contemplated by this Agreement to be consummated pursuant
to the terms and conditions hereof shall have been obtained.
9.1.8 Solvency. Borrowers shall be Solvent, and all of Borrowers'
--------
assets supporting the Loans contemplated to be made hereby shall be sufficient
in value to provide Borrowers with adequate working capital and to enable
Borrowers to operate their respective businesses profitably.
9.1.9 Access Rights/Financial Information. Through the Closing Date,
-----------------------------------
Agent, Lenders or their respective representatives shall have been given access
at all reasonable times to inspect and evaluate the Collateral and the books and
records of Borrowers, and Borrowers shall have provided Lenders with all
financial and other information which Agent may have reasonably requested.
9.1.10 Landlord Waivers. Agent shall have received landlord waivers,
----------------
in form and substance satisfactory to Agent and its counsel, with respect to
Restoration's distribution centers and Michael's leased locations, together with
copies of the leases relating thereto.
9.1.11 Opinions of Counsel. Agent shall have received such opinions
-------------------
of counsel for Borrowers as Agent or its counsel may reasonably require.
35
<PAGE>
9.1.12 Insurance. Agent shall have received insurance certificates,
---------
lender's loss payable endorsements and copies of all insurance policies
confirming insurance by Borrowers in amounts, coverage, form and by insurers
satisfactory to Agent.
9.1.13 Lien Priority. Agent shall have received file stamped UCC
-------------
financing statements and UCC amendments with respect to its security interest in
the Collateral consisting of Michael's Property, subject only to Permitted
Liens.
9.1.14 Fees. Agent and Lenders shall have received all fees payable
----
to them by Borrower as of the Closing Date.
9.1.15 Audit. Agent shall have conducted an updated audit of
-----
Borrowers' facilities and shall be satisfied with the results thereof.
9.1.16 Life Insurance. Within thirty days from Closing Date,
--------------
Restoration shall obtain key man life insurance on the life of Michael
Vermillion in the face amount of $1,000,000 and Agent shall be designated as
beneficiary thereof in form and substance satisfactory to Agent.
9.1.17 Guaranties. Each Borrower shall have executed and delivered to
----------
Lender a Secured Continuing Corporate Guaranty ("Guaranty") with respect to the
obligations of the other Borrower to Lender, each such Guaranty to be
unconditional and in form and substance satisfactory to Lender in its sole
discretion.
9.1.18 Employment Agreement. Agent shall have reviewed and approved
--------------------
the terms of Michael Vermillion's employment agreement with Michael's.
9.1.19 Audit Memo. Lender shall have reviewed and approved the
----------
informal memorandum prepared by Deloitte & Touche with respect to the financial
condition and other business aspects of Michael's.
9.1.20 Acquisition. Agent shall have reviewed and approved the final
-----------
Purchase and Sale Agreement relating to the purchase by Restoration of the
capital stock of Michael's ("Acquisition Agreement"), and the transactions
contemplated by the Acquisition Agreement shall have been consummated
substantially in accordance with the terms thereof.
9.1.21 Fee Letter. Agent shall have received the Fee Letter from
----------
Borrowers.
9.2 Conditions to All Loans. Notwithstanding any other provision of this
-----------------------
Agreement or any of the other Loan Documents, and without affecting in any
manner the rights of Agent and Lenders under the other sections of this
Agreement, Lenders shall not be required to make any Loan under this Agreement
unless and until each of the following conditions precedent has been and
continues to be satisfied:
9.2.1 Representations and Warranties. The representations and
------------------------------
warranties made by Borrowers herein or in any of the Loan Documents, or which
are contained in any certificate, document or financial or other statement
furnished at any time under or in connection herewith
36
<PAGE>
or therewith, shall be correct in all material respects on and as of the Closing
Date and, with respect to the making of each Loan after the Closing Date, as of
the borrowing date for such Loan (before and after giving effect to such Loan),
as if made on and as of such date (subject to Borrowers' right to update
representations and warranties as provided in Section 7.2), unless stated to
relate to a specific earlier date.
9.2.2 No Default or Event of Default. No Default or Event of Default
------------------------------
shall have occurred and be continuing on the Closing Date and, with respect to
the making of each Loan after the Closing Date, on the borrowing date for such
Loan or after giving effect to the Loan to be made on such date.
9.2.3 Litigation. No suit, action, investigation, inquiry or other
----------
proceeding by any governmental authority or other Person or any other legal or
administrative proceeding shall be pending or threatened (i) which questions the
validity or legality of the transactions contemplated by this Agreement, or
seeks damages in connection therewith and (ii) which if adversely determined
could reasonably be expected to have a Material Adverse Effect.
9.2.4 Solvency. Borrowers shall be Solvent, and all of Borrowers'
--------
assets supporting the Loans shall be sufficient in value, as reasonably
determined by Agent, to provide Borrowers with adequate working capital.
The borrowing by a Borrower of each Loan made after the Closing Date shall be
deemed to constitute a representation and warranty by it to the effect of each
subsection of this Section 9.2.
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
10.1 Events of Default. The occurrence of one or more of the following
-----------------
events shall constitute an "Event of Default":
10.1.1 Payment of Loans. Any Borrower shall fail to pay any of the
----------------
principal of, or interest or premium, if any, on the Loans on the due date
thereof (whether due at stated maturity, on demand, upon acceleration or
otherwise).
10.1.2 Payment of Other Obligations. Any Borrower shall fail to pay
----------------------------
any of the other Obligations on or within five (5) Business Days after the due
date thereof (whether due at stated maturity, on demand, upon acceleration or
otherwise).
10.1.3 Misrepresentations. Any representation, warranty or other
------------------
statement made or furnished to Agent or any Lender by or on behalf of any
Borrower or any Subsidiary of any Borrower, if any, in this Agreement, any of
the other Loan Documents or any instrument, certificate or financial statement
furnished in compliance with or in reference thereto proves to have been false
or misleading in any material respect when made or furnished, when reaffirmed or
modified pursuant to Section 7.2 hereof, or when reaffirmed pursuant to
subsection 9.2.1.
10.1.4 Breach of Specific Covenants. Any Borrower shall fail or
----------------------------
neglect to perform, keep or observe any covenant contained in Sections 5.2,
6.1.1, 6.2.5, 6.3.1, 8.1.1, 8.1.3,
37
<PAGE>
8.2 or 8.3 hereof on the date that such Borrower is required to perform, keep or
observe such covenant; provided that the breach of the financial covenant in
--------
subsection 8.3.1 may be cured by a Borrower if within 30 days of such breach
such Borrower receives additional equity capital in an amount and manner
satisfactory to all Lenders.
10.1.5 Breach of Other Covenants. Any Borrower shall fail or neglect
-------------------------
to perform, keep or observe any covenant contained in this Agreement (other than
a covenant which is dealt with specifically elsewhere in Section 10.1 hereof)
and the breach of such other covenant is not cured to the satisfaction of Agent
within 15 days after the sooner to occur of such Borrower's receipt of notice of
such breach from Agent or the date on which such failure or neglect first
becomes known to any officer of such Borrower.
10.1.6 Default Under Security Documents/Other Agreements. Any
-------------------------------------------------
default or event of default (however defined) shall occur under, or a Borrower
or any other Person (other than Agent or Lenders) shall default in the
performance or observance of any material term, covenant, condition or agreement
contained in, any of the Security Documents or the Other Agreements.
10.1.7 Other Defaults. There shall occur any default or event of
--------------
default (however defined) on the part of a Borrower under any agreement,
document or instrument to which such Borrower is a party or by which such
Borrower or any of its Property is bound, creating or relating to any
Indebtedness (other than the Obligations and trade payables) with a principal
amount outstanding, individually or in the aggregate, in excess of $250,000 with
respect to Restoration and $50,000 with respect to Michael's, if the payment or
maturity of such Indebtedness is accelerated in consequence of such event of
default or demand for payment of such Indebtedness is made.
10.1.8 Uninsured Losses. Any loss, theft, damage or destruction of
----------------
any of the Collateral in excess of $1,000,000 with respect to Restoration and
$200,000 with respect to Michael's, that is not fully covered (subject to such
deductibles as Agent shall have permitted) by insurance shall occur.
10.1.9 Insolvency and Related Proceedings. A Borrower or any of its
----------------------------------
Subsidiaries, if any, shall cease to be Solvent or shall suffer the appointment
of a receiver, trustee, custodian or similar fiduciary, or shall make an
assignment for the benefit of creditors, or any petition for an order for relief
shall be filed by or against a Borrower or any of its Subsidiaries, if any,
under the Bankruptcy Code (if against a Borrower or such Subsidiary the
continuation of such proceeding for more than 30 days), or a Borrower or any of
its Subsidiaries, if any, shall make any offer of settlement, extension or
composition to its unsecured creditors generally.
10.1.10 Business Disruption; Condemnation. There shall occur a
---------------------------------
cessation of a substantial part of the business of a Borrower or a Subsidiary of
a Borrower, if any, for a period which has a Material Adverse Effect or could
reasonable be expected to have a Material Adverse Effect on the long terms
prospects of the Borrower and its Subsidiaries taken as a whole; or a
38
<PAGE>
Borrower or a Subsidiary of a Borrower, if any, shall suffer the loss or
revocation of any license or permit now held or hereafter acquired by a Borrower
or such Subsidiary which is necessary to the continued or lawful operation of
their businesses, taken as a whole; or a Borrower or a Subsidiary of a Borrower,
if any, shall be enjoined, restrained or in any way prevented by court,
governmental or administrative order from conducting all or any material part of
their businesses, taken as a whole; or any material lease or agreement pursuant
to which a Borrower or a Subsidiary of a Borrower, if any, leases, uses or
occupies any Property shall be canceled or terminated prior to the expiration of
its stated term; or any part of the Collateral shall be taken through
condemnation or the value of such Property shall be impaired through
condemnation.
10.1.11 Change of Ownership or Management.
---------------------------------
(i) Stephen Gordon shall cease to own and control, beneficially and
of record, at least 10% of the issued and outstanding voting stock of
Restoration; or any Person that does not as of the Closing Date own 8% or more
of the issued and outstanding voting stock of Restoration shall acquire (through
one or more transactions) an additional 10% or more of the issued and
outstanding voting stock of Restoration; or Restoration shall cease to own and
control, beneficially and of record, 100% of the issued and outstanding voting
stock of Michael's or such lesser amount as shall occur by reason of voting
stock of Michael's transferred to Michael Vermillion pursuant to the earnout
terms in that certain Stock Purchase Agreement between Restoration and Michael
Vermillion. Notwithstanding the foregoing, if 51% or more in the aggregate of
the issued and outstanding voting stock of Restoration is owned by Desai
Capital, Stephen Gordon, Weston Presidio, Cardinal Investors and/or Chase
Capital, no Event of Default shall have occurred under this clause (i) of
subsection 10.1.11; provided that nothing in this clause (i) shall restrict, and
--------
no default shall arise as a result of a change in control (as described in this
clause (i)) resulting from an initial public offering of Restoration's stock.
(ii) Any one of Thomas Low, Stephen Gordon or Thomas Christopher
shall cease to be employed in an executive or managerial capacity by Restoration
or Michael Vermillion in an executive or managerial capacity by Michael's and
shall not be replaced within 30 days of such cessation of employment with a
person acceptable to Agent in its discretion, reasonably exercised.
10.1.12 ERISA. A Reportable Event shall occur which Agent, in its
-----
sole discretion, shall determine in good faith constitutes grounds for the
termination by the Pension Benefit Guaranty Corporation of any Plan or for the
appointment by the appropriate United States district court of a trustee for any
Plan, or if any Plan shall be terminated or any such trustee shall be requested
or appointed, or if a Borrower or any Subsidiary of a Borrower is in "default"
(as defined in Section 4219(c)(5) of ERISA) with respect to payments to a
Multiemployer Plan resulting from Borrower's or such Subsidiary's complete or
partial withdrawal from such Plan.
10.1.13 Challenge to Agreement. A Borrower, any Subsidiary of
----------------------
Borrower or any Affiliate of any of them, shall challenge or contest in any
action, suit or proceeding the validity or enforceability of this Agreement, or
any of the Security Documents, the legality or
39
<PAGE>
enforceability of any of the Obligations or the perfection or priority of any
Lien granted to Agent and Lenders.
10.1.14 Criminal Forfeiture. A Borrower, a Subsidiary of a Borrower
-------------------
or any of their respective senior managers shall be criminally indicted or
convicted under any law that could lead to a forfeiture of any material portion
of the Property of a Borrower or a Subsidiary of a Borrower, if any.
10.1.15 Judgments. Any money judgment against a Borrower, a
---------
Subsidiary of a Borrower or any of their respective Property in excess of
$500,000 in the aggregate with respect to Restoration and $125,000 in the
aggregate with respect to Michael's (exclusive of judgment amounts fully covered
by insurance where the insurer has admitted liability, in writing and without
qualification, in respect of such judgment) is rendered and remains undischarged
or unvacated for a period in excess of 30 days, or a stay of execution thereof
shall not have been procured within such 30-day period.
10.2 Acceleration of the Obligations. Without in any way limiting the
-------------------------------
right of Agent or Required Lenders to demand payment of any portion of the
Obligations payable on demand in accordance with Section 3.2 hereof, upon or at
any time during the continuance of an Event of Default, all or any portion of
the Obligations shall, at the option of Agent or Required Lenders and without
presentment, demand, protest or further notice by Agent or any Lender, become at
once due and payable upon demand and Borrowers shall forthwith pay to Agent and
Lenders, the full amount of such Obligations, provided, that upon the occurrence
--------
of an Event of Default specified in subsection 10.1.9 hereof, all of the
Obligations shall become automatically due and payable without declaration,
notice or demand by Agent or Lenders.
10.3 Other Remedies. Upon and after the occurrence of an Event of
--------------
Default, Agent and Lenders shall have and may exercise from time to time the
following rights and remedies:
10.3.1 All of the rights and remedies of a secured party under the
Code or under other applicable law, and all other legal and equitable rights to
which Agent and Lenders may be entitled, all of which rights and remedies shall
be cumulative and shall be in addition to any other rights or remedies contained
in this Agreement or any of the other Loan Documents, and none of which shall be
exclusive.
10.3.2 The right to take immediate possession of the Collateral, and
to (i) require Borrowers to assemble the Collateral, at Borrowers' expense, and
make it available to Agent and Lenders at a place designated by Agent, and (ii)
enter any premises where any of the Collateral shall be located and to keep and
store the Collateral on said premises until sold (and if said premises be the
Property of a Borrower, such Borrower agrees not to charge Agent or any Lender
for storage thereof).
10.3.3 The right to sell or otherwise dispose of all or any
Collateral in its then condition, or after any further manufacturing or
processing thereof, at public or private sale or sales, with such notice as may
be required by law, in lots or in bulk, for cash or on credit, all as
40
<PAGE>
Agent or Required Lenders, in its or their sole discretion, may deem advisable.
Borrowers agree that 5 days written notice to Borrowers of any public or private
sale or other disposition of Collateral shall be reasonable notice thereof, and
such sale shall be at such locations as Agent may designate in said notice.
Agent shall have the right to conduct such sales on a Borrower's premises,
without charge therefor, and such sales may be adjourned from time to time in
accordance with applicable law. Agent shall have the right to sell, lease or
otherwise dispose of the Collateral, or any part thereof, for cash, credit or
any combination thereof, and Agent and Lenders may purchase all or any part of
the Collateral at public or, if permitted by law, private sale and, in lieu of
actual payment of such purchase price, may set off the amount of such price
against the Obligations. The proceeds realized from the sale of any Collateral
may be applied first to the costs, expenses and reasonable attorneys' fees
incurred by Agent in collecting the Obligations, in enforcing the rights of
Agent and Lenders under the Loan Documents and in collecting, retaking,
completing, protecting, removing, storing, advertising for sale, selling and
delivering any Collateral, second to the interest due upon any of the
Obligations; and third, to the principal of the Obligations. If any deficiency
shall arise, Borrowers shall remain liable to Agent and Lenders therefor.
10.3.4 Agent, for the benefit of Agent and Lenders, is hereby granted
a license or other right to use, without charge, Borrowers' labels, patents,
copyrights, rights of use of any name, trade secrets, tradenames, trademarks and
advertising matter, or any Property of a similar nature, as it pertains to the
Collateral, in advertising for sale and selling any Collateral and Borrowers'
rights under all licenses and all franchise agreements shall inure to Agent's
and Lenders' benefit.
10.4 Remedies Cumulative; No Waiver. All covenants, conditions,
------------------------------
provisions, warranties, guaranties, indemnities, and other undertakings of
Borrowers contained in this Agreement and the other Loan Documents, or in any
document referred to herein or contained in any agreement supplementary hereto
or in any schedule given to Agent or any Lender or contained in any other
agreement between Agent or Lenders and Borrowers, heretofore, concurrently, or
hereafter entered into, shall be deemed cumulative to and not in derogation or
substitution of any of the terms, covenants, conditions, or agreements of
Borrowers herein contained. The failure or delay of Agent or any Lender to
require strict performance by Borrowers of any provision of this Agreement or to
exercise or enforce any rights, Liens, powers, or remedies hereunder or under
any of the aforesaid agreements or other documents or security or Collateral
shall not operate as a waiver of such performance, Liens, rights, powers and
remedies, but all such requirements, Liens, rights, powers, and remedies shall
continue in full force and effect until all Loans and all other Obligations
owing or to become owing from Borrowers to Agent and Lenders shall have been
fully satisfied. None of the undertakings, agreements, warranties, covenants
and representations of Borrowers contained in this Agreement or any of the other
Loan Documents and no Event of Default by a Borrower under this Agreement or any
other Loan Documents shall be deemed to have been suspended or waived by Agent,
unless such suspension or waiver is by an instrument in writing specifying such
suspension or waiver and is signed by a duly authorized representative of Agent
and directed to such Borrower.
41
<PAGE>
SECTION 11. THE AGENT
11.1 Appointment, Powers and Immunities. Each Lender hereby irrevocably
----------------------------------
appoints and authorizes Agent to act as its agent under this Agreement and the
other Loan Documents with such powers as are specifically delegated to Agent by
the terms of the Loan Documents, together with such other powers as are
reasonably incidental to such powers. Agent (which term as used in this
sentence and in Section 11.5 hereof and the first sentence of Section 11.6
hereof shall include reference to its affiliates and its own and its affiliates'
officers, directors, employees and agents): (a) shall have no duties or
responsibilities except those expressly set forth in the Loan Documents, and
shall not by reason of any Loan Document be a trustee for any Lender; (b) shall
not be responsible to Lenders for any recitals, statements, representations or
warranties contained in any Loan Document, or in any certificate or other
document referred to or provided for in, or received by any of them under, any
Loan Document, or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of any Loan Document or any other document
referred to or provided for in any Loan Document or for any failure by a
Borrower or any other Person to perform any of its obligations under any Loan
Document; (c) shall not be required to initiate or conduct any litigation or
collection proceedings under any Loan Document; and (d) shall not be responsible
for any action taken or omitted to be taken by it under any Loan Document or
under any other document or instrument referred to or provided for in any Loan
Document or in connection with any Loan Document, except for its own gross
negligence or willful misconduct. Agent may employ agents and attorneys-in-fact
and shall not be responsible for the negligence or misconduct of any such agents
or attorneys-in-fact selected by it in good faith. Agent may deem and treat the
payee of any Obligation as the holder thereof for all purposes of the Loan
Documents unless and until a notice of the assignment or transfer of such
Obligation shall have been filed with Agent. Each Lender further consents to
(x) the execution, delivery and performance by Agent of each Loan Document
entered into by Agent on behalf of Lenders as contemplated by this Agreement and
(y) the terms of such Loan Documents.
11.2 Reliance by Agent. Agent shall be entitled to rely upon any
-----------------
certification, notice or other communication (including any made by telephone,
telecopy, telex, telegram or cable) believed by it to be genuine and correct and
to have been signed or sent by or on behalf of the proper Person or Persons, and
upon advice and statements of legal counsel, independent accountants and other
experts selected by Agent. As to any matters not expressly provided for by any
Loan Document, Agent shall in all cases be fully protected in acting, or in
refraining from acting, under any Loan Document in accordance with instructions
given by Required Lenders or, if provided in this Agreement, in accordance with
the instructions given by all Lenders as is required in such circumstance, and
such instructions of such Lenders and any action taken or failure to act
pursuant to such instructions shall be binding on all Lenders.
11.3 Defaults. Agent shall not be deemed to have knowledge or notice of
--------
the occurrence of a Default or an Event of Default (other than the nonpayment of
principal of or interest on the Loans or of fees) unless Agent has received
notice from a Lender or a Borrower specifying such Default or Event of Default
and stating that such notice is a "Notice of Default". In the event that Agent
receives such a notice of the occurrence of a Default or Event of Default, Agent
shall give prompt notice of such receipt to each Lender (and shall give each
Lender
42
<PAGE>
prompt notice of each such nonpayment). Agent shall (subject to Section
11.7) take such action with respect to such Default or Event of Default as shall
be directed by Required Lenders, provided that, unless and until Agent shall
--------
have received such directions, Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem advisable in the best interest of Lenders
except to the extent that this Agreement expressly requires that such action be
taken, or not be taken, only with the consent or upon the authorization of
Required Lenders or all Lenders.
11.4 Rights as a Lender. With respect to its Commitments and the Loans
------------------
made by it, Fleet Capital Corporation (and any successor acting as Agent, if
any, as permitted by Section 11.8 hereof) in its capacity as a Lender under the
Loan Documents shall have the same rights, privileges and powers under the Loan
Documents as any other Lender and may exercise the same as though it were not
acting as Agent, and the term "Lender" or "Lenders" shall, unless the context
otherwise indicates, include Agent in its individual capacity. Fleet Capital
Corporation (and any successor acting as Agent) and its affiliates may (without
having to account for the same to any Lender) accept deposits from, lend money
to, make investments in and generally engage in any kind of banking, trust or
other business with a Borrower (and any of its Subsidiaries or Affiliates) as if
it were not acting as Agent, and Fleet Capital Corporation and its affiliates
may accept fees and other consideration from a Borrower for services in
connection with this Agreement or otherwise without having to account for the
same to Lenders.
11.5 Indemnification. Without limiting a Borrower's obligations under
---------------
this Agreement, Lenders agree to indemnify Agent and its affiliates, directors,
officers, employees, attorneys and agents (to the extent not otherwise
reimbursed by Borrowers under this Agreement or the other Loan Documents)
ratably in accordance with their respective Commitments, for any and all losses,
liabilities, damages or expenses (i) incurred by any of them in connection with
or by reason of any actual or threatened investigation, litigation or other
proceedings (including any such investigation, litigation or other proceedings
between Agent and any Lender) relating to the extensions of credit under, and
the transactions contemplated by, the Loan Documents or any actual or proposed
use by Borrower or any of its Subsidiaries of the proceeds of any such
extensions of credit (or arising under any Environmental Law as provided in
Section 12.2), including the reasonable fees and disbursements of counsel
incurred in connection with any such investigation, litigation or other
proceedings and (ii) otherwise payable or reimbursable by Borrowers to Agent
under this Agreement or the other Loan Documents but not paid or reimbursed by
or on behalf of Borrowers when due (but excluding in any such case any such
losses, liabilities, damages or expenses incurred by reason of the gross
negligence or willful misconduct of the Person to be indemnified).
11.6 Nonreliance on Agent and Other Lenders. Each Lender agrees that it
--------------------------------------
has, independently and without reliance on Agent or any other Lender, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis of Borrowers and its Subsidiaries and decision to enter into
this Agreement and that it will, independently and without reliance upon Agent
or any other Lender, and based on such documents and information as it shall
deem appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement. Agent shall not be required
to keep itself informed as to
43
<PAGE>
the performance or observance by Borrower of any Loan Document or any other
document referred to or provided for in any Loan Document or to inspect the
Properties or books of Borrowers or any of its Subsidiaries. Except for notices,
reports and other documents and information expressly required to be furnished
to Lenders by Agent under this Agreement, Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the affairs, financial condition or business of Borrowers or any of
its Subsidiaries (or any of their Affiliates) that may come into the possession
of Agent or any of its affiliates.
11.7 Failure to Act. Except for action expressly required of Agent under
--------------
the Loan Documents, Agent shall in all cases be fully justified in failing or
refusing to act under any Loan Document unless it shall receive further
assurances to its satisfaction from Lenders of their indemnification obligations
under Section 11.5 against any and all liability and expense that may be
incurred by it by reason of taking or continuing to take any such action.
11.8 Resignation of Agent. Subject to the appointment and acceptance of a
--------------------
successor Agent as provided below, Agent may resign at any time by notice to
Lenders and Borrowers. Upon any such resignation, Required Lenders shall have
the right to appoint a successor Agent. Any successor Agent shall have a net
worth of at least $250,000,000. If no successor Agent shall have been appointed
by Required Lenders and have accepted such appointment within 30 days after the
retiring Agent's giving of notice of resignation, then the retiring Agent may,
on behalf of Lenders, appoint a successor Agent. Upon the acceptance of any
appointment as Agent by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, remedies, powers, privileges,
duties and obligations of the retiring Agent, and the retiring Agent shall be
discharged from its duties and obligations, under the Loan Documents. After any
retiring Agent's resignation as Agent, the provisions of this Section 11 shall
continue in effect for its benefit in respect of any actions taken or omitted to
be taken by it while it was acting as Agent.
11.9 Collateral Sub-Agents. Each Lender by its execution and delivery of
---------------------
this Agreement agrees that, in the event it shall hold any monies or other
investments on account of Borrowers, such monies or other investments shall be
held in the name and under the control of such Lender, and such Lender shall
hold such monies or other investments as a collateral sub-agent for Agent under
this Agreement and the other Loan Documents. Borrowers by their execution and
delivery of this Agreement hereby consents to the foregoing.
11.10 Communications by Borrower. Except as otherwise provided in this
--------------------------
Agreement, Borrowers' communications with respect to the Loan Documents shall be
with the Agent.
SECTION 12. MISCELLANEOUS
12.1 Power of Attorney. Each Borrower hereby irrevocably designates,
-----------------
makes, constitutes and appoints Agent (and any of its duly authorized
representatives or agents) as Borrowers' true and lawful attorney (and agent-in-
fact) and Agent may (or such Persons
44
<PAGE>
designated by Agent may), without notice to Borrowers and in either Borrowers'
or Agent's name, but at the cost and expense of Borrowers:
12.1.1 At such time or times as Agent (or any such duly authorized
representatives or agents of Agent), in its sole discretion, may determine,
endorse Borrowers' name on any checks, notes, acceptances, drafts, money orders
or any other evidence of payment or proceeds of the Collateral which come into
the possession or control of Agent or any Lender.
12.1.2 At such time or times upon or during the continuance of an
Event of Default as Agent or its agent in its sole discretion may determine: (i)
demand payment of the Accounts from the Account Debtors, enforce payment of the
Accounts by legal proceedings or otherwise, and generally exercise all of
Borrowers' rights and remedies with respect to the collection of the Accounts;
(ii) settle, adjust, compromise, discharge or release any of the Accounts or
other Collateral or any legal proceedings brought to collect any of the Accounts
or other Collateral; (iii) sell or assign any of the Accounts and other
Collateral upon such terms, for such amounts and at such time or times as Agent
deems advisable; (iv) take control, in any manner, of any item of payment or
proceeds relating to any Collateral; (v) prepare, file and sign a Borrower's
name to a proof of claim in bankruptcy or similar document against any Account
Debtor or to any notice of lien, assignment or satisfaction of lien or similar
document in connection with any of the Collateral; (vi) receive, open and
dispose of all mail addressed to a Borrower and to notify postal authorities to
change the address for delivery thereof to such address as Agent may designate;
(vii) endorse the name of a Borrower upon any of the items of payment or
proceeds relating to any Collateral and deposit the same to the account of
Agent, for the benefit of Lenders ratably in accordance with their respective
Commitments, on account of the Obligations; (viii) endorse the name of a
Borrower upon any chattel paper, document, instrument, invoice, freight bill,
bill of lading or similar document or agreement relating to the Accounts,
Inventory and any other Collateral; (ix) use a Borrower's stationery and sign
the name of a Borrower to verifications of the Accounts and notices thereof to
Account Debtors; (x) use the information recorded on or contained in any data
processing equipment and computer hardware and software relating to the
Accounts, Inventory, Equipment and any other Collateral; (xi) make and adjust
claims under policies of insurance; and (xii) do all other acts and things
necessary, in Agent's determination, to fulfill Borrowers' obligations under
this Agreement.
12.2 Indemnity. Borrowers hereby agree to indemnify Agent and Lenders and
---------
hold Agent and Lenders harmless from and against any liability, loss, damage,
suit, action or proceeding ever suffered or incurred by Agent or Lenders
(including reasonable attorneys fees and legal expenses) as the result of
Borrowers' failure to observe, perform or discharge Borrowers' duties hereunder.
In addition, Borrowers shall defend Agent and Lenders against and save them
harmless from all claims of any Person with respect to the Collateral. Without
limiting the generality of the foregoing, these indemnities shall extend to any
claims asserted against Agent or Lenders by virtue of Agent's and Lenders' being
party to this Agreement by any Person under any Environmental Laws or similar
laws by reason of Borrowers' or any other Person's failure to comply with laws
applicable to solid or hazardous waste materials or other toxic substances.
Notwithstanding any contrary provision in this Agreement, the obligation of
45
<PAGE>
Borrowers under this Section 12.2 shall survive the payment in full of the
Obligations and the termination of this Agreement.
12.3 Amendments, Etc. Except as otherwise expressly provided in this
---------------
Agreement, any provision of this Agreement and the other Loan Documents may be
modified or supplemented only by an instrument in writing signed by Borrowers,
Agent and all Lenders, or by Borrowers and Agent acting with the written consent
of all Lenders, and any provision of this Agreement and the other Loan Documents
may be waived by all Lenders or by Agent acting with the written consent of all
Lenders. Any modification, supplement or waiver shall be for such period and
subject to such conditions as shall be specified in the instrument effecting the
same and shall be binding upon Agent, Lenders and Borrowers, and any such waiver
shall be effective only in the specific instance and for the purpose for which
given.
12.4 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
12.5 Assignments and Participations.
------------------------------
12.5.1 Borrowers may not assign any of its rights or obligations
under this Agreement without the prior consent of all Lenders and Agent. Any
attempted or purported assignment in contravention of the preceding sentence
shall be null and void.
12.5.2 Each Lender may (with the consent of Borrowers, unless such
assignment is to another Lender or a subsidiary, sister company or parent of any
Lender, in which case Borrowers' consent shall not be required) assign all or
any part of its Loans and its Commitments (but only with the consent of Agent
and only pro rata among all of the various Loans and Commitments to the
Borrowers), together with, in any such case, its related rights, remedies,
powers and privileges under the Loan Documents; provided that (i) any such
--------
partial assignment shall be in an amount at least equal to $10,000,000 and the
assigning Lender shall have a retained interest at least equal to $10,000,000;
(iii) each such assignment by a Lender of its Loans and Commitments shall be
made in such manner so that the same portion of its Loans and Commitments is
assigned to the respective assignee; and (iv) the assigning Lender or the
respective assignee shall have paid to Agent an assignment fee of $5,000. Upon
execution and delivery by the assignee to Borrowers and Agent of an instrument
in writing pursuant to which such assignee agrees to become a "Lender" under
this Agreement (if not already a Lender) having the Commitment or Commitments
and Loans specified in such instrument, and upon the consent of Agent, the
assignee shall have, to the extent of such assignment (unless otherwise provided
in such assignment with the consent of Agent), the obligations, rights and
benefits of a Lender under the Loan Documents holding the Commitment or
Commitments and Loans assigned to it (in addition to the Commitment or
Commitments and Loans, if any, theretofore held by such assignee) and the
assigning Lender shall, to the extent of such assignment, be released from the
Commitment or Commitments so assigned. Any Lender may sell participations in its
Loans and Commitments, but only on terms acceptable to Agent in its reasonable
discretion.
46
<PAGE>
12.5.3 In addition to the assignments and participations permitted
under the foregoing provisions of this Section 12.5, any Lender may assign and
pledge all or any portion of its Loans to any Federal Reserve Bank as collateral
security pursuant to Regulation A of the Board of Governors of the Federal
Reserve System and any Operating Circular issued by such Federal Reserve Bank.
No such assignment shall release the assigning Lender from its obligations under
the Loan Documents.
12.5.4 A Lender may furnish any information concerning Borrowers or
any of its Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants).
12.5.5 Notwithstanding anything in this Section 12.5 to the contrary,
no Lender may assign or participate to Borrowers or any of its Affiliates or
Subsidiaries any interest in any Obligation or Commitment (or any related
rights, remedies, powers or privileges) without the prior written consent of
each Lender and Agent.
12.6 Severability. Wherever 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 only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
12.7 Successors and Assigns. This Agreement, the Other Agreement and the
----------------------
Security Documents shall be binding upon and inure to the benefit of the
successors and permitted assigns of Borrowers, Agent and Lenders.
12.8 Cumulative Effect; Conflict of Terms. The provisions of the Other
------------------------------------
Agreements and the Security Documents are hereby made cumulative with the
provisions of this Agreement. Except as otherwise provided in Section 3.2
hereof and except as otherwise provided in any of the other Loan Documents by
specific reference to the applicable provision of this Agreement, if any
provision contained in this Agreement is in direct conflict with, or
inconsistent with, any provision in any of the other Loan Documents, the
provision contained in this Agreement shall govern and control.
12.9 Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute but one and the
same instrument.
12.10 Notices. Except as otherwise provided herein, all notices, requests
-------
and demands to or upon a party hereto, to be effective, shall be in writing and
shall be sent by certified or registered mail, return receipt requested, by
personal delivery against receipt, by overnight courier or by facsimile and,
unless otherwise expressly provided herein, shall be deemed to have been validly
served, given or delivered immediately when delivered against receipt, one
Business
47
<PAGE>
Day after deposit in the mail, postage prepaid, or with an overnight courier or,
in the case of facsimile notice, when sent, addressed as follows:
If to Agent: Fleet Capital Corporation
15260 Ventura Boulevard
Suite 400
Sherman Oaks, California 91403
Attention: Loan Administration Manager
Facsimile No.: (818) 382-4291
With a copy to: Orrick, Herrington & Sutcliffe llp
777 South Figueroa Street - 32nd Floor
Los Angeles, California 90017
Attention: Earl A. Glick, Esq.
Facsimile No.: (213) 612-2499
If to Lenders: As specified below its name on Annex 1
If to either Borrower: Restoration Hardware, Inc.
15 Koch Road, Suite J
Corte Madera, California 94925
Attention: Thomas E. Low
Chief Financial Officer
Facsimile No.: (415) 924-0428
and
The Michaels Furniture Company, Inc.
c/o Restoration Hardware, Inc.
15 Koch Road, Suite J
Corte Madera, California 94925
Attention: Thomas E. Low
Chief Financial Officer
Facsimile No.: (415) 924-0428
With a copy to: Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, California 94303
Attention: Therese A. Mrozek, Esq.
Facsimile No.: (650) 496-2885
48
<PAGE>
or to such other address as each party may designate for itself by notice given
in accordance with this Section 12.10; provided, however, that any notice,
-------- -------
request or demand to or upon Agent pursuant to subsection 3.1.1 or 4.2.2 hereof
shall not be effective until received by Agent.
12.11 Certain Consents. Whenever the consent of Agent or Lenders is
----------------
required to be obtained under this Agreement, any of the Other Agreements or any
of the Security Documents as a condition to any action, inaction, condition or
event, Agent and Lenders, as the case may be, shall, except as otherwise
expressly provided herein or in the other Loan Documents, be authorized to give
or withhold such consent in its or their sole and absolute discretion and to
condition such consent upon the giving of additional collateral security for the
Obligations, the payment of money or any other matter.
12.12 Credit Inquiries. Borrowers hereby authorize and permit Agent and
----------------
Lenders to respond to usual and customary credit inquiries from third parties
concerning Borrowers or any of their Subsidiaries.
12.13 Time of Essence. Time is of the essence of this Agreement, the
---------------
Other Agreements and the Security Documents.
12.14 Entire Agreement. This Agreement and the other Loan Documents,
----------------
together with all other instruments, agreements and certificates executed by the
parties in connection therewith or with reference thereto, embody the entire
understanding and agreement between the parties hereto and thereto with respect
to the subject matter hereof and thereof and supersede all prior agreements,
understandings and inducements, whether express or implied, oral or written.
12.15 Interpretation. No provision of this Agreement or any of the other
--------------
Loan Documents shall be construed against or interpreted to the disadvantage of
any party hereto by any court or other governmental or judicial authority by
reason of such party having or being deemed to have structured or dictated such
provision.
12.16 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN
-------------------------------
NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
LOS ANGELES, CALIFORNIA. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT IF
-------- -------
ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN
CALIFORNIA, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND
PROCEDURE FOR FORECLOSURE OF THE LIEN OF THE AGENT AND LENDERS UPON SUCH
COLLATERAL AND THE ENFORCEMENT OF AGENT'S AND LENDERS' OTHER REMEDIES IN RESPECT
OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE
DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF CALIFORNIA. AS PART OF THE
CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE
DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWERS OR LENDERS, BORROWERS
HEREBY
49
<PAGE>
CONSENT AND AGREE THAT THE SUPERIOR COURT OF LOS ANGELES COUNTY, OR, AT
THE OPTION OF AGENT OR ANY LENDER, THE UNITED STATES DISTRICT COURT FOR THE
CENTRAL DISTRICT OF CALIFORNIA, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWERS AND AGENT AND/OR LENDERS
PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
AGREEMENT. BORROWERS EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWERS
HEREBY WAIVE ANY OBJECTION WHICH BORROWERS MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENT TO THE
--- ----------
GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH
COURT. BORROWERS HEREBY WAIVE PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND
OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE IN ANY MANNER PERMITTED
PURSUANT TO SECTION 12.9 TO BORROWERS AT THE ADDRESSES SET FORTH IN THIS
AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF
BORROWERS' ACTUAL RECEIPT THEREOF OR THREE DAYS AFTER DEPOSIT IN THE U.S. MAIL,
PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO
AFFECT THE RIGHT OF AGENT OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY AGENT OR ANY LENDER
OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION
UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR
JURISDICTION.
12.17 WAIVERS BY BORROWERS. BORROWERS WAIVE (i) THE RIGHT TO TRIAL BY
--------------------
JURY (WHICH AGENT AND LENDERS HEREBY ALSO WAIVE) IN ANY ACTION, SUIT, PROCEEDING
OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN
DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL: (ii) PRESENTMENT, DEMAND AND
PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY,
RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL
PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND
GUARANTIES AT ANY TIME HELD BY AGENT OR ANY LENDER ON WHICH BORROWERS MAY IN ANY
WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER AGENT OR SUCH LENDER MAY
DO IN THIS REGARD; (iii) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE
COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO
ALLOWING AGENT OR ANY LENDER TO EXERCISE ANY OF AGENT'S OR SUCH LENDER'S
REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS;
AND
50
<PAGE>
(v) NOTICE OF ACCEPTANCE HEREOF. BORROWERS ACKNOWLEDGE THAT THE FOREGOING
WAIVERS ARE A MATERIAL INDUCEMENT TO AGENT'S AND LENDERS' ENTERING INTO THIS
AGREEMENT AND THAT AGENT AND LENDERS ARE RELYING UPON THE FOREGOING WAIVERS IN
ITS FUTURE DEALINGS WITH BORROWERS. BORROWERS WARRANT AND REPRESENT THAT THEY
HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAVE KNOWINGLY AND
VOLUNTARILY WAIVED THEIR JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties in
Los Angeles, California as of the day and year specified at the beginning of
this Agreement.
RESTORATION HARDWARE, INC.
("Borrower")
By
-------------------------------------
Title
------------------------------
THE MICHAELS FURNITURE COMPANY, INC.
("Borrower")
By
-------------------------------------
Title
------------------------------
FLEET CAPITAL CORPORATION
(as "Agent" and as a "Lender")
By
-------------------------------------
Title
------------------------------
51
<PAGE>
Annex 1
Addresses for Notices, Payment Accounts and Commitments of Lenders
COMMITMENT
----------
FLEET CAPITAL CORPORATION $_________ Revolving Credit Loans
(Restoration)
$_________ Seasonal Loans
(Restoration)
$_________ Revolving Credit Loans
(Michael's)
$_________ Term Loan
(Michael's)
Address for Notices
- -------------------
15260 Ventura Boulevard
Suite 400
Sherman Oaks, California 91403
Attention: Loan Administration Manager
Facsimile No.: (818) 382-4291
Payment Account
- ---------------
Fleet National Bank, N.A.
777 Main Street
Hartford, Connecticut 06115-2000
ABA: 011900445
Account: [937-001-4304]
Re: Restoration Hardware, Inc.
52
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-51027 of our report included in this Registration Statement of Restoration
Hardware, Inc. on Form S-1 of our report dated April 16, 1998 for Michael's
Concepts in Wood, Inc., and of our report dated April 6, 1998 (May 27, 1998 as
to the last two paragraphs of Note 10) for Restoration Hardware, Inc.
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
San Francisco, California
June 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF RESTORATION HARDWARE, INC. AND ITS
SUBSIDIARIES AS OF JANUARY 31, 1998 AND MAY 2, 1998 AND FOR THE YEAR ENDED
JANUARY 31, 1998 AND THE THREE MONTHS ENDED MAY 2, 1998, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-30-1999
<PERIOD-START> FEB-02-1997 FEB-01-1998
<PERIOD-END> JAN-31-1998 MAY-02-1998
<CASH> 912 1,387
<SECURITIES> 0 0
<RECEIVABLES> 3,820 4,495
<ALLOWANCES> 0 0
<INVENTORY> 40,363 48,685
<CURRENT-ASSETS> 46,804 57,225
<PP&E> 43,675 54,978
<DEPRECIATION> 4,666 7,470
<TOTAL-ASSETS> 87,233 110,308
<CURRENT-LIABILITIES> 38,616 57,035
<BONDS> 0 0
40,610 40,610
0 0
<COMMON> 541 544
<OTHER-SE> (9,866) (10,612)
<TOTAL-LIABILITY-AND-EQUITY> 87,233 110,308
<SALES> 97,872 32,647
<TOTAL-REVENUES> 97,872 32,647
<CGS> 65,728 23,634
<TOTAL-COSTS> 65,728 23,634
<OTHER-EXPENSES> 28,949 9,851
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 139 426
<INCOME-PRETAX> 3,056 (1,264)
<INCOME-TAX> 1,308 (518)
<INCOME-CONTINUING> 1,748 (746)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,748 (746)
<EPS-PRIMARY> (.69) (.18)
<EPS-DILUTED> (.69) (.18)
</TABLE>
