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TYPE: 10-Q
SEQUENCE: 1
DESCRIPTION: FORM 10-Q FOR PERIOD ENDED OCTOBER 31, 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________.
Commission file number 333-51027
RESTORATION HARDWARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 68-0140361
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(State or Other Jurisdiction of (I.R.S. Employer ID No.)
Incorporation or Organization)
15 Koch Road, Suite J, Corte Madera, CA 94925
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415)924-1005
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check [x] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days [X] Yes [_] No
As of October 31, 1998, 16,232,071 shares of the Registrant's Common Stock
were outstanding.
<PAGE>
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1998
INDEX
PAGE
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<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Balance Sheets (unaudited) as of October 31, 1998,
January 31, 1998 and November 1, 1997. 3
Statements of Operations (unaudited) for the
three and nine months ended October 31, 1998 and
November 1, 1997 4
Statements of Cash Flows (unaudited) for the
nine months ended October 31, 1998 and
November 1, 1997 5
Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURE PAGE
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
October 31, January 31, November 1,
1998 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,561 $ 912 $ 478
Accounts receivable 9,049 3,820 7,087
Merchandise inventories 73,846 40,363 31,349
Prepaid expense and other 5,302 1,709 1,237
---------- ---------- ----------
Total current assets 90,758 46,804 40,151
Property and equipment, net 68,130 39,009 35,429
Long-term deferred tax asset 1,070 1,070 435
Goodwill 4,350 - -
Other assets 1,074 350 339
---------- ---------- ----------
Total assets $ 165,382 $ 87,233 $ 76,354
========== ========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 47,053 $ 22,359 $ 20,743
Revolving line of credit and short-term debt 8,750 10,520 10,166
Current portion of deferred lease incentives 2,117 1,392 (23)
Other current liabilities 2,431 4,345 1,306
---------- ---------- ----------
Total current liabilities 60,351 38,616 32,192
Long-term debt 579 158 936
Long-term portion of deferred lease incentives 23,318 15,264 13,518
Deferred rent 3,618 1,910 1,517
---------- ---------- ----------
Total liabilities 87,866 55,948 48,163
Redeemable preferred stock
Series A, convertible, no par value, 2,634,415
authorized, 0, 2,492,686 and 2,492,686 issued and outstanding,
respectively, liquidation preference of $0, $1,656 and $1,656,
respectively - 2,343 2,231
Series B, convertible, no par value, 2,596,825
authorized, 0, 2,218,370 and 2,218,370 issued and outstanding,
respectively, liquidation preference of $0, $5,277 and $5,277,
respectively - 5,172 5,172
Series C, convertible, no par value, 1,701,658
authorized, 0, 1,656,431 and 1,656,431 issued and outstanding,
respectively, liquidation preference of $0, $5,840 and $5,840,
respectively - 5,792 5,792
Series D, convertible, no par value, 2,783,795
authorized, 0, 2,783,795 and 2,783,795 issued and outstanding,
respectively, liquidation preference of $0, $30,902 and $29,892,
respectively - 29,726 29,172
---------- ---------- ----------
Total redeemable preferred stock - 43,033 42,367
Stockholders' equity
Common stock, $.0001 par value; 40,000,000, 24,500,000 and
24,500,000 shares authorized, respectively; 16,232,071
4,171,223 and 4,171,223 (unaudited) issued and oustanding;
respectively 2 - -
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
none issued and outstanding - - -
Additional Paid in Capital 92,107 541 541
Deficit (14,593) (12,289) (14,717)
---------- ---------- ----------
Total stockholders' equity 77,516 (11,748) (14,176)
Total liabilities, redeemable preferred stock and
stockholders' equity $ 165,382 $ 87,233 $ 76,354
========== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
RESTORATION HARDWARE, INC.
CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
(in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------------- ---------------------------
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales $49,637 $23,544 $121,959 $50,913
Cost of sales and occupancy 33,791 16,495 84,931 36,081
------- ------- -------- -------
Gross profit 15,846 7,049 37,028 14,832
Selling, general and
administrative 15,044 6,642 36,731 15,580
Preopening store expenses 734 560 1,589 1,458
------- ------- -------- -------
Income (loss) from operations 68 (153) (1,292) (2,206)
Interest income (expense) (46) 4 (891) (30)
------- ------- -------- -------
Income (loss) before
income taxes 22 (149) (2,183) (2,236)
Provision for income taxes 9 (90) (895) (1,029)
------- ------- -------- -------
Net income (loss) $ 13 $ (59) $ (1,288) $(1,207)
======= ======= ======== =======
Net earnings (loss) per share:
Basic $ 0.00 $ (0.01) $ (0.13) $ (0.33)
Diluted $ 0.00 $ (0.01) $ (0.13) $ (0.33)
Weighted average shares
Basic 16,221 4,171 10,081 3,614
Diluted 17,714 4,171 10,081 3,614
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(in thousands)
(Unaudited)
Nine months ended
-----------------------------------
October 31, 1998 November 1, 1997
---------------- ----------------
Cash flows from
operating activities:
Net loss $ (1,288) $ (1,207)
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,266 1,932
Deferred income taxes - -
Changes in assets and liabilities:
Accounts receivable (2,475) (5,071)
Merchandise inventories (31,276) (17,256)
Prepaid expenses and other assets (4,134) (1,056)
Accounts payable and accrued
expenses 21,528 13,506
Taxes payable (2,573) (1,746)
Deferred rent 1,708 881
Deferred lease incentives and
other long term liabilities 9,252 8,938
---------------- --------------
Net cash used in operating
activities (4,992) (1,079)
Cash flows from investing activities:
Capital expenditures (31,909) (22,519)
Payment for purchase of The Michaels
Furniture Company (5,841) -
Cash collected on shareholder
advance 508 -
---------------- --------------
Net cash used in investing
activities (37,242) (22,519)
Cash flows from financing activities:
Borrowings (repayments) under revolving
line of credit (3,136) 9,612
Principal payments--capital lease
obligations (191) (139)
Borrowings (repayments) under term loan (313) 240
Loan to stockholder - -
Issuance of redeemable preferred stock - 26,922
Issuance of common stock 47,523 (138)
Preferred and common stock repurchases - (12,746)
---------------- --------------
Net cash provided by financing
activities 43,883 23,751
Net increase (decrease) in cash and cash
equivalents 1,649 153
Cash and cash equivalents:
Beginning of period 912 325
---------------- --------------
End of period $ 2,561 $ 478
================ ==============
Supplemental schedule of non cash
investing and financing activities:
Equipment acquired through noncash
capital lease transactions - 681
See Notes to Condensed Consolidated Financial Statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 1998 AND NOVEMBER 1, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of the Company without audit and, in the opinion of
management, include all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position at October 31, 1998
and November 1, 1997; the interim results of operations for the three and nine
months ended October 31, 1998 and November 1, 1997; and changes in cash flows
for the nine months then ended. The balance sheet at January 31, 1998,
presented herein, has been derived from the audited consolidated balance sheet
for the year then ended.
Accounting policies followed by the Company are described in Note 1 to the
audited consolidated financial statements for the year ended January 31, 1998.
Certain information and footnote disclosures normally included in the notes to
the annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted for purposes of the
condensed consolidated interim financial statements. The condensed
consolidated interim financial statements should be read in conjunction with
the audited consolidated financial statements, including notes thereto, for
the year ended January 31, 1998.
The results of operations for the three and nine-month periods herein presented
are not necessarily indicative of the results to be expected for the full year.
Impact of New Accounting Standard--Effective February 1, 1998 the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
comprehensive Income." This Statement requires that all items recognized under
accounting standards as components of comprehensive income be reported in an
annual financial statement that is displayed with the same prominence as other
annual financial statements. This Statement also requires that an entity
classify items of other comprehensive income by their nature in an annual
financial statement. For example, other comprehensive income may include foreign
currency translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on marketable securities classified as
available-for-sale. Comprehensive income does not differ from net income for the
Company for the three and nine-month periods ended October 31, 1998 and November
1, 1997.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities, which
requires costs of start-up activities and organization costs to be expensed as
incurred.
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The SOP requires entities to expense as incurred all start-up and preopening
costs that are not otherwise capitalizable as long-lived assets. The SOP will be
effective for fiscal years beginning after December 15, 1998. The Company's
adoption of the new accounting standard will involve the recognition of the
cumulative effect of the change in accounting principle required by SOP as a
one-time charge against earnings, net of any related income tax effect,
retroactive to the beginning of the fiscal year of adoption. The Company
believes that adoption of this standard will not have a material impact on the
Company's earnings or financial position.
2. REVOLVING LINE OF CREDIT
On August 12, 1998, the Company amended its line of credit agreement. The
amended agreement allows for cash borrowings and letters of credit up to $70.0
million, an increase of $12.0 million from the agreement dated April 30, 1998.
The agreement has also been extended to June 30, 2000, from the previous
maturity date of December 22, 1999. Interest is paid monthly at the bank's
reference rate (8.00% at October 31, 1998) or LIBOR plus 1.25%, depending on the
nature of the borrowings and the Company's debt to tangible net worth position.
The amended agreement has eliminated certain restrictive covenants, leaving the
Company subject to debt to tangible net worth and minimum net income
requirements. At October 31, 1998, the Company was in compliance with all
applicable covenants and had $8.8 million outstanding on the line of credit and
$1,398,000 outstanding letters of credit.
3. EARNINGS PER SHARE
Basic earnings per share is computed as net income divided by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible securities. The
1,493,000 share increase in the diluted weighted average shares for the three
months ended October 31, 1998 reflects the potential dilution of stock options.
On June 18, 1998 the Company issued 2,777,775 shares of common stock related to
an initial public offering and converted 9,151,282 of existing preferred stock
to common stock. Had the preferred stock been converted to common stock at the
beginning of the periods presented, rather than in connection with the initial
public offering the resulting proforma earnings per share and weighted average
number of common shares outstanding, both basic and diluted, would be as
follows.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Earnings (loss) per share
Pro Forma Basic $0.00 $0.00 ($0.09) ($0.09)
Pro Forma Diluted $0.00 $0.00 ($0.09) ($0.09)
Weighted average shares
Pro Forma Basic 16,221 13,323 14,740 12,765
Pro Forma Diluted 17,714 13,323 14,740 12,765
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Restoration Hardware, Inc. operated 60 stores in 23 states, the District of
Columbia and Canada as of October 31, 1998, compared to 36 stores in 18 states
as of November 1, 1997.
RESULTS OF OPERATIONS
THE THREE MONTHS (THIRD QUARTER) AND NINE MONTHS (YEAR-TO-DATE) ENDED OCTOBER
31, 1998 AS COMPARED TO THE THREE MONTHS (THIRD QUARTER) AND NINE MONTHS (YEAR-
TO-DATE) ENDED NOVEMBER 1, 1997
NET SALES. Net sales increased $26.1 million, or 111.0%, to $49.6 million in
the third quarter of 1998 from $23.5 million in the third quarter of 1997. Year
to date net sales were $122.0 million compared to $50.9 million for the same
period in 1997, an increase of $71.1 million, or 139.5%. This increase in net
sales was attributable to new stores, an increase in comparable store sales and
sales from the Company's wholly owned subsidiary, acquired during the first
quarter of 1998. At October 31, 1998, the Company operated 60 stores as
compared to 36 stores at November 1, 1997. These additional 24 stores
contributed $20.4 million of the sales increase for the third quarter of 1998
and $57.5 million of the sales increase year to date. Comparable store sales
increased 11.0% in the third quarter of 1998 and 14.4% year to date primarily as
a result of increases in number of sales transactions in the stores compared to
the prior year. The Company expects comparable store sales to decrease in the
future as its store base matures.
GROSS PROFIT. Gross profit increased $8.8 million, or 124.8%, to $15.8 million
in the third quarter of 1998 from $7.0 million in the third quarter of the prior
year. As a percentage of net sales, third quarter gross profit was 31.9% in
1998 compared to 29.9% in 1997. The increase in gross profit for the third
quarter, as a percentage of net sales, resulted from improved retail merchandise
margins, higher capitalized costs of merchandise due to the increase in
inventory levels and improved leverage on store occupancy costs over the prior
year.
Year-to-date gross profit was $37.0 million compared to $14.8 million in the
prior year, an increase of $22.2 million, or 149.6%. Year-to-date gross profit
as a percentage of net sales was 30.4% compared to 29.1% in the prior year. The
increase in gross profit over the prior year, as a percentage of sales, resulted
from improved retail merchandise margins offset by the consolidation effects of
lower manufacturing margins.
8
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SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expense increased
$8.4 million, or 126.5%, to $15.0 million in the third quarter of 1998 from $6.6
million in the third quarter of the prior year. As a percentage of net sales,
SG&A expenses increased to 30.3% in the third quarter of 1998 compared to 28.2%
in the third quarter of the prior year. The increase in SG&A expense for the
third quarter, as a percentage of sales, resulted mainly from higher costs of
inventory management including both the procurement and distribution of
inventory due to the Company's decision to bring in more holiday merchandise
prior to the fourth quarter. Additionally, operating costs were incurred for
the catalog compared to zero costs in the same period in the prior year.
Year-to-date SG&A expense was $36.7 million compared to $15.6 million in the
prior year, an increase of $21.2 million, or 135.8%. Year-to-date SG&A expense,
as a percentage of sales, was 30.1% compared to 30.6% in the prior year. While
store selling expenses and the cost of the corporate office continues to
increase in dollars, the Company has been able to leverage the expense as a
percentage of sales due to increasing sales volume. However, third quarter
procurement and distribution costs related to inventory increases impacted the
year to date expense thereby narrowing the improvement over the prior year.
PREOPENING STORE EXPENSE. Preopening store expense, which includes payroll and
benefit expense, facility supplies, occupancy and travel expenses incurred prior
to the store opening date, was $734,000 for the third quarter of 1998 compared
to $560,000 in the prior year. As a percentage of net sales, preopening store
expense was 1.5% for the third quarter of 1998 compared to 2.4% in the prior
year. Preopening expense was higher in the third quarter of 1998 than in the
third quarter of the prior year as nine new stores were opened in the current
year compared to six new stores opened in the prior year. Year-to-date
Preopening store expense was $1.6 million in 1998 compared to $1.5 million in
the prior year. Year-to-date, as a percentage of net sales, preopening store
expense was 1.3% for 1998 compared to 2.9% in the prior year.
NET INTEREST EXPENSE. Net interest expense, which includes capital lease
interest and interest expense net of interest income, was $46,000 for the third
quarter of 1998 compared to interest income of $4,000 in the third quarter of
the prior year. Year-to-date net interest expense was $891,000 in 1998 compared
to $30,000 in the prior year. The increase in expense was attributable to
higher borrowings under the Company's credit facility over prior year due to
higher inventory levels in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses for cash, other than to fund operating expenses, are
to support inventory requirements and for store expansion. Historically, the
Company has financed its operations primarily with internally generated funds,
borrowings under the
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Company's credit facility and privately invested funds, and most recently
through an initial public offering completed on June 19, 1998. The Company
believes that its cash and cash equivalents, available borrowings under its
revolving line of credit and internally generated funds will be sufficient to
finance its working capital and capital expenditure requirements for the next 12
months.
On August 12, 1998, the Company amended its line of credit agreement. The
amended agreement allows for cash borrowing and letters of credit up to $70.0
million, an increase of $12.0 million from the agreement dated April 30, 1998.
The agreement has also been extended to June 30, 2000, from the previous
maturity date of December 22, 1999. Interest is paid monthly at the bank's
reference rate (8.00% at October 31, 1998) or LIBOR plus 1.25%, depending on the
nature of the borrowings and the company's debt to tangible net worth position.
The amended agreement has eliminated certain restrictive covenants, leaving the
Company subject to debt to tangible net worth and minimum net income
requirements. At October 31, 1998, the Company was in compliance with all
applicable covenants and had $8.8 million outstanding on the line of credit and
$1,398,000 outstanding letters of credit.
Net cash used in operating activities year to date for 1998 was $5.0 million, an
increase of $3.9 million over cash used of $1.1 million in the prior year. This
increase resulted primarily from higher inventory purchases, higher accounts
receivable, prepaid and other asset balances offset by a lower change in
accounts payable and accrued liability balances.
Net cash used in investing activities year to date for 1998 was $37.2 million,
an increase of $14.7 million over cash used in investing activities of $22.5
million in the prior year. Historically, cash used in investing activities has
been related to capital expenditures for new store expansion. Such expenditures
totaled $32.0 million year to date for 1998 compared to $22.5 million in the
prior year. Additionally, the Company used $5.8 million to purchase The
Michaels Furniture Company in 1998.
Net cash provided by financing activities year to date for 1998 was $43.9
million compared to $23.8 million in the prior year, an increase of $20.1
million. The Company paid down $3.1 million on its revolving line of credit
year to date in 1998 compared to borrowings of $9.6 million in the prior year.
Net cash provided by financing activities also include $47.5 million received in
June 1998 as a result of the Company's initial public offering, less related
expenses. The proceeds were used to pay down balances on the Company's
revolving line of credit and term loan. Remaining unused proceeds were used for
working capital and other general corporate purposes. In the comparable period
of 1997, the Company issued Series D Preferred Stock and received $13.0 million,
net of Preferred and Common Stock repurchased, in proceeds used for store
expansion during the latter half of 1997.
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In connection with the acquisition of its furniture subsidiary ("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 $2.6 million, (ii) an additional
3.3% of such shares of Michaels if Michaels' EBITDA for the fiscal year ending
January 29, 2000 equals of 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.
YEAR 2000
The Year 2000 (Y2K) issue stems from the fact that many computer programs were
written using two, rather than four, digits to identify the applicable year. As
a result, computer programs with date and/or time-sensitive software may
recognize a two-digit code for any year in the next century as related to this
century. For example, "00", entered in a date field for the year 2000, may be
interpreted as the year 1900, resulting in system failures or miscalculations
and disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in other normal business activities.
Another consideration in this matter is not only the rollover from December 31,
1999 to January 1, 2000, but also that the year 2000 is a leap year, and many
computer programs will not recognize this fact, and will also cause date
calculations to be incorrect.
Readiness for the Year 2000
The Company has formed a Year 2000 (Y2K) Task Force to address the Y2K issue,
including efforts to assess issues the Company faces if third parties who do
business with the Company are not prepared to fully address their Y2K issues,
and contingency planning. The primary goal of this Task Force is to ensure an
uninterrupted transition into the new Millennium. The Task Force, which
utilizes the expertise of outside consultants, has prepared a plan that will
identify, prioritize and address Y2K issues, both internal and those of
significant third parties. The scope of the Y2K Readiness Project includes all
Company locations, software, hardware, interfaces with third party systems,
and manufacturing, as well as non information technology (IT) components such
as environmental and safety systems, facilities, utilities and supplier
readiness.
The Readiness Project is divided into four main phases. Phase 1 includes
defining the project scope, providing for Company-wide awareness and generating
a preliminary estimate of expense or a project budget. Phase 2 includes
identification and inventorying of IT resources and significant dependence on
third parties. Phase 3 includes assessment of Y2K compliance on both internal
and third party IT components and impact of compliance on current business
operations. Phase 4 includes rectification and remediation planning and
implementation and development of a contingency plan for critical business
operations should non-compliance potentially disrupt normal business functions.
The Company is currently in Phase 2 of the Readiness Project. The Company plans
for the Project to be completed by mid to late 1999.
Costs
The Company estimates expenditures necessary to complete the Y2K Readiness
Project will be approximately $500,000 over the next 12 months, with most of the
spending occurring in
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1999. The Company has identified that it will need to, and is in the process
of, upgrading its manufacturing operation's information system to the next
vendor version or replace it in order to become Y2K compliant. Other significant
expenditures necessary to complete the Y2K Readiness Project will include hiring
an outside consultant and other software upgrades/replacements. Operating costs
related to the Y2K Readiness Project will be incurred over several quarters and
will be expensed as incurred. The Company has not separately tracked the
internal costs incurred for the Y2K Readiness Project. Such costs are primarily
payroll and related costs for its information systems group. Other costs
incurred to date have been insignificant.
Risks and Contingency Plans
The Company intends and expects to implement the changes necessary to address
the Y2K issue for its internal IT systems. Because the Company has no "in-house"
applications, that is, all software has been purchased from third party vendors
and no software has been programmed or coded within the Company, the Company
believes that with modifications to existing software and/or conversions to new
software, the Y2K issue is not reasonably likely to pose significant operational
problems for the Company's IT systems as modified and converted.
The Company is presently unable to assess the likelihood that the Company will
experience significant operational problems due to unresolved Y2K compliance
issues from third parties. This not only applies to software and hardware
vendors, but also vendors of non-IT components. Although the Company is
currently working with third party vendors to address any issues, there can be
no assurance that the Company can timely mitigate its risks related to a third
party's failure to resolve its Y2K issues. If such mitigation is not achievable,
Y2K problems could have a material impact on the Company's operations.
The Company currently believes that the most reasonably likely worst-case
scenarios that it may confront relate to possible failure in one or more
geographic regions of third party systems over which the Company has no control,
such as, but not limited to, electrical, communication and delivery services.
For example, if such services were to cease the Company may have to temporarily
close stores in the affected areas. Given such a scenario, the Company's focus
in developing a contingency plan will be related to keeping stores open and
obtaining replenishment inventories, maintaining communication and data transfer
between the home office and store locations and ultimately of ensuring that
payments are made to both employees and vendors.
The Company's estimates of the costs of achieving Y2K compliance and the date by
which Y2K compliance will be achieved are based on management's best estimates,
which were derived using numerous assumptions about future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no assurance that these estimates will be
achieved, and actual results could differ materially from these estimates.
Specific factors that might cause such material differences include, but are not
limited to, the
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availability and cost of personnel trained in Y2K remediation work, the ability
to locate and correct all relevant computer codes, the success achieved by the
Company's suppliers in reaching Y2K readiness, the timely availability of
necessary replacement items and similar uncertainties.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
holiday season. Due to the importance of the holiday selling season, the fourth
quarter of each year has historically contributed, and the Company expects it
will continue to contribute, a disproportionate percentage of the Company's net
sales and most of its net income for the entire year. In anticipation of
increased sales activity, during the fourth quarter, the Company incurs
significant additional expenses. If, for any reason, the Company's sales were
to fall below its expectations in November and December, the Company's business,
financial condition and annual operating results would be materially adversely
affected. In addition, the Company makes decisions regarding merchandise well
in advance of the season in which it will be sold, particularly for the holiday
selling season. Significant deviations from projected demand for products could
have a material adverse effect on the Company's financial condition and results
of operations.
The Company's quarterly results of operations may also fluctuate based upon a
variety of other factors, including among other things, the number and timing
of store openings and related preopening store expenses, the amount of net
sales contributed by new and existing stores, the mix of products sold, the
timing and level of markdowns, store closings, refurbishments or relocations,
competitive factors and general economic conditions.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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Certain statements contained in this quarterly report on Form 10-Q contain
forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve risks
and uncertainties. Among the important factors which could cause actual results
to differ materially from those in the forward-looking statements are
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, and other factors set
forth under the caption "Factors that may Affect Future Results" herein and
those factors detailed in the Company's filings with the Securities and Exchange
Commission including its recent filing on Form S-1, including those described in
"Risk Factors", "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 therein."
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company. The
Company is, however, involved in routine litigation arising in ordinary course
of its business, and, while the results of the proceedings cannot be predicted
with certainty, the Company believes that the final outcome of such matters will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
*3.1 Amended and Restated Certificate of Incorporation
3.2 Bylaws, as amended at 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
*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
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*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
10.13 Second Amendment to the Fourth Amended and Restated Loan and Security
Agreement dated October, 1998
27.1 Financial Data Schedule
* Incorporated by reference to Form S-1 (File No. 333-51027)filed on June 17,
1998.
(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.
(c) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three month period
ended October 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
RESTORATION HARDWARE, INC.
--------------------------
Date: December 14, 1998 /s/ Stephen Gordon
--------------------------
By: Stephen Gordon
Chief Executive Officer
and Chairman
RESTORATION HARDWARE, INC.
--------------------------
Date: December 14, 1998 /s/ Thomas Low
--------------------------
By: Thomas Low
Senior Vice President and
Chief Financial Officer
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
RESTORATION HARDWARE, INC.
(Amended Through August 27, 1998)
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 the meeting. At each annual meeting, the stockholder
shall elect directors to succeed those whose
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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 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.
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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.
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
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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;
(c) the amount of stock of the corporation owned
beneficially, either directly or indirectly, by each proposed nominee and each
such person; and
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(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 (i) 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 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
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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. 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.
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
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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.
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.
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
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<PAGE>
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 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.
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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 persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
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
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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 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.
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.
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.
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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 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 Company may also have a Chairman of the Board, Chief Executive
Officer, one or more Vice Presidents, a Controller, one or more Assistant
Secretaries and Assistant Treasurers, and such other officers as may be
appointed by the Board of Directors, or, with authorization from the Board of
Directors, by the President. Any number of offices may be held by the same
person, unless the certificate of incorporation or these bylaws otherwise
provide.
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Section 2. The Board of Directors shall appoint the officers of the
----------
corporation at each annual meeting of stockholders.
Section 3. 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 4. 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.
Section 5. Duties and Functions.
----------
(a) 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 shall have and may exercise such powers as are, from time to
time, assigned to him by the Board of Directors and as may be provided by
law.
(b) The Chief Executive Officer will perform the duties and powers as
are incident to the office of the chief executive officer and shall have
and may exercise such powers as are, from time to time, assigned to him by
the Board of Directors and as may be provided by law.
(c) The President will perform the duties and power as are incident
to the office of President and shall have and may exercise such powers as
are, from time to time, assigned to him by the Board of Directors and as my
be provided by law.
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(d) The Chief Executive Officer, the Chief Financial Officer, 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.
(e) 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.
(f) 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 perform like duties for the standing
committees when required. He 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 shall be. He
shall have custody of the corporate seal of the corporation and he, 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
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give general authority to any other officer to affix the seal of the
corporation and to attest the affixing by his signature.
(g) 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.
(h) 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. He 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 chief financial officer and of the financial
condition of the corporation.
(i) 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 Chief Financial Officer or in the event of his
inability or refusal to act, perform the duties and
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exercise the powers of the chief financial officer and shall perform such
other duties and have such other powers as the Board of Directors may from
time to time prescribe.
(j) Any other officers shall perform such duties and have such 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 Directors, or the President or a Vice-President and the
Chief Financial Officer 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
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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.
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 before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
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.
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.
16
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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 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.
Section 5. 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, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
17
<PAGE>
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.
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.
Section 4. The fiscal year of the corporation shall be fixed by
----------
resolution of the Board of Directors.
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.
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
18
<PAGE>
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 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
19
<PAGE>
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 "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."
20
<PAGE>
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 of incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal bylaws.
21
<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.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this 27th day of August, 1998.
/s/ Thomas Low
--------------
Thomas Low
Secretary
22
<PAGE>
EXHIBIT 10.13
AMENDMENT NUMBER TWO
--------------------
This AMENDMENT TO LOAN AGREEMENT ("Amendment") dated as of this ____
day of October, 1998, among FLEET CAPITAL CORPORATION, as Agent, the financial
institutions party to the Loan Agreement (as defined below) as Lenders, and
RESTORATION HARDWARE, INC. and THE MICHAELS FURNITURE COMPANY, INC. (each a
"Borrower" and collectively "Borrowers"), is made in reference to the following
facts:
A. Agent, Lenders and Borrowers have previously entered into that
certain Fourth Amended and Restated Loan and Security Agreement dated as of
April 30, 1998 ("Loan Agreement") and various agreements and instruments
collateral thereto (collectively with the Loan Agreement, the "Loan Documents").
All capitalized terms used herein, unless otherwise defined herein, shall have
the meanings set forth in the Loan Documents.
B. Without waiving any of Agent's or Lenders' rights and remedies,
Agent and Lenders are willing to amend the Loan Agreement on the terms and
subject to the conditions set forth in this Amendment. Borrowers are entering
into this Amendment with the understanding and agreement that, except as
specifically provided herein, none of Agent's or Lenders' rights or remedies as
set forth in the Loan Documents is being waived or modified by the terms of this
Amendment.
NOW THEREFORE, in consideration of the foregoing agreed upon recitals
and the terms and conditions hereof, the parties do hereby agree as follows:
1. The provisions of Section 1.1.1 (A) of the Loan Agreement is
amended in full to read as follows:
"(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 (after giving effect to all amounts requested) plus the LC
Amount plus the aggregate outstanding principal amount of the Convertible Term
Loan plus the aggregate amount of Revolving Credit Loans to Michaels at such
date exceed the lesser of (i) the aggregate amount of the Restoration
Commitments as in effect from time to time or (ii) the aggregate Restoration
Borrowing Base at such time minus reserves against such Borrowing Base, if any,
that may be established by Agent from time to time in accordance with this
subsection; and"
2. The provisions of subsection 1.1.1(B) of the Loan Agreement are
amended in full to read as follows:
"(B) for Michaels, the amount of the Michaels' Revolving Credit
Commitment of such Lender for Revolving Credit Loans as in effect from time to
time, provided that (i) in no event shall the aggregate principal amount of all
Revolving Credit Loans to Michaels exceed the lesser of (a) the aggregate amount
of the Michaels Revolving Credit Commitments as in effect from time to time or
(b) the aggregate Michaels Borrowing Base at such time minus reserves against
such Borrowing Base, if any, that may be established by Agent
1
<PAGE>
from time to time in accordance with this subsection; and (ii) in no event shall
the aggregate outstanding principal amount of all Revolving Credit Loans to
Michael's (after giving effect to all amounts requested) plus the LC Amount plus
the aggregate outstanding principal amount of all Revolving Credit Loans to
Restoration plus the aggregate outstanding principal amount of the Convertible
Term Loan exceed the lesser of (a) the aggregate amount of the Restoration
Commitments as in effect from time to time or (b) the aggregate Restoration
Borrowing Base at such time minus reserves against such Borrowing Base, if any,
that may be established by the Agent from time to time in accordance with this
subsection."
3. The provisions of subsection 1.3 of the Loan Agreement are amended in
full to read as follows:
"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 (i) the
--------
aggregate outstanding undrawn amount of all Letters of Credit (the "LC Amount")
at any time shall not exceed $3,000,000 and (ii) in no event shall the LC Amount
(after giving effect to all requested Letters of Credit) plus the aggregate
outstanding principal amount of all Revolving Credit Loans to Restoration plus
the aggregate outstanding principal amount of the Convertible Term Loan plus the
aggregate outstanding principal amount of all Revolving Credit Loans to
Michael's exceed the lesser of (a) the aggregate amount of the Restoration
Commitments as in effect from time to time or (b) the aggregate Restoration
Borrowing Base at such time minus reserves against such Borrowing Base, if any,
that may be established by the Agent from time to time in accordance with
Section 1.1.1 hereof. 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 percentage of the aggregate
Restoration Commitments 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."
4. The provisions of Section 1.4 of the Loan Agreement are amended in
full to read as follows:
"1.4 Convertible Term Loan and Acquisition Line Loans. Lenders
------------------------------------------------
agree, ratably in accordance with their respective commitments as set forth on
Annex 1, to make Convertible Term Loans and, in accordance with their respective
Acquisition Line
2
<PAGE>
Commitments, to make Acquisition Line Loans available to Restoration for the
purposes and in the amounts set forth below:
(a) $10,000,000 term loan facility for use by Restoration,
at its option, once each calendar year, to convert a portion of
its outstanding Revolving Credit Loans into a term loan
("Convertible Term Loan"). Each Convertible Term Loan shall be
for a term of thirteen months, from the date of such conversion
(or, if earlier, on the termination of this Agreement pursuant to
Section 4 hereof), interest only, payable monthly in arrears, all
principal and unpaid interest to be paid at maturity or, if
earlier, upon termination of this Agreement for any reason. Such
conversions from Revolving Credit Loans to Convertible Term Loans
shall be in minimum increments of $1,000,000 each, and shall
occur upon Restoration's request therefor. Concurrently with any
such request, Restoration shall execute and deliver to Agent a
Convertible Term Loan Note in the form of Exhibit 1.4 hereto, in
favor of each Lender, in the face amount of the Convertible Term
Loan owing to such Lender.
(b) $10,000,000 term loan facility for use by Restoration,
at its option, for the purpose of acquiring similar businesses,
trademarks and the like ("Acquisition Line"). Provided no
Default or Event of Default then exists or would be created
thereby and each Lender has consented to the underlying
acquisition and the terms of such Loans in its sole discretion,
in the exercise of its reasonable credit judgment draws under the
Acquisition Line may be made, shall be in minimum amounts of
$1,000,000 and shall be for a purpose and upon such terms and
conditions as shall be acceptable to each of the Lenders in their
sole discretion in the exercise of their reasonable credit
judgment."
5. The provisions of Section 2.3 (iv) of the Loan Agreement are amended
in full to read as follows:
"(iv) Lenders shall receive payments of all amounts made by the
Borrowers hereunder free and clear of, and without deduction for, any Taxes. If
(1) Lenders shall be subject to any Tax in respect of any payment made by a
Borrower hereunder or any part thereof or, (2) Borrowers shall be required to
withhold or deduct any Tax from any such amount, the relevant amount payable
hereunder 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 amount of such recovery and the basis therefor shall, in the absence
of manifest error, be conclusive."
3
<PAGE>
6. The provisions of Section 2.6 of the Loan Agreement are amended in
full to read as follows:
"2.6 Reimbursement of Expenses. If, at any time or times regardless
-------------------------
of whether or not an Event of Default then exists, Agent or, where and to the
extent expressly indicated below any Lender, 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 (and
including the costs and expenses of any Lender in connection therewith); 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."
7. A new Section 2.8 is added to the Loan Agreement to read as follows:
"2.8. Changed Circumstances.
---------------------
(a) In the event that the Agent or any Lender shall have determined
in good faith (which determination shall be final and
conclusive) that:
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<PAGE>
(i) adequate and fair means do not exist for ascertaining the LIBOR
Rate, or
(ii) the making of a LIBOR Loan or the continuation of or conversion
of any Loan to a LIBOR Loan has been made unlawful due to (1)
the occurrence of a contingency that materially and adversely
affects the interbank foreign currency deposits market or (2)
compliance by the Agent or any Lender in good faith with any
applicable law or governmental regulation, guideline or order or
interpretation or change thereof by any governmental authority
charged with the interpretation or administration thereof or
with any request or directive of any such governmental authority
(whether or not having the force of law); or
(iii) the LIBOR Rate no longer represents the effective cost to any
Lender for U.S. dollar deposits in the interbank market for
deposits in which it regularly participates;
then, and in any such event, the Agent or such Lender shall forthwith so
notify the Borrowers. Until the Agent or such Lender notifies the
Borrowers that the circumstances giving rise to such notice no longer
apply, the obligation of the Agent or such Lender to allow selection by
the Borrowers of LIBOR Loans shall be suspended. If at the time the
Agent or such Lender so notifies the Borrower, either of the Borrowers
has previously made a LIBOR Request but such LIBOR Loan has not yet been
made, continued or converted, such notification shall be deemed to be
void and the applicable Borrower may borrow Base Rate Loans by giving a
substitute request therefor.
Upon such date as shall be specified in such notice (which shall not be
earlier than the date such notice is given) the Borrowers shall
forthwith convert the relevant LIBOR Loans to Base Rate Loans in
accordance with Section 2.3 hereof by giving a notice to the Agent.
(b) In case the adoption of or any change in any law, regulation,
treaty or official directive or the interpretation or application
thereof by any court or by any governmental authority charged with
the administration thereof or the compliance with any guideline or
request of any central bank or other governmental authority
(whether or not having the force of law):
(i) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by,
the Agent or any Lender (other than such
5
<PAGE>
requirements as are already included in the determination of
the LIBOR Rate), or
(ii) imposes upon the Agent or any Lender any other condition with
respect to its or the Borrowers' performance under this
Agreement,
and the result of any of the foregoing is to increase the cost to any
Lender, reduce the income receivable by any Lender or impose any expense
upon any Lender with respect to the Loans or the commitments of the
Lenders hereunder in an amount which such Lender in good faith determines
is material, such Lender shall notify the Borrowers thereof as promptly
as is reasonably practical. The Borrowers agree to pay to such Lender the
amount of such increase in cost, reduction in income or additional
expense as and when such cost, reduction or expense is incurred or
determined, upon presentation by such Lender of a statement in the amount
and setting forth a calculation thereof, which statement shall be deemed
true and correct absent manifest error."
8. A new Section 2.9 is added to the Loan Agreement to read as follows:
"2.9. Capital Requirements. If after the date hereof any Lender
--------------------
determines that (i) the adoption of or change in any law, rule, regulation or
guideline regarding capital requirements for banks or bank holding companies, or
any change in the interpretation or application thereof by any governmental
authority charged with the administration thereof, or (ii) compliance by the
Lender or its parent bank holding company with any guideline, request or
directive of any such entity regarding capital adequacy (whether or not having
the force of law), has the effect of reducing the return on such Lender's or
such holding company's capital as a consequence of its commitment to make Loans
and to issue or participate in the issuance of Letters of Credit hereunder to a
level below that which such Lender or such holding company could have achieved
but for such adoption, change or compliance (taking into consideration such
Lender's or such holding company's then existing policies with respect to
capital adequacy and assuming the full utilization of such entity's capital) by
any amount deemed by such Lender in good faith to be material, such Lender shall
notify the Borrowers thereof as promptly as is reasonably practical. The
Borrowers agree to pay to such Lender the amount of such reduction in the return
on capital as and when such reduction is determined, upon presentation by such
Lender of a statement in the amount and setting forth a calculation thereof,
which statement shall be deemed true and correct absent manifest error. In
determining such amount, such Lender may use any reasonable averaging and
attribution methods."
9. A new Section 2.10 is added to the Loan Agreement to read as follows:
"2.10. Indemnity. The Borrowers agree to indemnify the Lenders and
---------
to hold the Lenders harmless from and against any loss, cost or expense
(including loss of anticipated profits) that the Lenders may sustain or incur as
a consequence of (a) default by the Borrowers in payment of the principal amount
of or any interest on any LIBOR Loan as and when due and payable, including any
such loss or expense arising from interest or fees payable
6
<PAGE>
by any Lender to lenders of funds obtained by it in order to maintain its LIBOR
Loans, or (b) default by the Borrowers in making a borrowing or conversion after
a Borrower has given (or is deemed to have given) a LIBOR Request relating
thereto, or (c) the making of any payment of a LIBOR Loan or the conversion of
any such Loan to a Base Rate Loan on a day that is not the last day of the
applicable LIBOR Period with respect thereto, including interest or fees payable
by any Lender to lenders of funds obtained by it in order to maintain any such
Loan. The Borrowers agree to pay to the Lenders the amount of such loss, cost or
expense as and when such loss, cost or expense is incurred or determined, upon
presentation by the relevant Lender of a statement in the amount and setting
forth such Lender's calculation thereof, which statement shall be deemed true
and correct absent manifest error. This covenant shall survive the termination
of this Agreement and the repayment of any outstanding Note, Loans and other
obligations of the Borrowers hereunder."
10. A new Section 2.11 is added to the Loan Agreement to read as follows:
"2.11 Procedure for Claims.
--------------------
(a) The Borrowers shall not be required to compensate any Lender
pursuant to Section 2.8 or 2.9 hereof for any amounts arising in respect of
increased costs, funding indemnity, or other indemnity relating to changes in
regulatory conditions for any Lender to the extent that such amounts were
incurred more than 180 days prior to the date that such Lender notifies the
Borrowers of such Lender's intention to claim compensation therefor, provided
--------
that if the event or change in regulatory condition giving rise to such amounts
is retroactive, then such 180-day period referred to above shall be extended to
include the period of retroactive effect thereof.
(b) Each Lender agrees that as promptly as practicable after it
becomes aware of the occurrence of an event that would entitle it to make a
claim for compensation in respect of increased costs, or other regulatory
indemnities relating to changes of regulatory conditions for any Lender, it
shall use reasonable efforts to make, fund or maintain its affected Loans
through another lending office if as a result thereof the increased costs would
be avoided or materially reduced or any illegality would thereby cease to exist
and if, in the reasonable opinion of such Lender, the making, funding or
maintaining of such Loans through such other lending office would not in any
material respect be disadvantageous to such Lender or contrary to such Lender's
normal banking practices.
(c) Upon the receipt by any Borrower from any Lender (an "Affected
Lender") of a request for compensation in respect of increased costs, or other
regulatory indemnities relating to changes of regulatory conditions for any
Lender, the Borrowers may (i) request one more of the other Lenders to acquire
and assume all or part of such Affected Lender's Loans and Commitment; or (ii)
designate an Eligible Assignee satisfactory to the Borrower to acquire and
assume all or part of such Affected Lender's Loans and Commitment (a
"Replacement Lender"). Any such designation of a Replacement Lender under
clause (ii) shall be subject to the prior written consent of the Agent (which
consent shall not be unreasonably withheld). In connection with any such
assumption (A) the Replacement Lender shall pay to the Affected Lender in
immediately available funds on the date of the assignment the principal amount
of the Loans made by the Affected Lender hereunder which are being acquired by
the Replacement Lender,
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<PAGE>
and (B) the Borrowers shall pay to the Affected Lender in immediately available
funds on the date of the assignment the interest accrued to the date of the
assignment on the Loans which are being acquired by the Replacement Lender and
all other amounts then accrued for the Affected Lender's account or owed to it
hereunder with respect to such Loans (including any such increased costs or
regulatory indemnities.)"
11. The provisions of Section 3.1.1 (i) of the Loan Agreement are
amended in full to read as follows:
"(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 no Lender shall have
--------
any obligation to make any Loans 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."
12. The provisions of Section 3.1.2 of the Loan Agreement are amended in
full to read as follows:
"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) shall not be affected by (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, solely to the extent that the
Agent has obtained actual knowledge of such Default or Event of Default after
Agent shall have made the Loans available to Borrowers, or (iii) the failure of
any other Lender to make its Loans available to Agent."
8
<PAGE>
13. The provisions of Section 3.1.4 of the Loan Agreement are amended in
full to read as follows:
"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 (but in no event in excess of
the aggregate Restoration Commitments when such Revolving Credit Loans to the
Borrowers are aggregated with all Convertible Term Loans and the LC Amount as
set forth in Section 1.1.1 hereof) 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 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."
14. The provisions of Section 3.1.5 of the Loan Agreement are amended in
full to read as follows:
"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 Michaels Borrowing Base), provided that nothing
--------
contained herein shall be deemed to permit the making of any Discretionary
Extensions which would cause the aggregate outstanding Revolving Credit Loans to
the Borrowers (when combined with the aggregate Convertible Term Loans and the
LC Amount) to exceed the aggregate Restoration Commitments for any reason or to
require any Lender to make or, as the case may be, participate in, Revolving
Credit Loans, Convertible Term Loans or Letters of Credit, in excess of such
Lender's individual Restoration Commitment."
15. The provisions of Section 3.2.1 of the Loan Agreement are amended in
full to read 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 $250,000 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 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
9
<PAGE>
(other than with respect to any Discretionary Extension made and repaid in
accordance with Sections 3.1.4 and 3.1.5 hereof), Borrowers shall promptly repay
the Overadvance. Principal on account of the Convertible Term Loan and the
Acquisition Line loans shall be payable in the manner respectively set forth in
Section 1.4."
16. The provisions of Section 3.2.2 of the Loan Agreement are amended in
full to read as follows:
"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 all Lenders elect to accelerate the maturity and payment of
the Obligations or (iii) termination of this Agreement pursuant to Section 4
hereof."
17. The provisions of Section 4.2.1 of the Loan Agreement are amended in
full to read as follows:
"4.2.1 Termination by Lenders. Any Lender may terminate its
----------------------
Commitments without notice upon or after the occurrence of an Event of Default."
18. The provisions of Section 6.2.5 of the Loan Agreement are amended in
full to read as follows:
"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 Borrowers 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. Each of the Borrowers 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. At all times prior to the use of the Dominion Account of
Borrowers, Borrowers shall have control over their cash, but the Borrowers agree
that at all times they shall ensure that all cash (including all proceeds of any
Accounts) of the Borrowers and their Subsidiaries shall be maintained at an
account or accounts subject to the foregoing letter of instruction and that all
Accounts and Inventory proceeds shall be deposited in such accounts directly or
promptly following receipt by the Borrowers or any of their Subsidiaries. Once
in effect (if ever), until released, all funds deposited in the Borrowers'
Dominion Accounts shall immediately become the property of Agent, for the
account of Lenders, and Borrowers 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
10
<PAGE>
forbearance with respect to any Event of Default shall act as a cure thereof for
purposes of this subsection 6.2.5."
19. The provisions of Section 7.1.10 of the Loan Agreement are amended in
full to read as follows:
"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, there has been no material change in the
condition, 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."
20. Section 7.2 of the Loan Agreement is amended by adding a new
subsection (iii) to read as follows:
", or (iii) the representations and warranties set forth in the second
sentence of Section 7.1.10 which shall be deemed to be made only as of the date
of the making of any Loan and the date of delivery of financial statements
pursuant to Section 8.1.3."
21. The provisions of Section 8.2.2 of the Loan Agreement are amended in
full to read as follows:
"8.2.2 Loans. Make, except as permitted pursuant to the definition
-----
of a Restricted Investment, 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."
22. Subsection (ii) of Section 8.2.3 of the Loan Agreement is amended in
full to read as follows:
"(ii) Indebtedness, to the extent permitted by Section 8.2.2, of any
Subsidiary of Borrower, if any, to Borrower (except to the extent eliminated in
consolidation) or to another Subsidiary of Borrower;
23. The provisions of Section 8.2.12 of the Loan Agreement are amended in
full to read as follows:
"8.2.12 Restricted Investment. Make or have, or permit any
---------------------
Subsidiary of Borrower, if any, to make or have, any Restricted Investment or,
in any event, create, form or acquire, or permit any subsidiary to so create,
form or acquire any new Subsidiary."
11
<PAGE>
24. Section 8.3 of the Loan Agreement is amended by deleting therefrom the
following:
"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."
25. The provisions of Section 10.1.7 of the Loan Agreement are amended in
full to read as follows:
"10.1.7 Other Defaults. There shall occur any default or event of
--------------
default (however defined) on the part of a Borrower or any of its Subsidiaries
under any agreement, document or instrument to which such Borrower or Subsidiary
is a party or by which such Borrower or Subsidiary 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 $750,000 with respect to Restoration and $200,000 with
respect to Michaels or any other Subsidiary 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."
26. The provisions of Section 10.2 of the Loan Agreement are amended in
full to read as follows:
"10.2 Acceleration of the Obligations. Without in any way limiting
-------------------------------
the right of Agent or all 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 all 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."
27. The provisions of Section 10.3.3 of the Loan Agreement are amended in
full to read as follows:
"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 Agent or
all of the 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
12
<PAGE>
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."
28. The provisions of Section 12.5.2 of the Loan Agreement are amended in
full to read as follows:
"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, each of whom shall be an Eligible Assignee (as defined below), or unless
an Event of Default shall have occurred and be continuing, 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; (ii) 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; (iii) the assigning Lender or the respective assignee shall have paid
to Agent an assignment fee of $5,000; and (iv) such assignment, other than to
another Lender, or a subsidiary, sister company or parent of any Lender, shall
be to an Eligible Assignee (as defined below). 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.
An Eligible Assignee is (a) a commercial bank organized under the laws
of the United States of America, or any state thereof; (b) a savings and loan
association or savings bank organized under the laws of the United States of
America, or any state thereof; (c) a commercial bank organized under the laws of
any other country which is a member of the OECD, or a political subdivision of
any such country, provided that such bank is acting through a branch or agency
located in the country in which it is organized or another country which is also
a member of the OECD; (d) the central bank of any country which is a member of
the OECD; (e) a commercial finance company or finance subsidiary of a
corporation organized
13
<PAGE>
under the laws of the United States of America, or any state thereof; (f) an
insurance company organized under the laws of the United States of America, or
any state thereof; provided that in the case of any such organization listed in
(a) through (f) above, such organization shall have a combined capital and
surplus in excess of $250,000,000."
29. A new definition is added to Appendix A of the Loan Agreement in its
appropriate alphabetical place as follows:
"Acquisition Line Commitment - for each Lender, the obligation of such
---------------------------
Lender to make Loans to Restoration under the Acquisition Line pursuant to
Section 1.4(b) solely to the extent that such Lender shall have consented to the
terms and conditions of the underlying acquisition and the terms and conditions
of such Loan under the Acquisition Line and in an aggregate amount at any one
time outstanding up to but not exceeding the respective amount set forth
opposite the name of such Lender on Annex 1 as its Acquisition Line Commitment."
30. The definition of "Commitment" in Appendix A of the Loan Agreement is
amended in full to read as follows:
"Commitment collectively, the Restoration Commitment, the Michael's
----------
Revolving Credit Commitment and the Acquisition Line Commitment."
31. The introductory unnumbered paragraph in the definition of "Eligible
Inventory" in Appendix A of the Loan Agreement is amended in full to read as
follows:
"Eligible Inventory - such Inventory of a Borrower (other than
------------------
packaging materials and supplies) which Agent, in the exercise of its reasonable
credit judgment, deems to be Eligible Inventory. Without limiting the generality
of the foregoing, no Inventory shall be Eligible Inventory if:"
32. The definition of "Loans" in Appendix A of the Loan Agreement is
amended in full to read as follows:
"Loans - all loans and advances of any kind made by Lenders pursuant
-----
to the Agreement (including, without limitation, the issuance, extension, and
renewal of Letters of Credit and the participation by the Lenders therein)."
33. The definition of "Michaels' Revolving Credit Commitment" in Appendix
A of the Loan Agreement is amended in full to read as follows:
"Michael's Revolving Credit Commitment - for each Lender, the
-------------------------------------
obligation of such Lender to make Revolving Credit Loans to Michaels as a
sublimit of such Lender's Restoration Commitment in an aggregate amount at any
one time outstanding up to but not exceeding the respective amounts set forth
opposite the name of such Lender on Annex 1 as its Michael's Revolving Credit
Commitment."
34. The definition of "Overadvance" in Appendix A of the Loan Agreement is
amended in full to read as follows:
14
<PAGE>
"Overadvance - the amount, if any, by which (i) the outstanding
-----------
principal amount of all Revolving Credit Loans to the Borrowers plus the LC
----
Amount plus the principal amount of the Convertible Term Loans exceeds the
----
Restoration Borrowing Base or (ii) the outstanding amount of all Revolving
Credit Loans to Michael's exceeds the Michael's Borrowing Base."
35. The definition of "Required Lenders" in Appendix A of the Loan
Agreement is amended in full to read as follows:
"Required Lenders - Lenders having at least 66-2/3% of the aggregate
----------------
amount of the Commitments or, if the Commitments shall have terminated, Lenders
holding at least 66-2/3% of the aggregate unpaid principal amount of the Loans."
36. The definition of "Restoration Borrowing Base" in Appendix A of the
Loan Agreement is amended in full to read as follows:
"(j) Restoration Borrowing Base - as at any date of determination
--------------------------
thereof, an amount equal to the lesser of:
(i) $60,000,000; and
(ii) an amount equal to the sum of
(a) $35,000,000,
PLUS
----
(b) 65% of the value of Restoration's Eligible
Inventory at such date in excess of $46,000,000, measured
on the basis of the weighted average cost method."
37. The definition of "Restoration Commitment" in Appendix A of the Loan
Agreement is amended in full to read as follows:
"Restoration Commitment - for each Lender, the obligation of such
----------------------
Lender to make Revolving Credit Loans, and Convertible Term Loans to Restoration
and to issue or participate in Letters of Credit for the benefit of Restoration
(and as a sublimit thereunder to make Revolving Credit Loans to Michaels) in an
aggregate amount at any one time outstanding up to but not exceeding the
respective amounts set forth opposite the name of such Lender on Annex 1 as its
Restoration Commitment."
38. Subsection (vi) of the definition of "Restricted Investment" in
Appendix A of the Loan Agreement is amended in full to read as follows:
"(vi) investments in wholly-owned Subsidiaries consisting of (a) the
existing investment in Michaels, (b) any future investments in Michaels and (c)
investments, not to exceed $500,000 in the aggregate at any time outstanding, in
Restoration Hardware of Blackhawk, Inc."
15
<PAGE>
39. Except as amended by the terms herein, the Loan Documents remain in
full force and effect in accordance with their terms. If there is any conflict
between the terms and provisions of this Amendment, the terms and provisions of
Amendment Number One and the Loan Documents, the terms and provisions of this
Amendment shall govern.
40. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
41. This Amendment shall be governed by and construed according to the
laws of the State of California.
42. The Loan Documents, subject to the foregoing terms and conditions
provided by this Amendment, constitute the complete agreement of the parties
hereto with respect to the subject matters referred to herein and supersede all
prior or contemporaneous negotiations, promises, agreements, or representations,
all of which have become merged and finally integrated into the Loan Documents
and this Amendment.
43. Borrower agrees to pay, on demand, all attorneys' fees and costs
incurred in connection with the negotiation, documentation and execution of this
Amendment, not to exceed $8,000. If any legal action or proceeding shall be
commenced at any time by any party to this Amendment in connection with its
interpretation or enforcement, the prevailing party or parties in such action or
proceeding shall be entitled to reimbursement of its reasonable attorneys' fees
and costs in connection therewith, in addition to all other relief to which the
prevailing party or parties may be entitled.
44. Except for the fee letter of even date herewith between Agent and
Borrower, and as provided in the preceding paragraph hereof, there shall be no
closing fees or charges payable by Borrower in connection with this Amendment.
FLEET CAPITAL CORPORATION,
as Agent and Lender
By:
-------------------------------------
Its:
------------------------------------
RESTORATION HARDWARE, INC.
By:
-------------------------------------
Its:
------------------------------------
THE MICHAELS FURNITURE COMPANY, INC.
By:
-------------------------------------
Its:
------------------------------------
16
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> AUG-02-1998
<PERIOD-END> OCT-31-1998
<CASH> 2,561
<SECURITIES> 0
<RECEIVABLES> 9,049
<ALLOWANCES> 0
<INVENTORY> 73,846
<CURRENT-ASSETS> 90,758
<PP&E> 78,724
<DEPRECIATION> 10,594
<TOTAL-ASSETS> 165,382
<CURRENT-LIABILITIES> 60,351
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 77,514
<TOTAL-LIABILITY-AND-EQUITY> 165,382
<SALES> 49,637
<TOTAL-REVENUES> 49,637
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<OTHER-EXPENSES> 15,778
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