<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1998.
REGISTRATION NO. 333-51027
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
RESTORATION HARDWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF INCORPORATION)
DELAWARE 5719 68-0140361
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
15 KOCH ROAD, SUITE J
CORTE MADERA, CA 94925
(415) 924-1005
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEPHEN GORDON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
RESTORATION HARDWARE, INC.
15 KOCH ROAD, SUITE J
CORTE MADERA, CA 94925
(415) 924-1005
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
THERESE MROZEK, ESQ. PAUL C. PRINGLE, ESQ.
CURTIS L. MO, ESQ. GLENN F. BAITY, ESQ.
ANDREW R. HULL, ESQ. BROWN & WOOD LLP
BROBECK, PHLEGER & HARRISON LLP 555 CALIFORNIA STREET
TWO EMBARCADERO PLACE SUITE 5000
2200 GENG ROAD SAN FRANCISCO, CA 94104
PALO ALTO, CALIFORNIA 94303-0913 (415) 772-1200
(650) 424-0160
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================
PROPOSED
MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE
- - --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.0001 par value.................. $69,000,000(2) $20,355(3)
================================================================================
</TABLE>
(1) Includes shares of Common Stock that the Underwriters have the option to
purchase solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3) Such amount was previously paid as a filing fee in connection with the
initial filing of this Registration Statement on April 24, 1998.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION
8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 17, 1998
3,330,000 SHARES
[LOGO OF RESTORATION HARDWARE]
COMMON STOCK
($.0001 PAR VALUE)
----------
Of the 3,330,000 shares of Common Stock offered, 2,777,775 shares are being
sold by Restoration Hardware, Inc. ("Restoration Hardware" or the "Company")
and 552,225 shares are being sold by the Selling Stockholders. See "Principal
and Selling Stockholders". The Company will not receive any of the proceeds
from the sale of shares being sold by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is estimated that the initial public offering price per
share will be between $16.00 and $18.00. For factors to be considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "RSTO".
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>
- - -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) Before deducting estimated expenses of $1,300,000 payable by the Company.
(3) Certain stockholders of the Company have granted the Underwriters an option
for 30 days to purchase up to an additional 499,500 shares at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to
Selling Stockholders will be $ , $ and $ , respectively. See
"Underwriting".
----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
shares will be ready for delivery in New York, New York, on or about , 1998
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
----------
The date of this Prospectus is , 1998.
<PAGE>
[PHOTOGRAPH OF INTERIOR OF STORE]
[PHOTOGRAPH OF EXTERIOR OF STORE]
[PHOTOGRAPHS OF SAMPLE PRODUCTS WITH PRODUCT DESCRIPTIONS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. As used in
this Prospectus, unless the context otherwise requires, the terms "Restoration
Hardware" and the "Company" include Restoration Hardware, Inc. and its
consolidated subsidiaries (Restoration Hardware of Blackhawk, Incorporated and,
after March 20, 1998, The Michaels Furniture Company, Inc.) and their
respective operations.
Except as otherwise noted, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option, (ii) assumes the
conversion of all outstanding shares of the Company's Preferred Stock, par
value $.0001 per share (the "Preferred Stock"), into shares of the Company's
Common Stock, par value $.0001 per share (the "Common Stock"), to be effected
upon the completion of the Offering and (iii) gives retroactive effect to a 7-
for-1-split of the Common Stock effected in May 1998. See "Description of
Capital Stock--Common Stock". The Company has a 52- or 53-week fiscal year,
which ends on the Saturday closest to the end of January. Unless otherwise
indicated, references herein to years refer to the Company's fiscal years. For
example, references to 1997 shall mean the fiscal year ended January 31, 1998.
THE COMPANY
Restoration Hardware is a rapidly growing specialty retailer of home
furnishings, functional and decorative hardware and related merchandise that
reflect the Company's classic and authentic American point of view. Restoration
Hardware's merchandising strategy and its stores' architectural style create a
unique and attractive selling environment designed to appeal to an affluent,
well educated 35 to 55 year old customer. In 1997, the Company recorded net
sales of $97.9 million and operating income of $3.2 million, representing
compound annual growth rates since 1995 of 171.9% and 163.3%, respectively.
This growth has been driven primarily by the opening of five, ten and 21 stores
in 1995, 1996 and 1997, respectively, and by strong comparable store sales
growth of 12.9%, 24.5% and 11.1%, respectively, during each of these same
periods. The Company plans to continue its store expansion program and expects
to open approximately 25 new stores in 1998 and approximately 30 new stores in
1999. The Company operated 47 stores in 22 states at June 1, 1998.
Restoration Hardware commenced business more than 18 years ago as a purveyor
of fittings and fixtures for older homes. Since then, the Company has evolved
into a unique home furnishings retailer offering consumers an array of
distinctive, high-quality and often hard-to-find merchandise. The Company
displays its broad assortment of merchandise in an architecturally inviting
setting, which the Company believes appeal to both men and women. The Company
creates an attractive and entertaining environment in its stores by virtue of
its eclectic product mix, which combines classic, high-quality furniture,
lighting, home furnishings and functional and decorative hardware with unusual
"discovery" items such as the Original Russian Forever Flashlight and the Bite
The Man dog toy. This environment features surprising combinations and
assortments of merchandise. Customers encounter everything from nickel plated
towel bars and four-function tape measures to velvet sofas and a solid cherry
sleigh bed. Integral to the shopping experience, most product displays are
complemented by the Company's unique and often whimsical in-store signage
program. This signage, created and written by the Company's founder and CEO,
Stephen Gordon, provides historical, anecdotal and sometimes nostalgic
descriptions of products. The Company believes its signage program
significantly enhances the store's ability to connect with the customer. The
Company's focus on intriguing combinations of authentic, high-quality and
functional products provides its customers a unique shopping experience that
substantially differentiates the Company from its competitors and encourages
repeat business.
3
<PAGE>
A typical Restoration Hardware store features approximately 7,000 square feet
of selling space designed with a residential look and feel that the Company
believes customers will want to recreate in their own homes. Each store carries
approximately 4,500 stock keeping units ("SKUs"), many of which are frequently
turned over to refresh the store offerings and encourage customers to
rediscover the store. In 1997, the Company increased its SKU count by
approximately 750 items, adding approximately 1,250 new SKUs and discontinuing
approximately 500 SKUs. Products are displayed in an open and airy residential
setting which encourages the customers to wander from room to room, passing
through a foyer, adjacent hardware rooms, library, living room, bedroom and
bath and garden areas.
The following summarizes certain key operating characteristics of a
Restoration Hardware store and is based upon the 20 stores operated by the
Company for the full year ended January 31, 1998.
<TABLE>
<S> <C>
Average 1997 net sales per selling square foot..................... $ 588
Average 1997 store-level operating income.......................... $468,910
Average 1997 store-level operating margin.......................... 15.5%
</TABLE>
The Company has over time increased the size of its stores to accommodate the
space requirements of its furniture products and to provide customers an
enjoyable and comfortable shopping environment. As a result of the larger store
size, occupancy costs are expected to increase as a percentage of net sales and
net sales per selling square foot are expected to decline. In addition, the
Company expects comparable store sales to decrease in the future as its store
base matures.
BUSINESS STRATEGY
The Company's goals are to establish Restoration Hardware as a leading
lifestyle-oriented consumer brand and to realize substantial profitable growth.
The Company's strategy for achieving these goals includes the following key
elements:
EXPANSION STRATEGY. Restoration Hardware believes that its retail concept has
broad national appeal and that, as a result, it has significant new store
expansion opportunities over the next several years. Accordingly, the Company
plans to open approximately 25 new stores in 1998 and approximately 30 new
stores in 1999. In preparation for this expected expansion, management has
dedicated substantial resources to building the infrastructure and management
information systems necessary to support a large national chain. The Company
plans to continue to open stores in top tier malls, specialty centers and
select street locations in affluent urban and suburban areas. The Company is
opportunistic in selecting the best locations available that satisfy its
demographic, financial and other criteria and does not necessarily cluster its
store locations.
Additionally, and in response to strong customer demand, the Company intends
to introduce a catalog in September 1998. The Company believes its catalog
operation will generate incremental sales in markets without stores, create
additional store traffic in the Company's current markets and increase consumer
awareness and loyalty.
DIFFERENTIATED MERCHANDISING STRATEGY. The Company's merchandising strategy
is to offer distinctive, high-quality, hard-to-find merchandise for the home.
The Company offers a collection of merchandise not traditionally found in a
single store environment, including classic American styled furniture,
lighting, home furnishings, functional and decorative hardware, and discovery
items. The merchandise selection is carefully edited to provide a consistent
point of view throughout the store, emphasizing tasteful design, quality,
value, functionality and a timeless, classic feel. The Company
4
<PAGE>
focuses on products that have a sense of history or authenticity to which
customers can relate, believing that consumers have a strong desire to return
to traditions from their past or create traditions where none previously
existed. The Company's Teddy Chair, for instance, is a replica of a tailored,
comfortable leather chair used by Theodore Roosevelt on his train travels from
the Eastern United States to the West. Product selection also reflects a
penchant for the playful, including the Atomic Robot Man, Moon Pies, the Acme
Dog Biscuit Mix (complete with a bone-shaped cutter), as well as The Book of
Campfire Songs and the Gonzo Wonder Sponge. In addition, unlike many other
retailers, the Company focuses on purchasing products one item at a time rather
than focusing only on product categories. No product is selected to simply
round out a product category. Each item must stand on its own and is evaluated
on its own merits. The Company does not have prescribed price points and finds
it equally justifiable, from a merchandising point of view, to offer a vintage,
Austrian, wind-proof lighter at $5 and a solid, red oak Mule Chest at $1,990.
The Company's merchandise mix includes proprietary products and hard-to-find
products selected from non-traditional distribution channels that appear unique
to Restoration Hardware's customers.
INNOVATIVE STORE ENVIRONMENT. The environment in a Restoration Hardware store
is carefully designed to complement and highlight the unique merchandise mix
and to create an attractive and fun shopping environment for the customer. The
store design is based on residential interiors with a strong architectural
presence that has a look and feel which the Company believes customers seek to
recreate in their homes. The merchandise is displayed in a manner designed to
enhance its visual appeal and maximize customer impulse buying. To further
enhance the shopping experience, products are cross-merchandised creating
surprises for the customer throughout the store. Products are often highlighted
by personalized signage providing informative and sometimes amusing, anecdotal
descriptions that seek to intrigue the customer with the story behind the
merchandise selections. This signage, written by the founder and CEO Stephen
Gordon, is informative and whimsical, and is designed to enhance the customer's
connection to the product, thereby providing a powerful incentive to purchase.
FOCUS ON HIGHLY DESIRABLE TARGET CUSTOMER. The Company focuses on attracting
an affluent customer base of both men and women who typically are in their mid-
30s to mid-50s, well educated, generally own their home and report an average
household income in excess of $75,000. The Company believes that its growth
during recent years partially reflects growing interest among its customers in
decorating and outfitting their homes. By focusing on its target customer, the
Company believes it can successfully penetrate new markets throughout the
United States, while building a loyal customer base for repeat business.
EXCEPTIONAL CUSTOMER SERVICE. Restoration Hardware is committed to providing
the highest level of customer service. Key elements of such service include: a
high degree of product availability, excellent follow-through on requests and
questions, useful product information, a hassle-free return policy and high-
quality merchandise. To provide this service, the Company focuses on hiring
mature, professional and quality-conscious staff. The Company conducts training
in a number of areas, including product knowledge, and has a culture that
empowers its staff to go to great lengths to satisfy its customers' needs.
Finally, each store stocks the full array of products so customers may, in most
cases, leave the store with their purchases.
BUILDING THE BRAND AND OPERATING INITIATIVES. An integral part of the
Company's strategy is to strengthen the Restoration Hardware brand. The Company
believes that the opening of new stores, its daily interaction with customers
and all other aspects of its business play a role in building its brand
identity. To this end, the products, the architecture of the store, the
signage, the in-store music program and the Company's culture all reflect
Restoration Hardware's consistent and differentiated point of view.
5
<PAGE>
The Company continues to focus on several initiatives designed to both
enhance the performance of the stores and strengthen the Company's emerging
brand identity. These include: (1) continuing to expand proprietary offerings,
(2) increasing the number of imported SKUs, (3) strengthening relationships
with key vendors, (4) building the Company's catalog business and (5) refining
the Company's web site.
EXPERIENCED AND MOTIVATED MANAGEMENT TEAM. Over the past several years,
Restoration Hardware has devoted significant resources to recruit and build its
existing management team. The Company's executive officers and key managers
have extensive experience in various retail environments. In addition, upon
consummation of the Offering, executive officers and key managers will
beneficially own approximately 30% of the Company's outstanding Common Stock.
RECENT DEVELOPMENTS
In March 1998, the Company acquired all of the outstanding capital stock of
The Michaels Furniture Company, Inc. ("Michaels"), formerly known as Michael's
Concepts In Wood, Inc., for an aggregate purchase price of approximately $5.0
million plus contingent future payments and stock incentives based on the
performance of the acquired operations. Michaels had previously been an
independent supplier of furniture to the Company accounting for approximately
7.3% of its merchandise purchases in 1997. The Company believes that the
acquisition of Michaels will give Restoration Hardware a secure supply of a
popular furniture line for its stores and catalog.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Common Stock.
----------------
The Company was incorporated in California in 1987 and reincorporated in
Delaware in 1998. The Company's executive offices are located at 15 Koch Road,
Suite J, Corte Madera, California 94925, its telephone number is (415) 924-1005
and its web site address is www.restorationhardware.com.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm.
"Restoration Hardware" is a registered trademark of the Company. All rights
are fully reserved. All other trademarks, service marks or trade names referred
to in this Prospectus are the property of their respective owners.
6
<PAGE>
THE OFFERING(1)
<TABLE>
<S> <C>
Shares of Common Stock Offered:
Company.............................. 2,777,775 shares
Selling Stockholders................. 552,225 shares
Total Common Stock Offered........... 3,330,000 shares
Common Stock to be Outstanding After
the Offering.......................... 16,103,381 shares(2)
Use of Proceeds........................ To repay approximately $28 million of
outstanding indebtedness, to fund new
store openings and for working capital
and other general corporate purposes.
See "Use of Proceeds".
Proposed Nasdaq National Market sym-
bol................................... RSTO
</TABLE>
- - --------
(1) Excludes up to 499,500 shares that are subject to the over-allotment option
granted to the Underwriters by certain stockholders of the Company. See
"Underwriting".
(2) Includes 763 shares to be issued upon exercise of a warrant upon completion
of the Offering. Excludes 3,287,662 shares reserved for issuance under the
Company's 1995 Stock Option Plan and the Company's 1998 Stock Incentive
Plan (the "Stock Incentive Plan"), of which options to purchase 1,639,806
shares were outstanding at May 2, 1998 at a weighted average exercise price
of $3.81 per share and of which options to purchase 547,300 shares will be
granted concurrently with the Offering at the initial public offering
price. Also excludes 154,007 shares of Common Stock reserved for issuance
upon exercise of outstanding warrants. See "Capitalization", "Management--
Benefit Plans", and Note 6 of Notes to Consolidated Financial Statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements, including statements
concerning planned expansion and financial resources, in "Summary" under the
captions "The Company" and "Business Strategy", in "Risk Factors" under the
captions "Implementation and Management of Aggressive Growth Strategy",
"Dependence on Imports and Vulnerability to Import Restrictions" and
"Uncertainties Regarding Distribution of Merchandise", in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the captions "Overview" and "Liquidity and Capital Resources" and in "Business"
under the captions "The Company", "Company History", "Business Strategy",
"Merchandising Mix", "Product Selection, Purchasing and Sourcing", "Advertising
and Marketing", "Store Operations and Distribution" and "Management Information
Systems". These forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties related to the Company's
operations, some of which are beyond the Company's control. Certain factors
that could cause results to differ materially from those projected in the
forward-looking statements are described in "Risk Factors", including, but not
limited to, competition, new product offerings by competitors and price
pressures; seasonality, fluctuations in operating results and economic
cyclicality; effects of weather; changes in consumer preferences; the Company's
ability to implement its growth strategy, including management of growth and
expansion of its distribution facility; dependence on key personnel,
independent manufacturers and key suppliers; international sources of
merchandise. Risks and uncertainties that could have a material adverse effect
on the Company are also described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the captions "Quarterly
Results of Operations and Seasonality" and "Liquidity and Capital Resources",
and in "Business" under the captions "Business Strategy", "Competition" and
"Government Regulation". Any of these risks or uncertainties may cause actual
results or future circumstances to differ materially from any future results or
circumstances expressed or implied by the forward-looking statements contained
in this Prospectus.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE SEVEN THREE MONTHS
MONTHS MONTHS ENDED
ENDED ENDED 1997 ------------------
JULY 2, JANUARY 28, PRO FORMA MAY 3, MAY 2,
1993(1) 1994(1) 1995 1995 1996(2) 1997 COMBINED(3) 1997 1998
------- ------- ----------- ------- -------- -------- ----------- -------- --------
AS RESTATED (11)
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
CONSOLIDATED
OPERATIONS DATA:
Net sales.............. $ 4,615 $ 1,786 $ 4,666 $13,238 $ 39,672 $ 97,872 $114,045 $ 11,907 $ 32,647
Gross profit........... 935 316 1,842 4,698 14,373 32,144 37,130 3,155 9,013
Selling, general and
administrative
expenses.............. 783 527 1,300 4,075 12,213 27,080 31,188 3,733 9,553
Preopening store
expenses.............. -- 35 -- 162 681 1,869 1,869 256 298
Income from
operations............ 152 (246) 542 461 1,479 3,195 4,073 (834) (838)
Net income............. 96 (153) 328 236 796 1,748 1,846 (542) (746)
Redeemable stock
repurchases in excess
of carrying value..... -- -- -- -- -- 4,765 4,765 -- --
Accretion of
mandatorily redeemable
preferred stock....... -- -- -- -- 168 2,268 -- 138 999
Income (loss) available
to common
stockholders.......... 96 (153) 328 236 628 (5,285) (2,919) (680) (1,745)
Earnings per
share(4)(5)...........
Basic ............... .03 (.04) .07 .05 .13 (1.20) (.23) (.14) (.42)
Diluted ............. .03 (.04) .04 .03 .06 (1.20) (.23) (.14) (.42)
Weighted average shares
outstanding(4)(6).....
Basic................ 2,797 3,893 4,911 4,915 4,926 4,386 12,905 4,926 4,173
Diluted.............. 2,797 3,893 7,545 7,593 10,903 4,386 12,905 4,926 4,173
OPERATING DATA:
Number of stores open
at end of period...... 4 5 5 10 20 41 41 21 44
Average net sales per
selling square
foot(7)............... $ 448 $ 155 $ 349 $ 636 $ 651 $ 583 $ 583 N/A N/A
Comparable store net
sales increase(8)..... N/A N/A N/A 12.9% 24.5% 11.1% 11.1% 20.5% 18.0%
Average selling square
footage per store(9).. 2,643 2,674 2,674 3,865 4,805 6,113 6,113 5,119 6,161
Total selling square
footage at period
end................... 10,570 13,369 13,369 38,650 100,897 250,622 250,622 102,380 271,095
</TABLE>
<TABLE>
<CAPTION>
MAY 2, 1998
-------------------------
ACTUAL AS ADJUSTED(10)
-------- ---------------
AS RESTATED(11)
-------------------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 190 $ 42,807
Total assets......................................... 110,733 125,561
Total debt, including capital lease obligations...... 33,388 5,600
Redeemable preferred stock........................... 44,032 --
Stockholders' equity (deficit)....................... (13,490) 73,159
</TABLE>
- - -------
(1) Although the Company commenced operations in 1980, the Company did not
maintain the books and records necessary to prepare full financial
statements of the Company prior to the seven months ended January 28,
1995. As a result, the financial data for the fiscal year ended January
29, 1994 and for the five months ended July 2, 1994 have been derived from
the U.S. federal income tax returns of the Company for the relevant
periods involved. The financial data for such periods prior to the seven
months ended January 28, 1995 have been prepared by the Company using its
best estimates given the information available and are not necessarily
indicative of the results of operations and financial condition of the
Company as would have been reported if such data had been derived from
audited financial statements or appropriate financial accounting books and
records.
(2) 1996 was a 53-week fiscal year. For purposes of comparable store net sales
increase and average net sales per selling square foot, 1996 results were
calculated to correspond with 52-week years.
(3) Reflects the acquisition of The Michaels Furniture Company, Inc. and the
conversion of all outstanding Preferred Stock into Common Stock upon
completion of the Offering. See Pro Forma Combined Condensed Financial
Information.
(4) Gives retroactive effect to a 7-for-1-split of the Common Stock effected
in May 1998. See "Description of Capital Stock--Common Stock". Computed
based on income available to common stockholders which represents net
income less a cash premium over carrying cost of $4.8 million paid in
connection with the redemption of certain Preferred Stock. The impact of
such redemption decreased 1997 and 1997 Pro Forma Combined basic and
diluted earnings per share by $1.09 per share. The remaining Preferred
Stock will convert into Common Stock upon the completion of the Offering.
(5) For the five months ended July 2, 1994, 1997, 1997 Pro Forma Combined and
the three months ended May 3, 1997 and May 2, 1998, diluted earnings per
share excludes the effect of Preferred Stock since their conversion would
be antidilutive.
(6) See Note 1 of Notes to Consolidated Financial Statements.
(7) Average net sales per selling square foot is calculated by dividing total
net sales by the weighted average selling square footage of stores open
during the period indicated.
(8) A store becomes comparable at the beginning of the 14th month of
operation. The comparable store percentage in 1997 includes two stores
which were renovated in 1997. The Company had four, five, ten, 18, ten and
20 comparable stores at the end of 1994, 1995, 1996, 1997, the first
quarter of 1997 and the first quarter of 1998, respectively.
(9) Average selling square footage per store is calculated by dividing total
selling square footage by the number of stores open at the end of the
period indicated.
(10) Adjusted to reflect the sale of the 2,777,775 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $17.00 per share and the application of the estimated net proceeds
therefrom after deducting the estimated underwriting discount and
estimated expenses of the Offering. See "Use of Proceeds". Also gives
effect to the conversion of all outstanding Preferred Stock into Common
Stock upon completion of the Offering.
(11) Subsequent to the issuance of the Company's 1996 and 1997 consolidated
financial statements, the Company determined that the carrying value of
the outstanding Preferred Stock should have been increased by periodic
accretions so that the carrying amount would equal the mandatory
redemption amount at the mandatory redemption date. As a result, the
Company's consolidated financial statements for such years and the three
months ended May 3, 1997 and May 2, 1998 have been restated from the
amounts previously reported. See Note 11 of Notes to Consolidated
Financial Statements.
8
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be carefully considered in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus.
IMPLEMENTATION AND MANAGEMENT OF AGGRESSIVE GROWTH STRATEGY
The Company's net sales and net income have grown significantly during the
past several years, primarily as a result of the opening of new stores. The
Company intends to continue to pursue an aggressive growth strategy for the
foreseeable future, and its future operating results will depend largely upon
its ability to open and operate stores and manage a larger business
successfully. The Company intends to open approximately 25 new stores in 1998
(of which six stores have been opened as of June 1, 1998) and approximately 30
new stores in 1999. The Company's ability to open stores on a timely basis and
the performance of such stores will depend upon many factors, including, among
others, the Company's ability to identify and enter new markets, locate
suitable store sites, negotiate acceptable lease terms, hire and train store
managers and sales associates and obtain adequate capital resources on
acceptable terms. Any restrictions on the Company's ability to expand would
have a material adverse effect on the Company's business, results of
operations and financial condition. As a result, there can be no assurance
that Restoration Hardware will be able to achieve its targets for opening new
stores. Moreover, there can be no assurance that the Company's new stores will
be successful or achieve operating results comparable to the Company's
existing stores.
In 1995, all of the Company's stores were located in the Western United
States. In 1996, the Company expanded into new markets by opening stores in
Illinois, Michigan, Missouri, Colorado, Texas, Kansas and Virginia. In 1997,
the Company expanded into new markets by opening stores in Connecticut,
Florida, Georgia, Louisiana, Minnesota, New Jersey, New York, North Carolina,
Pennsylvania and Washington. The Company plans to continue to enter new
markets in various regions of the United States in 1998 and 1999. It has
already opened new stores in Alabama and Tennessee and has signed leases in
Utah, Massachusetts and Washington D.C. Operation of a greater number of new
stores and expansion into new markets may present competitive, distribution
and merchandising challenges that are different from those currently
encountered by the Company in its existing stores and markets. In addition,
there can be no assurance that the Company's expansion within its existing
markets will not adversely affect the individual financial performance of the
Company's existing stores or its overall results of operations.
The Company will need to continually evaluate the adequacy of its store
management and management information and distribution systems to manage its
planned expansion. In particular, the Company anticipates the need for an
additional distribution center in the Eastern United States during 1998. There
can be no assurance that the Company will anticipate all of the changing
demands that its expanding operations will impose on such systems, and the
failure to adapt its systems and procedures to such changing demands could
have a material adverse effect on the Company's business, results of
operations and financial condition. There can be no assurance that the Company
will successfully achieve its expansion targets or, if achieved, that planned
expansion will not have an adverse impact on results of operations.
From time to time, the Company evaluates potential strategies for improving
its gross margins and increasing net sales. There can be no assurance that the
implementation of any such strategies will be successful or will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Historically, cash flow from operations has been insufficient to finance the
Company's growth and the Company has relied upon a line of credit and proceeds
from private equity financings to finance working capital requirements. There
can be no assurance that the Company's operations will generate sufficient
cash flow or that adequate financings will be available to finance continued
growth.
9
<PAGE>
SMALL STORE BASE
The Company operated 47 stores at June 1, 1998. Ten of the Company's stores
were opened in 1996, 21 of the Company's stores were opened in 1997 and six
stores have been opened in 1998. Consequently, the Company has a limited
history of opening and operating stores. The results achieved to date by the
Company's relatively small store base may not be indicative of the results
that may be achieved from a larger number of stores. In addition, should any
new store be unprofitable or should any existing store experience a decline in
profitability, the effect on the Company's results of operations could be more
significant than would be the case if the Company had a larger store base.
FLUCTUATIONS IN COMPARABLE STORE SALES
A variety of factors affect the Company's comparable store sales including,
among others, the general retail sales environment, the Company's ability to
efficiently source and distribute products, changes in the Company's
merchandise mix, the impact of competition and the Company's ability to
execute its business strategy efficiently. The Company's comparable store
sales results have fluctuated significantly in the past and the Company
believes that such fluctuations may continue. The Company's comparable store
net sales increases for 1995, 1996, 1997 and the first quarter of 1998 were
12.9%, 24.5%, 11.1% and 18.0%, respectively. Past comparable store sales
results are no indication of future results, and the Company expects that its
comparable store sales results will decrease in the future.
QUARTERLY RESULTS AND SEASONALITY
The Company has experienced, and expects to continue to experience,
substantial seasonal fluctuations in its sales and operating results, which is
typical of many retailers. Historically, a disproportionate amount of the
Company's retail sales, approximately half of its annual net sales, and all of
its profits have been realized during its fourth fiscal quarter. The Company
expects this pattern to continue during the current fiscal year and
anticipates that in subsequent years the fourth quarter will continue to
contribute disproportionately to its operating results, particularly during
November and December. In anticipation of increased sales activity during the
fourth quarter, the Company incurs significant additional expenses, including
significantly higher inventory costs and the hiring of a substantial number of
temporary employees to supplement its permanent store staff. If, for any
reason, the Company's sales were to fall below its expectations during
November and December, the Company's business, financial condition and annual
operating results would be materially adversely affected. The Company's
quarterly results of operations may also fluctuate significantly as a result
of a variety of other factors, including, among other things, the timing of
new store openings, net sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in the
timing of holidays, changes in the Company's merchandise mix, the timing of
new catalog releases and net catalog sales. Primarily as a result of the
increasing number of recently opened stores and increased distribution and
administrative costs, the Company anticipates a larger aggregate net loss for
its first two quarters of 1998 as compared to 1997.
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends largely on the efforts and abilities of
senior management, particularly Stephen Gordon, the Company's President, Chief
Executive Officer and founder, Thomas Christopher, the Company's Chief
Operating Officer, and Thomas Low, the Company's Chief Financial Officer. The
loss of Mr. Gordon's services or the services of other members of the
management team could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company does not
have employment agreements with any of the members of its management team. In
addition, the Company's performance will depend upon its ability to attract
and retain qualified management, merchandising and sales personnel. There can
be no assurance that Mr. Gordon and the Company's existing management team
will be able to manage the Company or its growth or that the Company will be
able to attract and retain additional qualified personnel as needed in the
future.
10
<PAGE>
DEPENDENCE ON KEY VENDORS
The Company's performance depends on its ability to purchase its merchandise
in sufficient quantities at competitive prices. Although the Company has many
sources of merchandise, three of its vendors (Mitchell Gold, a manufacturer of
upholstered furniture, Robert Abbey Inc., a manufacturer of table and floor
lamps, and The Michaels Furniture Company, Inc. ("Michaels"), a manufacturer
of furniture) accounted for approximately 25% of the Company's aggregate
merchandise purchases in 1997. Michaels, a furniture manufacturer which the
Company acquired in 1998, accounted for approximately 7.3% of the Company's
aggregate merchandise purchases in 1997. Mitchell Gold and Robert Abbey Inc.
accounted for approximately 9.7% and 8.1%, respectively, of the Company's
aggregate merchandise purchases in 1997. In addition, the Company's smaller
vendors generally have limited resources, production capacities and operating
histories, and some of the Company's vendors, including Michaels, have limited
the distribution of their merchandise in the past. The Company has no long-
term purchase contracts or other contractual assurances of continued supply,
pricing or access to new products and any vendor or distributor could
discontinue selling to the Company at any time. There can be no assurance that
the Company will be able to acquire desired merchandise in sufficient
quantities on terms acceptable to the Company in the future, or be able to
develop relationships with new vendors or that any inability to acquire
suitable merchandise or the loss of one or more key vendors will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
In addition, a single vendor supports the Company's information systems, and
the Company has generally employed a single general contractor to oversee the
construction of its stores. A failure by such vendor to support these systems
or by such contractor to continue such services adequately would have a
material adverse effect on the Company.
DEPENDENCE ON IMPORTS AND VULNERABILITY TO IMPORT RESTRICTIONS
The Company estimates that in 1997 it purchased approximately 10% of its
merchandise directly from vendors located abroad, primarily in India, and
expects that such purchases will increase to approximately 20% of its
merchandise in 1998. These arrangements are subject to the risks of relying on
products manufactured abroad, including import duties and quotas, loss of
"most favored nation" trading status, currency fluctuations, work stoppages,
economic uncertainties including inflation, foreign government regulations,
political unrest and trade restrictions, including United States retaliation
against foreign trade practices. While the Company believes that it could find
alternative sources of supply, an interruption or delay in supply from India
or the Company's other foreign sources, or the imposition of additional
duties, taxes or other charges on these imports, could have a material adverse
effect on the Company's business, financial condition and results of
operations unless and until alternative supply arrangements are secured.
Moreover, products from alternative sources may be of lesser quality and/or
more expensive than those currently purchased by the Company.
UNCERTAINTIES REGARDING DISTRIBUTION OF MERCHANDISE
The Company anticipates that it will need to expand its current distribution
network to accommodate its planned expansion in 1998 and thereafter. There can
be no assurance that such expansion will not cause disruptions that could
materially adversely affect the Company's business, results of operations and
financial condition. Further, the Company relies upon third party carriers for
its product shipments, including shipments to and from all of its stores, and
accordingly is subject to the risks, including employee strikes and inclement
weather, associated with such carriers' ability to provide delivery services
to meet the Company's shipping needs. The Company is also dependent upon
temporary employees to adequately staff its distribution facility,
particularly during busy periods such as the Christmas season and while stores
are opening. There can be no assurance that the Company will continue to
receive adequate assistance from its temporary employees, or that there will
continue to be sufficient sources of temporary employees.
11
<PAGE>
INTEGRATION OF NEW OPERATION
In March 1998, the Company acquired all of the outstanding capital stock of
Michaels. The Company has not operated a manufacturing operation in the past,
and may be faced with the difficulty of integrating geographically separated
organizations having personnel with disparate business backgrounds and work
environments. There can be no assurance that the Company will be able to
integrate the operations of Michaels effectively or in a timely manner.
COMPETITION
The Company competes with a wide variety of national, regional, and local
retailers. However, due to the fragmented nature of the home furnishings
industry in the United States and the fact that the Company's merchandise cuts
across multiple categories, the competitive landscape is likely to vary
substantially based on each individual market. Competition exists from
businesses utilizing a similar retail store strategy, as well as traditional
furniture stores and department stores. Competitors that are utilizing a
similar retail store strategy include Pottery Barn (a division of Williams-
Sonoma), Crate & Barrel, Z Gallerie and Pier 1 Imports. The Company also
competes to a lesser extent with the catalog operations of companies such as
Smith & Hawken and Williams-Sonoma. Many of the Company's competitors are
larger and have substantially greater financial, marketing and other resources
than the Company.
CHANGES IN CONSUMER TRENDS
The success of the Company depends on its ability to anticipate and respond
to changing merchandise trends and consumer demands in a timely manner. The
Company believes it is benefitting from a lifestyle trend toward increased
interest in home renovation, gardening and interior decorating. Any change in
such trend could adversely affect consumer interest in the Company's major
product lines. Moreover, the Company's products must appeal to a broad range
of consumers whose preferences cannot always be predicted with certainty and
may change between sales seasons. If the Company misjudges either the market
for its merchandise or its customers' purchasing habits, it may experience a
material decline in sales or be required to sell inventory at reduced margins.
The Company could also suffer a loss of customer goodwill if its stores or
newly acquired furniture making operations do not adhere to its quality
control or service procedures or otherwise fail to ensure satisfactory quality
of the Company's products. These outcomes may have a material adverse effect
on the Company's business, operating results and financial condition.
GENERAL ECONOMIC CONDITIONS
Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including, among others, general business
conditions, interest rates, taxation and consumer confidence in future
economic conditions. Adverse economic conditions and any related decrease in
consumer demand for discretionary items such as those offered by the Company
could have a material adverse effect on the Company's business, results of
operations and financial condition.
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, the Company's current stockholders and
management will continue to own beneficially shares of the Company's capital
stock constituting approximately 79% and 41%, respectively, of the voting
power of the outstanding capital stock. As a result, the Company's current
stockholders and management will be able to control the election of directors
and, in general, to determine the outcome of any matter submitted to a vote of
the Company's stockholders for approval. See also "Certain Transactions" and
"Principal and Selling Stockholders".
12
<PAGE>
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock. There is no assurance that an active trading market will develop
or be sustained after completion of the Offering or that the market price of
the Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined through
negotiations between the Company and the Underwriters. See "Underwriting". The
Company believes quarterly fluctuations in its financial results and factors
not directly related to the Company's operating performance, such as product
or financial results announcements by competitors, could contribute to the
volatility of the price of its Common Stock, causing it to fluctuate
significantly. These factors, as well as general economic conditions, such as
recessions or high interest rates, may adversely affect the market price of
the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Common Stock in the public
market following the Offering, or the prospect of such sales, could adversely
affect the market price of the Common Stock and the Company's ability to raise
capital in the future in the equity markets. Upon completion of the Offering,
there will be 16,103,381 shares of Common Stock outstanding. Of these shares,
the 3,330,000 shares to be sold in the Offering will be eligible for immediate
resale without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by an "affiliate", of the Company, as that
term is defined in Rule 144 under the Securities Act. Upon expiration of lock-
up agreements with the Underwriters, 180 days after the date of this
Prospectus (or earlier with the consent of the Underwriters), 12,773,381
shares will be eligible for immediate resale subject to the limitations of
Rule 144. As of May 2, 1998, options to purchase 1,639,806 shares of Common
Stock had been granted under the Company's 1995 Stock Option Plan.
Simultaneously with the completion of the Offering, options to purchase
547,300 shares of Common Stock will be granted under the Company's 1998 Stock
Incentive Plan. The Company intends to file as soon as practicable following
completion of the Offering a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Stock Incentive Plan. This registration statement is expected to become
effective immediately upon filing, whereupon, subject to the satisfaction of
applicable exercisability periods, Rule 144 volume limitations applicable to
affiliates and, in certain cases, the agreements with the Underwriters
referred to above, shares of Common Stock issued upon exercise of outstanding
options granted pursuant to the Stock Incentive Plan will be available for
immediate resale in the open market.
ANTI-TAKEOVER MATTERS
The Company's Certificate of Incorporation and Bylaws contain provisions
that may have the effect of delaying, deterring or preventing a takeover of
the Company that stockholders purchasing in the Offering may consider to be in
their best interests. The Certificate of Incorporation and Bylaws include,
among other things, provisions establishing a Board of Directors with
staggered, three-year terms, requiring supermajority voting to effect certain
amendments to the Certificate of Incorporation and Bylaws and to approve any
merger, consolidation or similar business combination involving the Company or
sale of all or substantially all of the assets of the Company, limiting the
persons who may call special meetings of stockholders, prohibiting stockholder
action by written consent and establishing advance notice requirements for
nominations for election to the Board of Directors or for proposing matters
that can be acted upon at stockholders' meetings. Additionally, the Company is
authorized to issue up to 5,000,000 shares of "blank check" Preferred Stock,
and the Board of Directors may fix the preferences, limitations and relative
rights of those shares without any vote or action by the stockholders. The
potential issuance of Preferred Stock and the concentrated ownership of the
Company could make it more difficult for a party to gain control of the
Company. See "Description of Capital Stock".
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,777,775 shares of
Common Stock by the Company in the Offering (assuming an initial public
offering price of $17.00 per share and after deducting an assumed underwriting
discount and estimated offering expenses) are estimated to be $42.6 million.
The Company intends to use the net proceeds (i) to repay approximately $28.0
million of outstanding indebtedness incurred under its credit agreement (which
is described in "Management's Discussion and Analysis of Financial Condition--
Liquidity and Capital Resources" and Note 4 of Notes to Consolidated Financial
Statements) and (ii) for working capital and other general corporate purposes,
including the funding of new store openings. Pending such uses, the net
proceeds of the Offering will be invested in short-term, interest-bearing
securities. See "Business--Business Strategy".
The Company will not receive any proceeds from the sale of the 552,225
shares of Common Stock offered by the Selling Stockholders. See "Principal and
Selling Stockholders".
DIVIDEND POLICY
The Company expects to retain any earnings to finance the expansion and
development of its business, has not paid dividends historically and has no
plans to pay cash dividends for the foreseeable future. The payment of
dividends is within the discretion of the Company's Board of Directors and
will depend on the earnings, capital requirements and operating and financial
condition of the Company, among other factors. The Company's credit agreement
prohibits the payment of dividends. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources".
14
<PAGE>
DILUTION
As of May 2, 1998, the Company had a net tangible book value of
approximately $26.5 million or $1.99 per share. Net tangible book value per
share is equal to total tangible assets (total assets less intangible assets)
less total liabilities of the Company, divided by the number of shares of
Common Stock and Redeemable Preferred Stock then outstanding. Without taking
into account any adjustment in net tangible book value attributable to
operations after May 2, 1998, after giving effect to the sale by the Company
of 2,777,775 shares in the Offering at an assumed initial public offering
price of $17.00, the pro forma net tangible book value of the Company as of
May 2, 1998 (after deduction of an assumed underwriting discount and estimated
offering expenses and the application of the net proceeds as described under
"Use of Proceeds") would have been approximately $69.1 million or $4.29 per
share. This represents an immediate increase in net tangible book value of
$2.30 per share to existing stockholders and an immediate dilution of $12.71
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $17.00
Net tangible book value per share as of May 2, 1998............... $1.99
Increase per share attributable to new investors.................. 2.30
-----
Pro forma net tangible book value per share after the Offering.... $ 4.29
------
Dilution per share to new investors............................... $12.71
======
</TABLE>
The following table summarizes on a pro forma basis as of May 2, 1998 the
relative investments of all existing stockholders and new investors, giving
effect to the sale by the Company of shares in the Offering at an assumed
initial public offering price of $17.00 per share (without giving effect to
underwriting discounts and offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)...... 13,325,606 82.8% $41,154,328 46.6% $3.09
New investors................. 2,777,775 17.2 47,222,175 53.4 17.00
---------- ----- ----------- -----
Total....................... 16,103,381 100.0% $88,376,503 100.0%
========== ===== =========== =====
</TABLE>
- - --------
(1) Includes 8,068,494 shares purchased and $21,352,381 of consideration for
officers, directors and affiliated persons. Additionally, officers,
directors and affiliated persons have rights to acquire an additional
963,515 shares of Common Stock through outstanding options and warrants.
If officers, directors and affiliated persons exercise all of these
outstanding options and warrants, shares purchased by existing
stockholders would be 14,289,121 or 83.7%, total consideration received
from existing stockholders would be $42,889,082 or 47.6% and average price
per share for existing stockholders would be $3.00.
The above information assumes no exercise of any outstanding options or
warrants after May 2, 1998 other than exercise of a warrant to purchase 763
shares upon the completion of the Offering. As of May 2, 1998, there were
outstanding options and warrants to purchase an aggregate of 1,793,813 shares
of Common Stock at exercise prices ranging from $.66 to $17.14 per share.
Purchasers of shares of Common Stock offered in the Offering will incur
additional dilution to the extent outstanding stock options and warrants are
exercised. See "Management--Benefit Plans" and Notes 6 and 10 of Notes to
Consolidated Financial Statements.
15
<PAGE>
CAPITALIZATION
The following table sets forth the short-term obligations and capitalization
of the Company as of May 2, 1998 and as adjusted to give effect to the
conversion of all outstanding Preferred Stock into Common Stock, the sale of
the Common Stock offered hereby and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds". This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 2, 1998
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
AS RESTATED (3)
--------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term obligations, including current portion
of long-term
obligations(1).................................... $ 29,226 $ 1,437
----------- -----------
Long-term obligations, net of current portion(1)... 4,163 4,163
----------- -----------
Redeemable preferred stock, 9,179,121 shares autho-
rized, actual; 9,151,282 shares issued and out-
standing, actual; no shares authorized, as adjust-
ed; no shares, issued and outstanding, as adjust-
ed................................................ 44,032 --
----------- -----------
Stockholders' equity:
Preferred stock, no shares authorized, actual; no
shares issued and outstanding, actual; 5,000,000
shares authorized, as adjusted; no shares issued
and outstanding, as adjusted..................... -- --
Common stock, 19,000,000 shares authorized,
actual; 4,173,561 shares issued and outstanding,
actual; 40,000,000 shares authorized, as
adjusted; 16,103,381 shares issued and
outstanding, as adjusted(2)...................... 544 2
Additional paid-in capital........................ -- 87,191
Retained earnings................................. (14,034) (14,034)
----------- -----------
Total stockholders' equity........................ (13,490) 73,159
----------- -----------
Total capitalization............................. $ 63,931 $78,759
=========== ===========
</TABLE>
- - --------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Note 4 of
Notes to Consolidated Financial Statements. The Company also leases
certain property consisting of retail stores, corporate offices and
distribution centers and equipment. See Note 3 of Notes to Consolidated
Financial Statements and Note 3 of Notes to Financial Statements of
Michaels for more information regarding rental payments under leases in
effect at May 2, 1998.
(2) Includes 763 shares issued upon exercise of a warrant upon completion of
the Offering. Excludes (i) 154,007 shares reserved for issuance upon
exercise of outstanding warrants at May 2, 1998, and (ii) 3,287,662 shares
reserved for issuance under the 1995 Stock Option Plan and 1998 Stock
Incentive Plan, of which 1,639,806 shares were subject to outstanding
options at May 2, 1998 at a weighted average exercise price of $3.81 per
share and 547,300 shares will be issuable upon exercise of options to be
granted concurrently with the Offering. See "Management--Benefit Plans"
and Note 6 of Notes to Consolidated Financial Statements.
(3) Subsequent to the issuance of the Company's 1996 and 1997 consolidated
financial statements, the Company determined that the carrying value of
the outstanding Preferred Stock should have been increased by periodic
accretions so that the carrying amount would equal the mandatory
redemption amount at the mandatory redemption date. As a result, the
Company's consolidated financial statements for such years and the three
months ended May 3, 1997 and May 2, 1998 have been restated from the
amounts previously reported. See Note 11 of Notes to Consolidated
Financial Statements.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT OPERATIONS AND PER SHARE DATA)
The Statements of Consolidated Operations Data and Balance Sheet Data
presented below as of and for the seven months ended January 28, 1995 and as
of and for each of the fiscal years in the three-year period ended January 31,
1998 have been derived from the audited financial statements of the Company
(as restated). The Statements of Consolidated Operations Data and Balance
Sheet Data presented below as of and for the three months ended May 3, 1997
and May 2, 1998, have been derived from the unaudited consolidated financial
statements of the Company (as restated). The selected financial data for the
three months ended May 2, 1998 are not necessarily indicative of the results
to be expected for the 1998 fiscal year or any other future period. Although
the Company commenced operations in 1980, the Company did not maintain the
books and records necessary to prepare full financial statements of the
Company prior to the seven months ended January 28, 1995. As a result, the
Statements of Consolidated Operations Data and Balance Sheet Data presented
below as of and for the fiscal year ended January 29, 1994 and as of and for
the five months ended July 2, 1994 have been derived from the U.S. federal
income tax returns of the Company for the relevant periods involved. The
financial data for such periods prior to the seven months ended January 28,
1995 have been prepared by the Company using its best estimates given the
information available and are not necessarily indicative of the results of
operations and financial condition of the Company as would have been reported
if such data had been derived from audited financial statements or appropriate
financial accounting books and records. The financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FIVE SEVEN THREE MONTHS
MONTHS MONTHS ENDED
ENDED ENDED ----------------
JULY 2, JANUARY 28, MAY 3, MAY 2,
1993 1994 1995 1995 1996(1) 1997 1997 1998
------ ------- ----------- ------- ------- ------- ------- -------
AS RESTATED (7)
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
CONSOLIDATED OPERATIONS
DATA:
Net sales.............. $4,615 $1,786 $4,666 $13,238 $39,672 $97,872 $11,907 $32,647
Cost of sales and
occupancy............. 3,680 1,470 2,824 8,540 25,299 65,728 8,752 23,634
------ ------ ------ ------- ------- ------- ------- -------
Gross profit........... 935 316 1,842 4,698 14,373 32,144 3,155 9,013
Selling, general and
administrative
expenses.............. 783 527 1,300 4,075 12,213 27,080 3,733 9,553
Preopening store
expenses.............. -- 35 -- 162 681 1,869 256 298
------ ------ ------ ------- ------- ------- ------- -------
Income from
operations............ 152 (246) 542 461 1,479 3,195 (834) (838)
------ ------ ------ ------- ------- ------- ------- -------
Net interest income
(expense)............. 3 -- 6 (48) (113) (139) (79) (426)
------ ------ ------ ------- ------- ------- ------- -------
Provision for income
taxes................. 59 (93) 220 177 570 1,308 (371) (518)
------ ------ ------ ------- ------- ------- ------- -------
Net income............. $ 96 $(153) $ 328 $ 236 $ 796 $ 1,748 $ (542) $ (746)
====== ====== ====== ======= ======= ======= ======= =======
Redeemable preferred
stock repurchases in
excess of carrying
value................. -- -- -- -- -- 4,765 -- --
Accretion of
mandatorily redeemable
preferred stock....... -- -- -- -- 168 2,268 138 999
------ ------ ------ ------- ------- ------- ------- -------
Income (loss) available
to common
stockholders.......... 96 (153) 328 236 628 (5,285) (680) (1,745)
------ ------ ------ ------- ------- ------- ------- -------
Earnings per share(2)
Basic................. $ .03 $(.04) $ .07 $ .05 $ .13 $ (1.20) $ (.14) $ (.42)
Diluted............... .03 (.04) .04 .03 .06 (1.20) (.14) (.42)
Weighted average shares
outstanding(2)(3)
Basic................. 2,797 3,893 4,911 4,915 4,926 4,386 4,926 4,173
Diluted............... 2,797 3,893 7,545 7,593 10,903 4,386 4,926 4,173
OPERATING DATA:
Number of stores open
at end of period...... 4 5 5 10 20 41 21 44
Average net sales per
selling square
foot(4)............... $ 448 $ 155 $ 349 $ 636 $ 651 $ 583 N/A N/A
Comparable store net
sales increase(5)..... N/A N/A N/A 12.9% 24.5% 11.1% 20.5% 18.0%
Average selling square
footage per store(6).. 2,643 2,674 2,674 3,865 4,805 6,113 5,119 6,161
Total selling square
footage at period
end................... 10,570 13,369 13,369 38,650 100,897 250,622 102,380 271,095
</TABLE>
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, JANUARY 27, FEBRUARY 1, JANUARY 31, MAY 2,
1994 1995 1996 1997 1998 1998
----------- ----------- ----------- ----------- ----------- --------
AS RESTATED (7)
--------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $ 994 $2,093 $ 5,260 $ 6,501 $ 8,188 $ 190
Total assets........... 2,228 3,280 16,330 32,230 87,233 110,733
Total debt, including
capital lease
obligations........... 187 199 1,710 1,580 10,678 33,388
Redeemable preferred
stock................. -- 1,665 7,737 13,856 43,033 44,032
Stockholders' equity
(deficit)............. 352 631 877 1,505 (11,748) (13,490)
</TABLE>
- - -------
(1) 1996 was a 53-week fiscal year. For purposes of comparable store net sales
increase and average net sales per selling square foot, 1996 results were
calculated to correspond with 52-week years.
(2) Gives retroactive effect to (i) the conversion of all outstanding shares
of the Preferred Stock into shares of Common Stock to be effected upon
completion of the Offering and (ii) a 7-for-1-split of the Common Stock
effected by the Company in May 1998. See "Description of Capital Stock--
Common Stock". Computed based on income available to common stockholders
which represents net income less a cash premium over carrying cost of $4.8
million paid in connection with the redemption of certain Preferred Stock.
The impact of such redemption decreased 1997 basic and diluted earnings
per share by $1.09 per share.
(3) See Note 1 of Notes to Consolidated Financial Statements.
(4) Average net sales per selling square foot is calculated by dividing total
net sales by the weighted average selling square footage of stores open
during the period indicated.
(5) A store becomes comparable at the beginning of the 14th month of
operation. The comparable store percentage in 1997 includes two stores
which were renovated in 1997. The Company had four, five, ten, 18, ten and
20 comparable stores at the end of 1994, 1995, 1996, 1997, the first
quarter of 1997 and the first quarter of 1998, respectively.
(6) Average selling square footage per store is calculated by dividing total
selling square footage by the number of stores open at the end of the
period indicated.
(7) Subsequent to the issuance of the Company's 1996 and 1997 consolidated
financial statements, the Company determined that the carrying value of
the outstanding Preferred Stock should have been increased by periodic
accretions so that the carrying amount would equal the mandatory
redemption amount at the mandatory redemption date. As a result, the
Company's consolidated financial statements for such years and the three
months ended May 3, 1997 and May 2, 1998 have been restated from the
amounts previously reported. See Note 11 of Notes to Consolidated
Financial Statements.
17
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
The Company's acquisition of Michaels will be accounted for under the
"purchase" method of accounting which requires the purchase price to be
allocated to the acquired assets and liabilities of Michaels on the basis of
their estimated fair values as of the date of acquisition. The following pro
forma combined condensed statements of income give effect to the acquisition
of Michaels as if it occurred on February 2, 1997, and include adjustments
directly attributable to the acquisition of Michaels and expected to have a
continuing impact on the combined company (collectively, the "Pro Forma
Financial Information"). As the Pro Forma Financial Information has been
prepared based on estimated fair values, amounts actually recorded may change
upon determination of the total purchase price (which may change based on
future performance) and additional analysis of individual assets and
liabilities assumed.
The Pro Forma Financial Information and related notes are provided for
informational purposes only and are not necessarily indicative of the results
of operations of the Company as they may be in the future or as they might
have been had the acquisition been effected on the assumed dates. The Pro
Forma Financial Information should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes thereto and the Financial
Statements of Michaels, and the related Notes thereto, included elsewhere in
this Prospectus.
18
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
COMPANY MICHAELS ADJUSTMENTS COMBINED
--------------- ---------- ----------- -----------------
AS RESTATED (8) AS RESTATED (7,8)
--------------- -----------------
<S> <C> <C> <C> <C>
Net sales............... $ 97,872 $21,529 $(5,356)(1) $ 114,045
Cost of goods sold and
occupancy.............. 65,728 16,113 (4,926)(1) 76,915
--------- ------- ------- ----------
Gross profit............ 32,144 5,416 (430) 37,130
Selling, general and ad-
ministrative expenses.. 27,080 4,439 (331)(2) 31,188
Preopening and interest
expense-net............ 2,008 232 540 (3) 2,780
--------- ------- ------- ----------
Income before income
taxes.................. 3,056 745 (639) 3,162
Provision for income
taxes.................. 1,308 264 (256)(4) 1,316
--------- ------- ------- ----------
Net income.............. $ 1,748 $ 481 $ (383) $ 1,846
========= ======= ======= ==========
Redeemable preferred
stock repurchases in
excess of carrying val-
ue..................... 4,765 4,765
Accretion of mandatorily
redeemable preferred
stock.................. 2,268 (2,268)(7) --
--------- ----------
Income (loss) available
to common stockhold-
ers.................... $ (5,285) $ (2,919)
--------- ----------
Net income (loss) per
common share(5)(6):
Basic................. $ (1.20) $ (.23)
--------- ----------
Diluted............... $ (1.20) $ (.23)
--------- ----------
Weighted average shares
outstanding(5)(6):
Basic................. 4,386,207 12,905,399
--------- ----------
Diluted............... 4,386,207 12,905,399
--------- ----------
</TABLE>
- - -------
(1) Eliminates the sales and cost of goods sold on inventory purchased from
Michaels.
(2) Reflects the amortization of goodwill related to the acquisition of
Michaels on a straight line basis over 25 years and adjusts salary expense
to reflect compensation specified in an employment agreement entered into
in connection with the acquisition.
(3) Represents interest expense on borrowings under the Company's line of
credit incurred in conjunction with the acquisition of Michaels. Interest
expense was computed at 10.0% (based on the prime rate plus 1.5% per
annum).
(4) Adjusts the historical provision for income taxes to give effect to the
pro forma adjustments discussed in (1), (2) and (3) above at the
historical income tax rate.
(5) Gives retroactive effect to a 7-for-1-split of the Common Stock which was
effected by the Company in May 1998. See "Description of Capital Stock--
Common Stock". Computed based on income available to common stockholders
which represents net income less a $4.8 million cash premium paid over
carrying cost in connection with the redemption of certain Preferred
Stock. The impact of such redemption decreased actual basic and diluted
net income (loss) per share by $1.09 per share and decreased pro forma
basic and diluted net income (loss) per share by $.37 per share. See Note
1 of Notes to Consolidated Financial Statements.
(6) Excludes the effect of Preferred Stock since their conversion would be
antidilutive.
(7) The pro forma net income (loss) per common share and the pro forma
weighted average shares outstanding have been adjusted to reflect pro
forma effects of the conversion of the Preferred Stock into Common Stock
which will occur automatically upon the completion of the Offering, as if
it had occured on February 2, 1997.
(8) Subsequent to the issuance of the Company's 1996 and 1997 consolidated
financial statements, the Company determined that the carrying value of
the outstanding Preferred Stock should have been increased by periodic
accretions so that the carrying amount would equal the mandatory
redemption amount at the mandatory redemption date. As a result, the
Company's consolidated financial statements for such years and the three
months ended May 3, 1997 and May 2, 1998 have been restated from the
amounts previously reported. The restatement had the effect of reducing
the repurchase of redeemable preferred stock in excess of carrying value
by $13,000. See Note 11 of Notes to Consolidated Financial Statements.
19
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 2, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
MICHAELS
----------------
HISTORICAL FEB. 1- MAR. 21- PRO FORMA PRO FORMA
COMPANY MAR. 20 MAY 2 ADJUSTMENTS COMBINED
----------- ------- -------- ----------- -----------
AS RESTATED AS RESTATED
(8) (7,8)
----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............... $ 30,086 $3,406 $3,931 $(2,740)(1) $ 34,683
Cost of goods sold and
occupancy.............. 21,903 2,759 3,145 (2,528)(1) 25,279
--------- ------ ------ ------- ----------
Gross profit............ 8,183 647 786 (212) 9,404
Selling, general and
administrative
expenses............... 9,053 588 456 21 (2) 10,118
Preopening and interest
expense-net............ 701 27 24 73 (3) 825
--------- ------ ------ ------- ----------
Income before income
taxes.................. (1,571) 32 306 (306) (1,539)
Provision for income
taxes.................. (644) 22 125 (122)(4) (619)
--------- ------ ------ ------- ----------
Net income (loss)....... $ (927) $ 10 $ 181 $ (184) $ (920)
========= ====== ====== ======= ==========
Accretion of mandatorily
redeemable preferred
stock.................. 999 (999)(7) --
--------- ----------
Net income (loss)
available to common
stockholders........... $ (1,926) $ (920)
--------- ----------
Net income (loss) per
common share(5)(6):
Basic................. $ (0.22) $ (0.07)
--------- ----------
Diluted............... $ (0.22) $ (0.07)
--------- ----------
Weighted average shares
outstanding(5)(6):
Basic................. 4,172,996 13,322,505
--------- ----------
Diluted............... 4,172,996 13,322,505
--------- ----------
</TABLE>
- - --------
(1) Eliminates the sales and cost of goods sold on inventory purchased from
Michaels.
(2) Reflects the amortization of goodwill related to the acquisition of
Michaels on a straight line basis over 25 years and adjusts salary expense
to reflect compensation specified in an employment agreement entered into
in connection with the acquisition.
(3) Represents interest expense on borrowings under the Company's line of
credit incurred in conjunction with the acquisition of Michaels. Interest
expense was computed at 10.0% (based on the prime rate plus 1.5% per
annum).
(4) Adjusts the historical provision for income taxes to give effect to the
pro forma adjustments discussed in (1), (2) and (3) above at the
historical income tax rate.
(5) Gives retroactive effect to a 7-for-1-split of the Common Stock which was
effected by the Company in May 1998. See "Description of Capital Stock--
Common Stock".
(6) Excludes the effect of Preferred Stock since their conversion would be
antidilutive.
(7) The pro forma net income (loss) per common share and the pro forma
weighted average shares outstanding have been adjusted to reflect pro
forma effects of the conversion of the Preferred Stock into Common Stock
which will occur automatically upon the completion of the Offering as if
it had occurred on February 2, 1997.
(8) Subsequent to the issuance of the Company's 1996 and 1997 consolidated
financial statements, the Company determined that the carrying value of
the outstanding Preferred Stock should have been increased by periodic
accretions so that the carrying amount would equal the mandatory
redemption amount at the mandatory redemption date. As a result, the
Company's consolidated financial statements for such years and the three
months ended May 3, 1997 and May 2, 1998 have been restated from the
amounts previously reported. See Note 11 of Notes to Consolidated
Financial Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and the related Notes thereto which are included
elsewhere in this Prospectus.
OVERVIEW
Restoration Hardware is a rapidly growing specialty retailer of home
furnishings, hardware and related merchandise, with 47 stores operating in 22
states as of June 1, 1998. From 1995 to 1997, the Company's net sales and
operating income grew at compound annual growth rates of 171.9% and 163.3%,
respectively, principally due to the opening of new stores and strong
comparable store sales growth. Restoration Hardware achieved comparable store
net sales growth of 12.9%, 24.5%, 11.1% and 18.0% in 1995, 1996, 1997 and the
first quarter of 1998, respectively. The Company expects comparable store
sales to decrease in the future as its store base matures.
The Company opened its first store in 1980 and embarked on an aggressive
store opening strategy in 1994. The Company increased its store base from five
stores at the end of 1994 to ten stores at the end of 1995, to 20 stores at
the end of 1996 and to 41 stores at the end of 1997. The Company currently
plans to open approximately 25 new stores in 1998 and approximately 30 new
stores in 1999. There can be no assurance that the Company will be able to
achieve its planned expansion on a timely or profitable basis.
The Company has over time increased the size of its stores to accommodate
the space requirements of its furniture products and to provide customers an
enjoyable and comfortable shopping environment. As a result of the larger
store size, occupancy costs are expected to increase as a percentage of net
sales and net sales per selling square foot are expected to decline. There can
be no assurance that the additional expenses associated with the larger store
size will be offset by higher net sales.
Because of the seasonality of its business, the Company has historically
experienced net losses in the first three quarters of each year. Primarily as
a result of the increasing number of recently opened stores and increased
distribution and administrative costs, the Company anticipates a larger
aggregate net loss for the first two quarters of 1998 as compared to 1997.
In March 1998, the Company acquired all of the outstanding capital stock of
Michaels. The Company has not operated a manufacturing operation in the past,
and may be faced with the difficulty of integrating geographically separated
organizations having personnel with disparate business backgrounds and work
environments. There can be no assurance that the Company will be able to
integrate the operations of Michaels effectively or in a timely manner.
The Company's 52 or 53 week fiscal year ends on the Saturday closest to the
end of January. The fiscal year ended February 1, 1997 included 53 weeks.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of net sales and certain operating data for the Company for the
periods indicated.
<TABLE>
<CAPTION>
SEVEN MONTHS THREE MONTHS ENDED
ENDED ----------------------
JANUARY 28, 1995 1995 1996 1997 MAY 3 1997 MAY 2, 1998
---------------- ----- ----- ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF CONSOLI-
DATED
OPERATIONS DATA:
Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales and occu-
pancy................. 60.5 64.5 63.8 67.2 73.5 72.4
Gross profit........... 39.5 35.5 36.2 32.8 26.5 27.6
Selling, general and
administrative ex-
penses................ 27.9 30.8 30.8 27.7 31.4 29.3
Preopening store ex-
penses................ -- 1.2 1.7 1.9 2.2 0.9
Income from opera-
tions................. 11.6 3.5 3.7 3.3 (7.0) (2.6)
Interest income (ex-
pense)--net........... 0.1 (0.4) (0.3) (0.1) (0.7) (1.3)
Income before income
taxes................. 11.7 3.1 3.4 3.1 (7.7) (3.9)
Comparable store net
sales
increase.............. N/A 12.9% 24.5% 11.1% 20.5% 18.0%
Total number of stores
at end of
period................ 5 10 20 41 21 44
</TABLE>
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
NET SALES. Net sales increased $20.7 million, or 174.2%, to $32.6 million in
the first quarter of 1998 from $11.9 million in the first quarter of 1997.
Comparable store net sales increased 18.0% over the first quarter of 1997 and
contributed $2.1 million of the increase in net sales. Sales for the three
stores opened in the first quarter of 1998 contributed $1.0 million of the
increase in net sales. Stores open prior to May 2, 1998 but not qualifying as
comparable stores contributed $15.0 million of the increase in net sales.
Michaels contributed $2.6 million of the increase in net sales. The increase
in net sales was primarily attributable to increased unit sales.
GROSS PROFIT. Gross profit increased $5.8 million, or 185.7%, to $9.0
million in the first quarter of 1998 from $3.2 million in the first quarter of
1997. As a percentage of net sales, gross profit was 27.6% in the first
quarter of 1998 compared to 26.5% in the first quarter of 1997. The increase
in gross profit was primarily attributable to higher net sales offset by
higher distribution and merchandise expenses associated with the procurement
and distribution of merchandise and higher occupancy expenses related to the
stores opened in 1997 and in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.8 million, or 155.9%, to $9.6 million in
the first quarter of 1998 from $3.7 million in the first quarter of 1997. The
dollar increase in such expense was primarily attributable to store payroll
and non-occupancy costs associated with the opening of 23 stores and
administrative expenses attributable to the expansion of the Company's
headquarters and distribution facilities. As a percentage of net sales,
selling, general and administrative expenses decreased to 29.3% of net sales
in the first quarter of 1998 from 31.4% of net sales in the first quarter of
1997.
INTEREST INCOME (EXPENSE)--NET. Interest expense, primarily attributable to
the Company's credit facility, increased $347,000, or 439.2%, to $426,000 in
the first quarter of 1998 from $79,000 in 1997. This increase is attributable
to the increase in borrowings related to higher merchandise levels for the
larger store base and increased capital expenditures related to new stores
opened or scheduled to open in the first half of 1998.
22
<PAGE>
1997 COMPARED TO 1996
NET SALES. Net sales increased $58.2 million, or 146.7%, to $97.9 million in
1997 from $39.7 million in 1996. Sales for the 21 stores opened in 1997
contributed $37.2 million of the increase in net sales. Comparable store net
sales increased 11.1% over the prior year and contributed $2.9 million of the
increase in net sales. The growth in comparable store sales was due in large
part to expanded merchandise categories, additional SKUs, improved customer
service and increased awareness of the Company's stores in the market. Stores
open prior to 1997, but not qualifying as comparable stores, contributed $18.1
million of the increase in net sales. The increase in net sales was primarily
attributable to increased unit sales.
GROSS PROFIT. Gross profit increased 123.6% to $32.1 million in 1997 from
$14.4 million in 1996. As a percentage of net sales, gross profit was 32.8% in
1997 compared to 36.2% in 1996. The lower gross profit experienced in 1997 was
attributable to higher store occupancy and distribution costs associated with
the Company's strategy to open stores in higher-quality sites, including a
higher percentage of enclosed mall stores, which generally have higher
occupancy costs. The higher store occupancy costs were partially offset by
improved buying and enhanced merchandising and inventory controls.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 121.7% to $27.1 million in 1997 from $12.2
million in 1996. The dollar increase in such expenses was primarily
attributable to store payroll and other non-occupancy costs associated with
the opening of 21 stores and increased administrative expenses associated with
the expansion of the Company's headquarters in 1997. As a percentage of net
sales, selling, general and administrative expenses decreased to 27.7% of net
sales in 1997 from 30.8% of net sales in 1996. This decrease was primarily due
to lower store and corporate expenses as a percentage of sales as the Company
was able to better leverage its expanding store base.
INTEREST INCOME (EXPENSE)--NET. Interest expense, principally attributable
to the Company's credit facility, increased 23.0% to $0.1 million in 1997 from
1996. The expense was offset in part by investment income from the proceeds of
a private equity financing in 1997.
1996 COMPARED TO 1995
NET SALES. Net sales increased $26.5 million, or 199.7%, to $39.7 million in
1996 from $13.2 million in 1995. Sales for the ten stores opened in 1996
contributed $13.9 million of the increase in net sales. Comparable store net
sales increased 24.5% in 1996 and contributed $2.3 million of the increase in
net sales. The Company believes the increase in comparable store sales in 1996
was the result of the introduction of a broader assortment of furniture and
lighting and higher in-stock positions. Stores open prior to 1996, but not
qualifying as comparable stores, contributed $9.4 million of the increase in
net sales. The year ended February 1, 1997 included a fifty-third week which
contributed $0.9 million of the increase in net sales. The increase in net
sales was primarily attributable to increased unit sales.
GROSS PROFIT. Gross profit increased 205.9% to $14.4 million in 1996 from
$4.7 million in 1995. As a percentage of net sales, gross profit was 36.2% in
1996 compared to 35.5% in 1995. The increased gross profit experienced in 1996
was primarily due to efficiencies achieved in purchasing, as well as improved
management of the margins at the store level, offset by higher occupancy
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 199.7% to $12.2 million in 1996 from $4.1
million in 1995. The dollar increase in such expenses was primarily
attributable to store payroll and other non-occupancy costs associated with
the opening of ten stores in 1996. As a percentage of net sales, selling,
general and administrative expenses remained the same at 30.8% for 1996 and
1995.
23
<PAGE>
INTEREST INCOME (EXPENSE)--NET. Interest expense, principally attributable
to the Company's credit facility, increased 135.4% to $0.1 million in 1996
from 1995. The expense was offset in part by investment income from the
proceeds of private equity financings in 1996 and 1995.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------ ------------------------------------- -------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF CONSOLI-
DATED
OPERATIONS DATA:
Net Sales............... $4,578 $5,870 $8,849 $20,375 $11,907 $15,462 $23,544 $46,959 $32,647
As a % of full year..... 11.5% 14.8% 22.3% 51.4% 12.2% 15.8% 24.0% 48.0% N/A
Gross profit............ $1,492 $2,034 $3,120 $ 7,727 $ 3,155 $ 4,626 $ 7,050 $17,313 $ 9,013
As a % of full year..... 10.4% 14.2% 21.7% 53.7% 9.8% 14.4% 21.9% 53.9% N/A
As a % of net sales..... 32.6% 34.7% 35.3% 37.9% 26.5% 29.9% 29.9% 36.9% 27.6%
Income (loss) from oper-
ations................. $ (231) $ (59) $ 301 $ 1,468 $ (834) $(1,222) $ (153) $ 5,404 $ (838)
As a % of full year..... (15.6)% (4.0)% 20.4% 99.2% (26.1)% (38.2)% (4.8)% 169.1% N/A
As a % of net sales..... (5.0)% (1.0)% 3.4% 7.2% (7.0)% (7.9)% (0.6)% 11.5% (2.6)%
Comparable store net
sales increase......... 24.0% 19.0% 26.1% 25.6% 20.5% 8.5% 16.6% 6.9% 18.0%
</TABLE>
The Company has experienced, and expects to continue to experience,
substantial seasonal fluctuations in its sales and operating results, which is
typical of many retailers. Historically, a disproportionate amount of the
Company's retail sales, approximately one half of its annual net sales, and
substantially all of its profits have been realized during its fourth fiscal
quarter. The Company expects this pattern to continue during the current
fiscal year and anticipates that in subsequent years the fourth quarter will
continue to contribute disproportionately to its operating results,
particularly during November and December. In anticipation of increased sales
activity during the fourth quarter, the Company incurs significant additional
expenses, including the hiring of a substantial number of temporary employees
to supplement its permanent store and distribution center staff. If, for any
reason, the Company's sales were to fall below its expectations during
November and December, the Company's business, financial condition and annual
operating results would be materially adversely affected. The Company's
quarterly results of operations may also fluctuate significantly as a result
of a variety of other factors, including, among other things, the timing of
new store openings, net sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in the
timing of holidays and changes in the Company's merchandise mix. Primarily as
a result of the increasing number of recently opened stores and increased
distribution and administrative costs, the Company anticipates a larger
aggregate net loss for the first two quarters of 1998 as compared to the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of liquidity and capital have been cash flows
from operations, borrowings under its credit facilities and proceeds from
equity financings. The Company's primary capital requirements have been for
new store development, working capital and general corporate needs.
Net cash provided by (used in) operations for the first quarter of 1998 and
for 1997 and 1996 was $(7.7) million, $4.1 million and $(1.2) million,
respectively. Net cash used in investing activities for the first quarter of
1998 and for 1997 and 1996 was $13.2 million, $26.8 million and $10.6 million,
respectively, primarily for the opening of new stores. Financing activities
consist primarily of issuance of stock and net changes in short term
borrowings. Financing activities for the first quarter of 1998 included $5.5
million for the acquisition of Michaels. Net cash provided by financing
activities for the
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<PAGE>
first quarter of 1998 and for 1997 and 1996 was $21.3 million, $23.3 million
and $5.8 million, respectively. The increase in cash provided by financing
activities in 1997 was due to the issuance of a Series D Preferred Stock in
May 1997 which generated $14.2 million net proceeds to the Company. In
connection with the Series D Preferred Stock financing, the Company also
repurchased 1,325,541 shares of Common Stock. The repurchase was effected to
provide partial liquidity to certain shareholders who had participated in
early Company financings. The Company sold additional shares of Series D
Preferred Stock to fund the repurchase. The consent of the Company's
commercial lender was required and obtained in connection with the repurchase.
Net borrowings under the Company's credit facilities totalled $15.9 million at
May 2, 1998 and $9.8 million at the end of 1997.
The Company currently has an outstanding Loan and Security Agreement (the
"Loan Agreement") with a commercial lender. The Loan Agreement provides for a
total availability of $58.0 million, consisting of a $50.0 million facility
for the Company and an $8.0 million facility for its subsidiary, Michaels
(collectively with the Company, the "Borrowers"). The Company's facility under
the Loan Agreement provides for revolving credit loans in an aggregate
outstanding principal amount of up to $40.0 million (including up to $1.5
million in the form of letters of credit). Availability under the Company's
revolving credit facility is based on the calculation of 65% of the Company's
eligible inventory (valued under the weighted average cost method), less any
letters of credit outstanding. Interest on outstanding indebtedness under the
revolving credit facility accrues at the lender's prime commercial lending
rate (the "Base Rate") or, if the Company elects, at an annual rate of LIBOR
plus 2.0%, subject to reduction at the completion of the Offering by 0.5%. The
Borrowers' obligations under the Loan Agreement are secured by security
interests in substantially all of the personal property of the Borrowers,
including, without limitation, accounts receivable, inventory, equipment,
machinery, contract rights and chattels. The Loan Agreement matures on
December 22, 1999.
The Company's facility under the Loan Agreement also includes a seasonal
facility (the "Seasonal Facility") to fund the opening of new stores of the
Company during the period from February 1 to December 31 of each year. The
aggregate principal amount available under the Seasonal Facility may not
exceed $10.0 million at any time. The amount available for each store opening
under the Seasonal Facility is equal to the lesser of (i) $500,000 and (ii)
100% of actual store opening costs, net of tenant improvement allowances
provided by certain landlords. Advances under the Seasonal Facility take the
form of term loans repayable in full on January 1 of each year with the first
such repayment due on January 1, 1999. Interest is payable monthly in arrears
and at maturity. Interest under the Seasonal Facility accrues at the Base Rate
plus 0.75%.
The Michaels facility under the Loan Agreement provides for revolving credit
loans in an aggregate principal amount of up to $3.0 million. Availability
under the Michaels revolving credit facility is based on the calculation of
85% of the net amount of eligible accounts receivable outstanding, plus 25% of
the value of Michaels eligible inventory measured on a first-in, first-out
basis, at the lower of cost or market, not to exceed $500,000. Interest on the
Michaels revolving credit loans accrues at the same rate as for revolving
credit loans to the Company, except that Michaels will only benefit from the
0.5% reduction following an initial public offering if the term loan to
Michaels is repaid with the proceeds thereof. The Michaels facility under the
Loan Agreement also provides for a term loan to Michaels of $5.0 Million. The
term loan amortizes over five years commencing on the first anniversary of the
advance of the term loan. Interest on the term loan accrues at the Base Rate
plus 1.25%.
The Loan Agreement contains customary covenants restricting the activity of
the Borrowers, including, without limitation, financial covenants based on the
Company's EBITDA, inventory turnover ratio, and Michaels' cash flow and fixed
charge coverage ratio and other covenants restricting the Borrower's ability
to merge, consolidate, or acquire non-subsidiary entities, make loans, incur
debts or liens, make capital expenditures, pay cash dividends, open new stores
or engage in substantial asset sales. As of January 31, 1998, the Company was
not in compliance with its maximum indebtedness to
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net worth ratio covenant of 1.70:1.0, posting 1.90:1.0. For the year ended
January 31, 1998, the Company was not in compliance with its maximum capital
expenditure covenant of $26,000,000, posting $26,700,000, and minimum
inventory turnover ratio covenant of 2.2, posting a turnover ratio of 2.14.
For the quarter ended May 2, 1998, the Company was not in compliance with its
maximum capital expenditure covenant of $7,400,000, posting $8,100,000. The
Company has received waivers from its bank for each covenant with which it was
in non-compliance as of and for the year ended January 31, 1998 and as of and
for the quarter ended May 2, 1998.
The Company estimates that net capital expenditures for 1998 will be
approximately $24 million. This amount will be primarily for new store
development and to a lesser extent for purchase of distribution equipment and
the enhancement of management information systems.
In connection with its acquisition of Michaels, the Company is required to
pay the former owner contingent cash consideration equal to 35% of Michaels'
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the period from March 20, 1998 to January 30, 1999 and 25% of Michaels' EBITDA
for fiscal years ending January 29, 2000 and January 27, 2001. In addition,
the Company is required to transfer shares of Michaels to the former owner of
Michaels equal to (i) 3.3% of the outstanding shares of Michaels if Michaels'
EBITDA for the period commencing on March 20, 1998 and ending on January 30,
1999 equals or exceeds $2.605 million, (ii) an additional 3.3% of such shares
of Michaels if Michaels' EBITDA for the fiscal year ending January 29, 2000
equals or exceeds $3.6 million and (iii) an additional 3.4% of such shares of
Michaels if Michaels' EBITDA for the fiscal year ending January 27, 2001
equals or exceeds $4.0 million. Michaels' EBITDA for the period from March 20,
1998 to May 2, 1998 was $364,000.
The Company believes cash flow from operations, funds available under its
credit facilities and the net proceeds, if any, from the Offering will be
sufficient to satisfy the Company's capital requirements for the next 12
months.
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<PAGE>
BUSINESS
THE COMPANY
Restoration Hardware is a rapidly growing specialty retailer of home
furnishings, functional and decorative hardware and related merchandise that
reflects the Company's classic and authentic American point of view.
Restoration Hardware's merchandising strategy and its stores' architectural
style create a unique and attractive selling environment designed to appeal to
an affluent, well educated 35 to 55 year old customer. In 1997, the Company
recorded net sales of $97.9 million and operating income of $3.2 million,
representing compound annual growth rates since 1995 of 171.9% and 163.3%,
respectively. This growth has been driven primarily by the opening of five,
ten and 21 stores in 1995, 1996 and 1997, respectively, and by strong
comparable store sales growth of 12.9%, 24.5% and 11.1%, respectively, during
each of these same periods. The Company plans to continue its store expansion
program and expects to open approximately 25 new stores in 1998 and
approximately 30 new stores in 1999. The Company operated 47 stores in 22
states at June 1, 1998.
Restoration Hardware commenced business more than 18 years ago as a purveyor
of fittings and fixtures for older homes. Since then, the Company has evolved
into a unique home furnishings retailer offering consumers an array of
distinctive, high-quality and often hard-to-find merchandise. The Company
displays its broad assortment of merchandise in an architecturally inviting
setting, which the Company believes appeal to both men and women. The Company
creates an attractive and entertaining environment in its stores by virtue of
its eclectic product mix, which combines classic, high-quality furniture,
lighting, home furnishings and functional and decorative hardware with unusual
discovery items such as the Original Russian Forever Flashlight and the Bite
The Man dog toy. This environment features surprising combinations and
assortments of merchandise. Customers encounter everything from nickel plated
towel bars and four-function tape measures to velvet sofas and a solid cherry
sleigh bed. Integral to the shopping experience, most product displays are
complemented by the Company's unique and often whimsical in-store signage
program. This signage, created and written by the Company's founder and CEO,
Stephen Gordon, provides historical, anecdotal and sometimes nostalgic
descriptions of products. The Company believes its signage program
significantly enhances the store's ability to connect with the customer. The
Company's focus on intriguing combinations of authentic, high-quality and
functional products provides its customers a unique shopping experience that
substantially differentiates the Company from its competitors and encourages
repeat business.
A typical Restoration Hardware store features approximately 7,000 square
feet of selling space designed with a residential look and feel that the
Company believes customers will want to recreate in their own homes. Each
store carries approximately 4,500 SKUs, many of which are frequently turned
over to refresh the store offerings and encourage customers to rediscover the
store. In 1997, the Company increased its SKU count by approximately 750
items, adding approximately 1,250 new SKUs and discontinuing approximately 500
SKUs. Products are displayed in an open and airy residential setting which
encourages the customers to wander from room to room, passing through a foyer,
adjacent hardware rooms, library, living room, bedroom and bath and garden
areas.
The following summarizes certain key operating characteristics of a
Restoration Hardware store and is based upon the 20 stores operated by the
Company for the full year ended January 31, 1998.
<TABLE>
<S> <C>
Average 1997 net sales per selling square foot..................... $ 588
Average 1997 store-level operating income.......................... $468,910
Average 1997 store-level operating margin.......................... 15.5%
</TABLE>
27
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COMPANY HISTORY
The Company's founder, Stephen Gordon, developed the concept for Restoration
Hardware based upon his passion for fine craftsmanship and design. After
purchasing and remodeling a neglected Queen Anne Victorian home in Eureka,
California, Mr. Gordon recognized the need for a retail concept which carried
high-quality hardware, fixtures and related items. In 1980, Restoration
Hardware opened its first store in Old Town Eureka. The Eureka store consisted
of approximately 1,500 square feet of selling space and focused primarily on
providing hard-to-find, high-quality hardware and Victorian fixtures.
Following its first external equity financing in 1994, the Company
accelerated its expansion, professionalized its management team and upgraded
its financial and information systems. The Company also refined its
merchandising strategy in response to customer demand for a broader assortment
of merchandise: furniture and home furnishings were introduced to the
merchandise selection and hardware items became more decorative in nature. To
accommodate the space requirements for these new products, the Company
increased the size of its store model. The Company believes that its typical
store size of approximately 7,000 square feet of selling space provides
customers an enjoyable, comfortable shopping environment and an effective
display for Restoration Hardware's selection of merchandise. After over 18
years of developing the Restoration Hardware retail concept, management
believes it has a unique and clearly differentiated store concept and
merchandising mix which management can continue to successfully roll out on a
nationwide basis.
BUSINESS STRATEGY
The Company's goals are to establish Restoration Hardware as a leading
lifestyle-oriented consumer brand and to realize substantial profitable
growth. The Company's strategy for achieving these goals includes the
following key elements:
EXPANSION STRATEGY. Restoration Hardware believes that its retail concept
has broad national appeal and that, as a result, it has significant new store
expansion opportunities over the next several years. Accordingly, the Company
plans to open approximately 25 new stores in 1998 and approximately 30 new
stores in 1999. The Company intends to open new stores in markets it does not
already serve and open more stores in its current markets. In preparation for
this expected expansion, management has dedicated substantial resources to
building the infrastructure and management information systems necessary to
support a large national chain.
The Company plans to continue to open stores in top tier malls, specialty
centers and select street locations in affluent urban and suburban areas. The
Company is opportunistic in selecting the best locations available that
satisfy its demographic, financial and other criteria and does not necessarily
cluster its store locations. All potential sites are subject to extensive
analysis, including demographic and psychographic factors, the look and feel
of the site and the terms of the lease. The Company utilizes the services of
outside firms to provide market and demographic data and to assist in locating
and securing potential locations.
Additionally, and in response to strong customer demand, Restoration
Hardware intends to introduce a catalog in September 1998. The Company
believes its catalog operation will generate incremental sales in markets
without stores, create additional store traffic in the Company's current
markets and increase consumer awareness and loyalty.
DIFFERENTIATED MERCHANDISING STRATEGY. The Company's merchandising strategy
is to offer distinctive, high-quality, hard-to-find merchandise for the home.
The Company offers a collection of merchandise not traditionally found in a
single store environment, including classic American styled furniture,
lighting, home furnishings, functional and decorative hardware, and discovery
items. The merchandise selection is carefully edited to provide a consistent
point of view throughout the store,
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emphasizing tasteful design, quality, value, functionality and a timeless,
classic feel. The Company focuses on products that have a sense of history or
authenticity to which customers can relate, believing that consumers have a
strong desire to return to traditions from their past or create traditions
where none previously existed. The Company's Teddy Chair, for instance, is a
replica of a tailored, comfortable leather chair used by Theodore Roosevelt on
his train travels from the Eastern United States to the West. Product
selection also reflects a penchant for the playful, including the Atomic Robot
Man, Moon Pies, the Acme Dog Biscuit Mix (complete with a bone-shaped cutter),
as well as The Book of Campfire Songs and the Gonzo Wonder Sponge. In
addition, unlike many other retailers, the Company focuses on purchasing
products one item at a time rather than focusing only on product categories.
No product is selected to simply round out a product category. Each item must
stand on its own and is evaluated on its own merits. The Company does not have
prescribed price points and finds it equally justifiable, from a merchanding
point of view, to offer a vintage, Austrian, windproof lighter at $5 and a
solid, red oak Mule Chest at $1,990. The Company's merchandise mix includes
proprietary products and hard-to-find products selected from non-traditional
distribution channels that appear unique to Restoration Hardware's customers.
INNOVATIVE STORE ENVIRONMENT. The environment in a Restoration Hardware
store is carefully designed to complement and highlight the unique merchandise
mix and to create an attractive and fun shopping environment for the customer.
Key elements of this unique store environment include:
ARCHITECTURALLY DRIVEN STORE DESIGN. The design of a Restoration Hardware
store is based on residential interiors with a strong architectural
presence that has a look and feel which the Company believes customers seek
to recreate in their homes. Restoration Hardware stores feature classic
wood columns, finely detailed casework and natural wood floors. Colors are
subdued, utilizing the Company's signature sage green, complemented by a
palette of white and natural wood tones. Essential to the design are high
ceilings, distinctive lighting and spacious, separate rooms for different
product categories and seasonal presentations. The ambiance enhances the
perceived value of the Company's merchandise and provides customers with a
model for interior design that influences and validates their purchasing
decisions. The design of the store also draws customers from room to room
where they are encouraged to pick up, touch and explore different products.
The Company believes this lengthens the stay of an individual within the
store and increases the likelihood of multiple purchases.
INTRIGUING IN-STORE PRODUCT PRESENTATION. The merchandise is displayed in
a manner designed to enhance its visual appeal and maximize customer
impulse buying. Each store features open area rooms, such as the library,
the living room and the bedroom, for display of the core product
categories. Distinctive discovery items are cross-merchandised within the
rooms creating surprising combinations of merchandise. At Restoration
Hardware, functional goods are often treated as decorative accessories. For
example, hammers may be merchandised in a glass vase on a coffee table,
flashlights and stainless steel dustpans may grace a solid cherry dresser,
or a display of waiter's crumbers and carpentry guides may be symmetrically
poised on a vintage nightstand.
Another important dimension to the Company's merchandising strategy is
the utilization of the store space itself. Under the direction of the
Company's visual merchants, the stores are continually revising product
placement. Visual design packages reflecting both floor and window changes
are routinely developed and implemented by a multi-store visual team. Home
furnishings displays are updated to have seasonal impact and the discovery
items are rotated throughout the store environment to maintain freshness.
The changing layout of the merchandise also contributes to the sense of
discovery shoppers experience and helps to maintain the interest level of
repeat customers. Restoration Hardware regularly updates its product
offerings. However, items are not discontinued merely to make the store
look new and fresh, and the Company adheres to the philosophy of keeping
some constancy in its product offerings.
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CREATIVE AND ENTERTAINING IN-STORE SIGNAGE. In order to highlight the
distinctive merchandise, products are frequently accompanied by customized
signage which appears handcrafted. The signage is informative, occasionally
whimsical and often reinforces the Company's focus on the value of quality and
traditions in our lives. The signage is designed to provide enjoyment and a
powerful incentive to purchase. The prose focuses the customer on a sense of
tradition and history, is often anecdotal, and sometimes humorous. "Customers
may not need a set of authentic doctor's office canisters", the signage
suggests, "but you yearn for them. For all the boys and girls who promised Mom
they'd grow up to be physicians and didn't". At Restoration Hardware the
Company's signage program heightens the sense of retail theatre. The products
are the actors, each with their own lines "spoken through" the signage.
FOCUS ON HIGHLY DESIRABLE TARGET CUSTOMER. The Company focuses on attracting
an affluent customer base of both men and women who typically are in their
mid-30s to mid-50s, well educated, generally own their home and report an
average household income in excess of $75,000. The Company believes that its
growth during recent years partially reflects growing interest among its
consumers in decorating and outfitting their homes. For this customer, the
Company's merchandise selection, residential ambience and signage program
provide a distinctive and enjoyable shopping experience. By focusing on its
target customer, the Company believes it can successfully penetrate new
markets in a variety of locations throughout the United States, while building
a loyal customer base for repeat business.
EXCEPTIONAL CUSTOMER SERVICE. Restoration Hardware is committed to providing
the highest level of customer service. Key elements of such service include: a
high degree of product availability, excellent follow-through on requests and
questions, useful product information, a hassle-free return policy and high-
quality merchandise. To provide this service, the Company focuses on hiring
mature, professional and quality-conscious staff. The Company conducts
training in a number of areas, including product knowledge, and has a culture
that empowers its staff to go to great lengths to satisfy its customers'
needs. Another extremely important factor for customers is the ability to
receive their merchandise, especially furniture, in a timely manner. Each
store maintains a stock room and receives inventory that encompasses the
complete range of merchandise exhibited on the sales floor. Customers can in
most cases leave the store with their purchases, including stocked furniture
items. The Company's strong customer service emphasis supports its unique
shopping experience and has been critical to the Company's ability to market
higher price point items such as furniture.
BUILDING THE BRAND AND OPERATING INITIATIVES. An integral part of the
Company's strategy is to strengthen the Restoration Hardware brand. The
Company believes that the opening of new stores, its daily interaction with
customers and all other aspects of its business play a role in building its
brand identity. To this end, the products, the architecture of the store, the
signage, the in-store music program and the Company's culture all reflect
Restoration Hardware's consistent and differentiated point of view.
The Company continues to focus on several initiatives designed to both
enhance the performance of the stores and strengthen the Company's emerging
brand identity. These include: (1) continuing to expand proprietary offerings,
(2) increasing the number of imported SKUs, (3) strengthening relationships
with key vendors, (4) building the Company's catalog business and (5) refining
the Company's web site.
MERCHANDISING MIX
Restoration Hardware offers a broad but carefully edited selection of
merchandise that provides a consistent point of view throughout the stores.
The Company offers a collection of merchandise not traditionally found in a
single store environment, including classic American styled furniture, home
30
<PAGE>
furnishings, lighting, functional and decorative hardware and discovery items.
Each store carries approximately 4,500 SKUs, many of which are frequently
turned over to refresh the store offerings and encourage customers to
rediscover the store. In 1997, the Company increased its SKU count by
approximately 750 items, adding approximately 1,250 new SKUs and discontinuing
approximately 500 SKUs. A key element within Restoration Hardware's
merchandise mix are the discovery items, consisting of unusual, hard-to-find,
sometimes whimsical and intriguing product offerings. The merchandise mix also
includes proprietary products and hard-to-find products selected from non-
traditional distribution channels that appear unique to Restoration Hardware's
customers.
Although the Company seeks to have a broad assortment of merchandise within
each of its product categories, the Company's selection process is more item-
driven than category driven. Each product needs to stand on its own
distinctive merits. No product is selected to simply round out a product
category. The following table sets forth the Company's product categories by
percentage of sales for 1997:
<TABLE>
<CAPTION>
PRODUCT CATEGORY % OF SALES
---------------- ----------
<S> <C>
Furniture and Lighting............................................ 42%
Discovery Items, Accessories and Books............................ 23
Hardware and Housewares........................................... 17
Bath and Bedroom.................................................. 9
Garden and Other.................................................. 9
---
100%
===
</TABLE>
STORE LAYOUT
The layout of a Restoration Hardware store features distinct rooms,
typically the foyer, the living room, the library, the bedroom and the bath
and garden areas, within which core product categories are grouped. Discovery
items and other products are cross-merchandised within these core groupings to
allow for surprising product combinations and to increase impulse buying. This
room design reinforces the residential ambience of a Restoration Hardware
store and provides customers with a model for interior design that validates
their purchasing decisions.
FOYER AND HARDWARE ROOMS. Customers enter Restoration Hardware through the
store's foyer, where the Company uses an open design and changing product
presentation to draw customers into the store. Merchandise assortments are
frequently rotated in this area, maintaining freshness and inviting customers
to discover and explore the store. To the right and left of the foyer, the
Company displays hardware. Hardware is both the genesis of the Company's
business and an increasingly important point of differentiation for its
stores. Even as Restoration Hardware increases assortments in furniture and
furnishings, the Company remains committed to increasing product in hardware
and fittings. The first hardware room includes the Company's broad assortment
of cabinet hardware, comprised of over 600 knobs and pulls in a wide variety
of finishes. The second hardware room features classic items such as house
plaques and numbers, mailboxes, knockers and numerous fittings, all designed
for easy installation by the customer. In addition, since most of the hardware
is wall-mounted, the Company is able to devote valuable floor space in the
hardware rooms to merchandise such as furniture and lighting.
LIVING ROOM. Restoration Hardware's living room serves as the main display
room. A typical living room is designed with high ceilings, bronze chandeliers
and a mix of merchandise that is frequently changed. The Company utilizes the
living room to highlight its furniture and lighting items such as the Kathleen
Sofa and Roses Table Lamp. The Company often stocks select book titles in this
area, such as Graces, and home furnishings to further enhance the residential
nature of this space. In addition, to take advantage of the high traffic in
the living room, the Company cross- merchandises many of its impulse oriented
discovery items here.
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LIBRARY. Comfortable upholstered and rich leather chairs welcome customers
into the library, where they are invited to browse through the wide assortment
of books. Libraries often feature a fireplace with a richly detailed mantel to
enhance the ambience. The Company carries how-to books on gardening,
woodworking, interior decorating and home renovation as well as reference and
"coffee table" books on architecture, design and a variety of other subjects.
Books are displayed as sources of information and entertainment as well as
decorative accessories. Carefully selected titles such as Pocket Ref (Almost a
Nerd in Your Pocket) and The Book of American Traditions are also featured
throughout the store, further emphasizing the Restoration Hardware point of
view.
BEDROOM AND BATH AREA. The bedroom features furniture, an assortment of
proprietary linens and duvets and a broad collection of drapery rods and
panels. The bath area features a clawfoot bath tub, towel bars, hooks, mirrors
and other items designed to allow customers to easily embellish the bath.
These items include soap dishes and canisters in glass, stainless, aluminum,
pewter and ceramic as well as shower curtains, rings and hooks.
GARDEN AREA. The garden room features limestone floors, skylights, a fully
functioning fountain and greenery to present an ambience suitable for display
of the Company's gardening merchandise. Products typically include outdoor
furniture, fountains, statuary, silk flowers, planters, tools and accessories.
During the spring and summer months, the mix of merchandise within the garden
is broadened.
PRODUCT SELECTION, PURCHASING AND SOURCING
A typical Restoration Hardware store stocks approximately 4,500 different
SKUs which the Company currently purchases from approximately 400 vendors.
These vendors include major domestic manufacturers, specialty niche
manufacturers and importers. Important to the Company's strategy is its
ability to maintain the freshness of its merchandise selection by continually
adding new products. These new items complement the core product assortment,
give a fresh look to the stores and sustain the interest of the repeat
customer. Stephen Gordon and the Company's merchandise team are responsible
for new product. This team, comprised of buyers, assistants and an in-house
product development director, regularly attends product shows in the United
States and travels overseas in search of new product development and sourcing
opportunities.
The Company has recently begun focusing on increasing its selection of
imported merchandise. The Company maintains agents in China, India, England,
France, Portugal and Eastern Europe and its merchandising team travels to Asia
and Europe in search of new products. By sourcing products offshore, the
Company seeks to achieve increased buying effectiveness and ensure exclusivity
for a portion of its product line. In many instances, the Company also works
closely with its vendors to develop products which are unique to Restoration
Hardware.
In March 1998, the Company acquired all of the outstanding capital stock of
Michaels for an aggregate purchase price of approximately $5.0 million plus
contingent future payments and stock incentives based on the performance of
the acquired operations. Michaels had previously been an independent supplier
of furniture to the Company accounting for approximately 7.3% of its
merchandise purchases in 1997. The Company believes that the acquisition of
Michaels will give Restoration Hardware a secure supply of a popular furniture
line for its stores and catalog.
ADVERTISING AND MARKETING
The Company has traditionally focused its advertising efforts and
expenditures in the third and fourth quarters. Print campaigns are conducted
in October, November and December featuring full page advertisements in major
market and regional newspapers. Print advertising is focused on line
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<PAGE>
drawings of specific products, accompanied by the Company's distinctive
product descriptions. The Company runs both a "Famous Fall Lighting Sale"
campaign and a "Holiday Wit & Wisdom" campaign. In connection with the latter
campaign, the Company also direct mails a holiday gift guide with holiday gift
suggestions and a response card designed to increase store traffic.
The Company also maintains a public relations effort designed to ensure
national and regional press to support its brand awareness as well as to
support new store openings in both existing and new markets. In addition, the
Company maintains a website, www.restorationhardware.com, designed to promote
consumer awareness of Restoration Hardware and generate store traffic.
Additionally, and in response to strong customer demand, Restoration
Hardware intends to introduce a catalog in September 1998. The Company
believes its catalog operation will generate incremental sales in markets
without stores, create additional store traffic in the Company's current
markets and increase consumer awareness and loyalty. The Company intends to
outsource the telemarketing, fulfillment and information system functions
associated with the catalog operations.
STORE OPERATIONS AND DISTRIBUTION
The Company's store operations and distribution are critical components in
Restoration Hardware's ability to satisfy its customers and build the brand
awareness and loyalty the Company strives for. The Company strongly emphasizes
customer service.
Store operations are managed through several operating districts. Each
district manager is responsible for approximately eight stores. To ensure
delivery of excellent customer service, each store is staffed by a store
manager, an assistant store manager and anywhere from five to 20 store
associates depending on expected customer traffic. Store associates are
assigned to one or more of the rooms within the store to ensure that customer
needs are addressed in each part of the store. In order to retain and motivate
qualified employees, the Company compensates its store managers with base
salaries plus both monthly and yearly bonuses based on sales and profit
performance. All other store associates receive bonuses for team efforts in
comparable sales performance and performance to budget. The Company conducts
training in a number of areas, including product knowledge, and has a culture
that empowers staff to go to great lengths to satisfy their customers.
Another important element of customer service is the customer's ability to
receive their merchandise, especially furniture, in a timely manner.
Accordingly, each store maintains a stock room and in many instances a third
party warehouse close to the store and receives inventory that encompasses the
complete range of merchandise exhibited on the sales floor. Customers can in
most cases leave the store with their purchases, including stock furniture
items.
Although most of the Company's merchandise is drop shipped directly to its
stores, the Company added a 160,000 square foot distribution facility in 1997
and is in the process of adding additional distribution facilities to
implement its 1998 and 1999 store expansion plans. In addition, the Company
has engaged an independent distribution and logistics consultant to assist in
evaluating and implementing its long-term distribution strategy.
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<PAGE>
STORE SELECTION AND STORE LOCATIONS
The Company is opportunistic in selecting the best locations available that
satisfy its demographic, financial and other criteria and does not necessarily
cluster its store locations. All potential sites are subject to extensive
analysis, including demographic and psychographic factors, the look and feel
of the site and the terms of the lease. The Company utilizes the services of
outside firms to provide market and demographic data and to assist in locating
and securing potential locations.
As of June 1, 1998, the Company operated 47 stores in 22 states throughout
the United States. The following table provides certain additional information
regarding the Company's existing stores.
<TABLE>
<CAPTION>
TYPE OF SELLING SQUARE
STORE LOCATION LOCATION FOOTAGE
-------------- ---------------- --------------
<S> <C> <C>
PRE-1995 STORES
Eureka, California Street 2,500
Danville, California Specialty Center 5,146
Corte Madera, California Mall 2,790
Berkeley, California Street 5,632
Newport Beach, California Mall 4,282
1995 STORES
Portland, Oregon Street 4,743
San Mateo, California Mall 4,412
Palo Alto, California Street 6,126
Pasadena, California Street 4,027
Phoenix, Arizona Mall 5,973
1996 STORES
Skokie, Illinois Mall 6,387
Woodland Hills, California Mall 5,905
Troy, Michigan Mall 5,708
Houston, Texas Specialty Center 6,107
Richmond Heights, Missouri Mall 6,116
Littleton, Colorado Mall 7,021
Leawood, Kansas Specialty Center 6,412
Dallas, Texas Street 6,369
Houston, Texas Specialty Center 6,045
Alexandria, Virginia Street 6,177
1997 STORES
Schaumburg, Illinois Mall 7,015
Seattle, Washington Specialty Center 8,101
King of Prussia, Pennsylvania Mall 7,748
Atlanta, Georgia Specialty Center 7,314
McLean, Virginia Mall 6,693
Sherman Oaks, California Mall 6,763
Garden City, New York Mall 6,828
Paramus, New Jersey Mall 6,215
Farmington, Connecticut Mall 6,894
Charlotte, North Carolina Specialty Center 6,980
Century City, California Mall 7,400
San Antonio, Texas Specialty Center 7,015
Pittsburgh, Pennsylvania Specialty Center 5,700
San Diego, California Mall 7,047
Tampa, Florida Street 6,137
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
TYPE OF SELLING SQUARE
STORE LOCATION LOCATION FOOTAGE
-------------- ---------------- --------------
<S> <C> <C>
Santa Monica, California Street 6,787
Los Angeles, California Mall 7,022
St. Paul, Minnesota Street 7,408
Raleigh, North Carolina Mall 6,528
Atlanta, Georgia Mall 5,935
Metairie, Louisiana Mall 7,544
1998 STORES (TO DATE)
Miami, Florida Mall 6,164
Birmingham, Alabama Specialty Center 6,422
Wichita, Kansas Specialty Center 5,557
Germantown, Tennessee Specialty Center 6,021
Short Hills, New Jersey Mall 6,542
West Nyack, New York Mall 6,426
</TABLE>
MANAGEMENT INFORMATION SYSTEMS
Restoration Hardware's management information systems ("MIS") include fully
integrated store, merchandising, distribution and financial systems. In 1995,
the Company completed the implementation of a state-of-the-art MIS system from
STS Systems, an MIS system utilized by many leading retailers. This system
includes point-of-sale ("POS") data collection and integrates purchase order
management, sales reporting, merchandise analysis and stock replenishment as
well as accounting functions. The Company expects this system to provide
productivity benefits, enhanced merchandise information and improved inventory
control during 1998 and beyond.
These systems utilize a Unix-based minicomputer to run third-party software,
and the Company currently relies on a STS Systems for both its hardware and
software support of its systems. Sales information is updated daily in the
sales audit and merchandise reporting systems by polling transaction data from
each store's POS terminals. The Company's POS system consists of registers
providing price look-up, scanning of bar-coded tickets and capture of credit
information and payroll hours. The POS system also tracks inventory receipts
and transfers, which are uploaded to the host system, and price changes, which
are downloaded into the POS devices. Information obtained from nightly polling
also results in automated merchandise replenishment in response to the
specific SKU requirements of each store. The Company evaluates information
obtained through such reporting to implement decisions regarding merchandising
assortment, allocation and markdowns. In addition, this information allows the
Company to forecast purchasing requirements based on the combination of recent
sales trends and historical purchase patterns. The Company believes that its
management information systems are an important factor in allowing the Company
to efficiently support its rapid growth and maintain a competitive industry
position. See "Risk Factors--Dependence on Key Vendors".
Many currently installed computer systems and software products are coded to
accept only two- digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. The Company
has assessed its accounting and management information systems and does not
currently expect that any significant modifications will be required for such
systems. Moreover, the Company does not believe that the total cost of any
potential modifications will be material. There can be no assurance, however,
that the Company or its vendors will be able to modify timely and successfully
their respective systems to comply with Year 2000 requirements. Any failure to
become Year 2000 compliant on the part of the Company or its vendors or the
incurrence of any costs associated with related litigation could have a
material adverse effect on the Company's business, financial condition and
results of operations.
35
<PAGE>
COMPETITION
The Company competes with a wide variety of national, regional and local
retailers. However, due to the fragmented nature of the home furnishings
industry in the United States and the fact that the Company's merchandise cuts
across multiple categories, the competitive landscape is likely to vary
substantially based on each individual market. Competition exists from
businesses utilizing a similar retail store strategy, as well as traditional
furniture stores and department stores. Competitors that are utilizing a
similar retail store strategy include Pottery Barn (a division of Williams-
Sonoma), Crate & Barrel, Z Gallerie and Pier 1 Imports. The Company also
competes to a lesser extent with the catalog operations of companies such as
Smith & Hawken and Williams-Sonoma. Many of the Company's competitors are
larger and have substantially greater financial, marketing and other resources
than Restoration Hardware.
The Company believes that the ability to compete successfully is determined
by several factors, including breadth and quality of product selection,
effective merchandise presentation, customer service, pricing and store
location. The Company believes that it competes favorably on the basis of
these factors.
TRADEMARKS
The Company has registered its trademark "Restoration Hardware" in the
United States and Mexico, and has applied for registration of such trademark
in Canada. Such application in Canada is pending and there can be no assurance
that such application will be granted.
The "proprietary" products referred to in this Prospectus consist of
products which are labeled or packaged using the "Restoration Hardware"
trademark, or products procured from vendors on an exclusive basis for sale to
consumers only through the Company. Such products have not historically
accounted for a significant portion of the Company's revenues although the
Company expects sales of these products to increase over time. Other than the
foregoing trademark appearing thereon, these products do not constitute
intellectual property per se.
EMPLOYEES
At May 2, 1998, the Company had 903 full-time employees and 414 part-time
employees. The Company believes it maintains good employee relations.
GOVERNMENT REGULATION
Many of the Company's imports are subject to existing or potential duties,
tariffs or quotas that may limit the quantity of certain types of goods which
may be imported into the United States and other countries. In addition, the
Company is subject to currency fluctuations, work stoppages, economic
uncertainties including inflation, foreign government regulations, political
unrest and trade restrictions, including United States retaliation against
foreign practices.
PROPERTIES
The Company currently leases two properties located in Corte Madera,
California which are used as its headquarters. One property consists of
approximately 3,600 square feet of office space and approximately 11,000
square feet of warehouse space. The lease expires on November 30, 1999, with
an option to extend the lease for one additional three year term. The second
property consists of approximately 11,000 square feet of office space. The
Company has exercised an option for approximately an additional 4,000 square
feet of office space in this facility beginning September 1998. The lease
expires on May 15, 2002. The Company leases approximately 160,000 square feet
of warehouse space in Hayward, California for use as its distribution center.
The lease expires on July 31, 2004, with an option to extend the lease for one
additional five year term. The Company also leases an approximately 50,000
square foot distribution center in Oakland, California which is subleased for
the duration of the lease.
36
<PAGE>
As of June 1, 1998, the Company leased approximately 510,000 gross square
feet for its stores. Most of the existing stores are leased by the Company
with lease terms ranging from 10 to 15 years. Most leases for the Company's
stores provide for a minimum rent plus a percentage rent based upon sales
after certain minimum thresholds are achieved. The leases generally require
the Company to pay insurance, utilities, real estate taxes and repair and
maintenance expenses.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in legal proceedings and
litigation incidental to the normal conduct of its business. The Company is
not currently involved in any material legal proceedings or litigation.
37
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the executive officers, directors and certain
key employees and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen Gordon........... 47 Chairman of the Board, President, Chief Executive
Officer and Founder
Thomas Christopher....... 50 Executive Vice President, Chief Operating Officer
and Director (3)
Thomas Low............... 39 Senior Vice President, Chief Financial Officer and
Secretary
Bill Ashton.............. 47 Director of Distribution
Marta Benson............. 35 Director of Catalog
Dale Dombrowski.......... 47 Director of Visual Merchandising
Nina Johnson............. 35 General Merchandise Manager
Kellie Krug.............. 37 Director of Marketing
David Loretta............ 30 Director of Planning and Analysis
Mary Ness................ 43 Director of Inventory Management
Gerilyn Rapmund.......... 32 Controller
Randy Reimer............. 51 Director of Human Resources and Training
Ed Robinson.............. 33 Director of Product Development
Anne Wilson.............. 36 Director of Management Information Systems
Damon Ball............... 40 Director (1)(3)
Robert Camp.............. 55 Director (2)(3)
David Ferguson........... 43 Director (1)
Raymond Hemmig........... 48 Director (2)(3)
Michael Lazarus.......... 42 Director (1)
Marshall Payne........... 41 Director (2)
</TABLE>
- - --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Real Estate Committee.
STEPHEN GORDON founded the Company in 1980 and has served as President,
Chief Executive Officer and a Director since that time. Mr. Gordon has
successfully led the Company through a long period of comparable store net
sales growth and consistent profitability at the store level. Until the
recruitment of a professional management team in 1994 and 1995, Mr. Gordon
actively managed all aspects of the business. He obtained his B.A. at Drew
University and his M.A. in Psychology from Humboldt State University.
THOMAS CHRISTOPHER joined the Company as Executive Vice President, Chief
Operating Officer and a Director in June 1994. Prior to joining Restoration
Hardware, Mr. Christopher was with Barnes & Noble, Inc. for five years where
he served in various capacities, including Chief Executive Officer of Bookstop
Inc. and President of Barnes & Noble Superstores. Previously, Mr. Christopher
worked for 19 years at Pier 1 Imports, a national chain of home furnishing
retail stores, where he served in a variety of roles, including Executive Vice
President of Operations. He obtained his B.B.A. in Economics from Kent State
University.
THOMAS LOW joined the Company as Senior Vice President and Chief Financial
Officer in April 1995. From July 1986 to March 1995, Mr. Low served in various
capacities with Home Express, Inc., a retailer of home furnishings, including
Controller from June 1990 to March 1995. Home Express, Inc.
38
<PAGE>
filed Chapter 11 bankruptcy proceedings in January 1990 and again in February
1996. Prior to joining Home Express, Inc., Mr. Low served as a financial
analyst with W.R. Grace & Co. in its restaurant division. He obtained his B.S.
in Resource Science from the University of California, Davis and his M.B.A.
with a Finance Concentration from the University of California, Irvine.
BILL ASHTON joined the Company as Director of Distribution in September
1997. Mr. Ashton served as Senior Director of Distribution for Polo/Ralph
Lauren from April 1984 until July 1997. From January 1979 until March 1984, he
served as Manager of Auditing for Federated Department Stores. Prior to that,
Mr. Ashton served six years as Logistics Officer and Aviator in the United
States Marine Corps. He received his B.S. from Muskingum College.
MARTA BENSON joined the Company as a Merchandise Manager in August 1996 and
was promoted to Director of Catalog in February 1998. Prior to that, she was
associated with Smith & Hawken, a specialty retailer focusing on garden
merchandise for eight years. At Smith & Hawken she served most recently as
Manager, Catalog Merchandise from May 1993 until joining the Company and as
Senior Buyer, Catalog Captain from February 1991 to April 1993. Ms. Benson
received her B.A. from Wesleyan University.
DALE DOMBROWSKI joined the Company as Director of Visual Merchandising in
July 1993. From September 1992 until joining the Company, Mr. Dombrowski
served as Design Director of Filamento, a single specialty retail store. Prior
to that, he was associated with Pottery Barn for 13 years, most recently from
1986 to 1992 as Manager of Visual Merchandising. Mr. Dombrowski received his
A.A.S. from the Fashion Institute of Technology.
NINA JOHNSON joined the Company as a Merchandise Manager in March 1995. She
was promoted to General Merchandise Manager of the Company in December 1996.
Ms. Johnson served as Senior Buyer, Decorative Home at Mervyn's, a department
store chain, from April 1994 until November 1994 and as Retail Marketing and
Merchandising Manager at Ghirardelli Chocolate Co. from June 1993 until March
1994. From June 1991 until March 1993, Ms. Johnson served as Buyer, Tabletop
for the Pottery Barn division of Williams Sonoma, Inc., a specialty retail
chain. Previously, Ms. Johnson served in various capacities at Bloomingdale's,
a department store chain, from 1984 until 1991, including Buyer, Food Division
Housewares from 1989 until 1991. Ms. Johnson received her B.A. in Economics
from William Smith College.
KELLIE KRUG joined the Company as Director of Marketing in March 1998. Ms.
Krug served as Marketing Director at Gymboree Corporation from March 1997 to
February 1998 and at Imaginarium Toy Stores from March 1990 to June 1994. She
also served in various marketing positions at Ross Stores, Inc. from April
1986 to June 1988. Ms. Krug received her B.A. from San Jose State University.
DAVID LORETTA joined the Company as Senior Financial Analyst and Accounts
Payable Supervisor in March 1997. Mr. Loretta was promoted to the position of
Manager of Financial Planning and Analysis in February 1997, and currently
serves as Director of Planning and Analysis. From March 1994 to March 1996, he
served in various accounting and finance capacities at Home Express, Inc., a
retailer of home furnishings. Previously, Mr. Loretta served as an Assistant
Bank Examiner for the Federal Deposit Insurance Corporation in Southern
California. He received his B.A. in Economics from the University of
California, Riverside and his M.B.A. in International Business/Entrepreneurial
Studies from San Diego State University.
MARY NESS joined the Company as Director of Inventory Management in April
1995. From October 1993 to April 1995, Ms. Ness served as Merchant, Gifts at
Gump's, a department store chain. Ms. Ness served as Buyer, Baskets,
Christmas, Paper/Party for Cost Plus, Inc., a specialty retail chain from
October 1991 until January 1993. From July 1986 until October 1991, she served
as Director, Inventory Management for the Pottery Barn and Hold Everything
divisions of Williams Sonoma, Inc., a
39
<PAGE>
specialty retail chain. Previously, Ms. Ness served as an Associate Buyer and
Production Manager with The Gap, a clothing retail chain, from 1982 until 1986
and as a Buyer with Livingston's, a clothing retailer, from 1979 until 1982.
She received her B.A. in Economics from the University of California, Santa
Barbara and her M.B.A. in Marketing from San Francisco State University.
GERILYN RAPMUND has served as Controller of the Company since March 1997.
From January 1994 to March 1997 she was Controller and Accounting Manager of
ViewStar Corporation, a software company. From September 1990 to January 1994,
Ms. Rapmund served as Financial Reporting and Accounting Manager at The Good
Guys!, a consumer electronics retailer. From September 1988 to September 1990,
Ms. Rapmund served as an auditor for Deloitte & Touche LLP. Ms. Rapmund
received her B.A. in Accounting from California Polytechnic State University
at San Luis Obispo.
RANDY REIMER joined the Company as its Director of Human Resources in June
1997, after having provided independent human resource consulting assistance
to the Company for the two previous years. Mr. Reimer has 25 years of
diversified experience in human resources, including 8 years with Federated
Department Stores where he was Vice-President of Employee Relations for one of
Federated's midwest divisions and later, as Senior Vice President of Human
Resources for I. Magnin. He received his B.A. in Liberal Arts from California
State University--Hayward and has completed partial coursework toward a M.S.
in Human Resources Management at Golden Gate University.
ED ROBINSON joined the Company as Director of Product Development in January
1997. Mr. Robinson served as Director of Product Development for Pilgrim Home
and Hearth, a retail design consultant, from February 1995 until September
1996. From August 1993 until February 1995, he was a Partner and Designer at
Sand Lake Design, a designer consultant whose clients included Williams-
Sonoma, Banana Republic and Pottery Barn. Previously, Mr. Robinson served as a
Designer for Architractor Design Group, an architectural designer of
commercial and residential projects, from August 1992 until August 1993, as
Designer of Housewares for George Schmidt Design, a design consultant, from
June 1990 until August 1992, and as Designer-Concept, Prototyping and
Illustration for Child Growth and Development, a designer of learning toys,
from May 1988 until May 1990. He received his B.A. in Industrial Design from
the Pratt Institute of Art and Design.
ANNE WILSON joined the Company as Director of Management Information Systems
in April 1997. From May 1995 to April 1997, Ms. Wilson served as the Systems
and Applications Development Manager at Home Express, Inc., a retailer of home
furnishings. Previously, she served in various capacities with I. Magnin, a
specialty retail chain, including MIS Manager, Accounts Payable Manager and
Senior Assistant Buyer, from 1987 until 1995. She started her retail career
with Livingston's, a clothing retailer, as a manager trainee in 1983, and left
there as a buyer in 1987. Ms. Wilson received her B.A. in Organizational
Studies and Psychology from Pitzer College.
DAMON BALL has been a director of the Company since May 1997. Mr. Ball has
been a Senior Vice President of Desai Capital Management Incorporated ("DCMI")
since December 1993 and, for more than five years prior thereto, served as a
Vice President of DCMI. DCMI is a specialized equity investment management
firm which manages the assets of various institutional clients, including
Private Equity Investors III, L.P. and Equity-Linked Investors II. Mr. Ball
received his B.A. in Economics and Political Science from the University of
Pennsylvania and his M.B.A. degree from the Harvard Business School.
ROBERT CAMP joined the Board of Directors in June 1994. He is the former CEO
of Pier 1, Inc. and was associated with that firm from 1967 to 1985. In 1971,
Mr. Camp co-founded Import Bazaar Ltd., a Canadian based import business,
which was subsequently sold to Pier 1. In 1986, he founded Simpson and Fisher
Companies, Inc., a specialty retail holding company. He owns and operates
Hero's Welcome Inc., a general store and mail order operation, which he and
his wife founded in 1993. He is a graduate of the University of Washington.
40
<PAGE>
DAVID FERGUSON has been a general partner of Chase Capital Partners, the
sole general partner of Chase Ventures and an affiliate of Chase Securities,
for the last five years. He has been a director of the Company since May 1997.
Mr. Ferguson currently serves as a director of Guitar Center, Inc., a music
specialty retailer, Wild Oats Markets, Inc., a natural foods retailer, and
various privately held companies. Mr. Ferguson received his B.A. from Loyola
College in Baltimore, Maryland and his M.B.A. from The Wharton School of the
University of Pennsylvania. Mr. Ferguson is a C.P.A .
RAYMOND HEMMIG joined the Board of Directors in June 1994. He has served as
Chairman of the Board of Ace Cash Express, Inc., a chain of retail financial
services stores, since 1988 and Chairman, Chief Executive Officer and General
Partner of Retail & Restaurant Growth Capital, L.P., a private investment
partnership since 1995. Mr. Hemmig served as Chief Executive Officer of ACE
from 1988 to 1994. Previously, Mr. Hemmig was a foodservice, retail and
franchise industries consultant from 1985 to 1988. He served as Executive Vice
President of Grandy's Inc., a subsidiary of Saga Corp., from 1983 to 1985, and
was Vice President and Chief Operating Officer of Grandy's Country Cookin',
the predecessor restaurant company, from 1980 to 1983. He also worked with
Hickory Farms of Ohio, Inc. from 1973 to 1980 in various operational and
executive positions. He is a director of Party City, a publicly held discount
party supply retailer, and Elizabeth Arden Red Door Salons, Inc., an operator
of day spas.
MICHAEL LAZARUS joined the Board of Directors in January 1996. He co-founded
Weston Presidio Capital in 1991, a $300 million private equity fund with
offices in San Francisco and Boston. He serves as a Managing Partner. Prior to
the formation of Weston Presidio Capital, Mr. Lazarus served as Managing
Director and Director of the Private Placement Department of Montgomery
Securities since 1986. From 1983 to 1986, he was in senior management of
Berkeley International, an international venture capital firm. Mr. Lazarus was
with Price Waterhouse from 1977 to 1983. Mr. Lazarus is a director of Just For
Feet, Inc., an athletic footwear retailer, Guitar Center, Inc., a music
speciality retailer, and various privately held companies. Mr. Lazarus
received his B.A. in Accounting from Grove City College and is a C.P.A.
MARSHALL PAYNE joined the Board of Directors in June 1994. He has been with
Cardinal Investment Company, Inc. since 1983 and is currently Vice President.
Mr. Payne also serves on the board of several private and the following public
companies: Ace Cash Express, Inc., a chain of retail financial services
stores, and Leslie Building Products, Inc., a building products manufacturer.
Mr. Payne received his B.A. from Stanford University and his M.B.A. from
Harvard Business School.
BOARD OF DIRECTORS AND COMMITTEES
Pursuant to the Company's Certificate of Incorporation, upon completion of
the Offering, the Board of Directors will be classified into three classes,
each with three directors. One class (comprised of Messrs. Ball and Hemmig,
with one vacancy) will be elected for a term expiring at the annual meeting of
stockholders to be held in 1999; another class (comprised of Messrs. Camp,
Ferguson and Payne) will be elected to hold office for an initial term
expiring at the annual meeting to be held in 2000; and another class
(comprised of Messrs. Christopher, Gordon and Lazarus) will be elected to hold
office for an initial term expiring at the annual meeting to be held in 2001.
Thereafter, the successors of the class of directors whose term expires at the
meeting will be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election. Officers are appointed by the Board of Directors and serve at its
discretion.
The Company maintains an Audit Committee, a Compensation Committee and a
Real Estate Committee. The Audit Committee oversees actions taken by the
Company's independent auditors. The Compensation Committee reviews the
compensation levels of the Company's executive officers and
41
<PAGE>
makes recommendations to the Board of Directors regarding compensation. The
Compensation Committee also administers the 1998 Stock Incentive Plan. See "--
Benefit Plans--1998 Stock Incentive Plan". The Real Estate Committee evaluates
and approves potential store locations.
COMPENSATION OF DIRECTORS
Non-employee directors receive $1,000 for each meeting of the Company's
Board of Directors attended, $500 for each Committee meeting attended and
reimbursement of travel expenses. Non-employee Board members will receive
option grants at periodic intervals under the Automatic Option Grant Program
of the 1998 Stock Incentive Plan and will also be eligible to receive
discretionary option grants under the Discretionary Option Grant Program of
such plan. See "--Benefit Plans--1998 Stock Incentive Plan".
On May 30, 1997, the Company granted to each of Messrs. Camp, Hemmig,
Lazarus and Payne an option to purchase 3,500 shares of Common Stock and to
each of Messrs. Ball and Ferguson an option to purchase 7,000 shares of Common
Stock, at an exercise price of $10.49 per share, the fair market value per
share of Common Stock on such date. On the effective date of the Offering,
each of Messrs. Ball, Camp, Ferguson, Hemmig, Lazarus and Payne will receive
an option to purchase 14,000 shares of Common Stock at the initial public
offering price per share. The options are immediately exercisable for all of
the option shares but any shares purchased under the options are subject to
repurchase by the Company, at the option exercise price paid per share, upon
the termination of the optionee's service with the Company prior to vesting in
the option shares. The shares subject to each option grant will vest in a
series of three equal annual installments upon the optionee's completion of
each of the three years of service with the Company after the grant date. The
options have a maximum term of 10 years measured from the grant date, subject
to earlier termination following the optionee's cessation of service. The
shares subject to each option will vest in full in the event the Company is
acquired by merger or asset sale, unless the options are assumed by, and the
repurchase rights with respect to unvested option shares are assigned to, the
successor corporation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Messrs. Ferguson, Hemmig and Payne. No executive officer of the
Company serves on the board of directors or compensation committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation earned by the Company's Chief Executive Officer and each of the
two other most highly compensated executive officers of the Company whose
total salary and bonus for the fiscal year ended January 31, 1998 exceeded
$100,000 (collectively, the "Named Executive Officers") for services rendered
in all capacities to the Company and its subsidiaries during such fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- -------------
NUMBER OF
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#)(2) COMPENSATION(3)
------------------ ---- --------- -------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Gordon.......... 1997 $153,077 $33,456 $21,346 28,000 $183
Chairman of the Board, 1996 111,536 37,260 16,110 70,000 --
President and Chief 1995 100,160 20,000 9,600 140,000 --
Executive Officer
Thomas Christopher...... 1997 $133,038 23,862 $11,400 28,000 $157
Executive Vice 1996 101,538 28,350 12,000 52,500 --
President and Chief 1995 87,769 15,000 7,200 -- --
Operating Officer
Thomas Low.............. 1997 $103,562 17,712 $ 9,700 28,000 $116
Senior Vice President 1996 83,846 22,950 7,200 42,000 --
and Chief Financial Of-
ficer 1995 57,621 8,800 2,400 43,750 --
</TABLE>
- - --------
(1) "Other Annual Compensation" includes: (i) for 1997 a $4,273 relocation
allowance and a $4,273 medical allowance provided to Mr. Gordon and (ii)
car allowances provided to Messrs. Gordon, Christopher and Low.
(2) The options listed in the table were granted under the Company's 1995
Stock Option Plan. See "Management--Option/SAR Grants in Last Fiscal Year"
for a description of the terms of these options. The options outstanding
under the 1995 Stock Option Plan will be incorporated into the new 1998
Stock Incentive Plan, but will continue to be governed by their existing
terms. See "Management--Benefit Plans".
(3) Represents contributions by the Company to the Company's 401(k) Plan which
was implemented in November 1997.
43
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows, with respect to the Named Executive Officers,
certain information concerning the grant of stock options during 1997. No
stock appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR PRICE(2) DATE 5% 10%
---- ---------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stephen Gordon(4)....... 28,000 5.7% $11.54(4) 9/2/07 $ 155,326 $ 438,702
Thomas Christopher(4)... 28,000 5.7% $10.49 9/2/07 $ 184,706 $ 468,082
Thomas Low(4)........... 28,000 5.7% $10.49 9/2/07 $ 184,706 $ 468,082
</TABLE>
- - --------
(1) The options are immediately exercisable for all of the option shares but
any shares purchased under the options are subject to repurchase by the
Company, at the option exercise price paid per share, upon the termination
of the optionee's service with the Company prior to vesting in the option
shares. The shares subject to each option grant will vest in a series of
three equal annual installments upon the optionee's completion of each of
the three years of service with the Company after the grant date. The
options have a maximum term of ten years measured from the grant date,
subject to earlier termination following the optionee's cessation of
service. The shares subject to each option will vest in full in the event
the Company is acquired by merger or asset sale, unless the options are
assumed by, and the repurchase rights with respect to unvested option
shares are assigned to, the successor corporation.
(2) The exercise price may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. Alternatively, the option may
be exercised through a cashless exercise procedure pursuant to which the
optionee provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Company, out of the sale proceeds, an
amount equal to the exercise price plus all applicable withholding taxes.
The Compensation Committee may also assist an optionee in the exercise of
an option by (i) authorizing a loan from the Company in a principal amount
not to exceed the aggregate exercise price plus any tax liability incurred
in connection with the exercise or (ii) permitting the optionee to pay the
option price in installments over a period of years upon terms established
by the Compensation Committee.
(3) There can be no assurance provided to any executive officer or other
holder of the Company's securities that the actual stock appreciation over
the ten year option term will be at the assumed 5% and 10% levels or at
any other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
options granted to the Named Executive Officers.
(4) In addition to the options listed in the above table, on the date the
Underwriting Agreement is executed for the Offering (the "Underwriting
Date"), Messrs. Gordon, Christopher and Low will receive option grants
under the Company's 1998 Stock Incentive Plan to purchase 67,900, 58,100
and 48,300 shares of Common Stock, respectively, at an exercise price per
share equal to the initial public offering price. The options will become
exercisable in a series of three equal annual installments upon the
optionee's completion of each of the three years of service measured from
the option grant date, subject to earlier termination following the
optionee's cessation of service. The options will accelerate and become
exercisable in full in the event the Company is acquired by merger or
asset sale, unless the options are assumed by the successor corporation.
(5) Mr. Gordon's options were granted with an exercise price per share equal
to 110% of the fair market value per share of Common Stock on the
September 4, 1997 option grant date. The fair market value of Mr. Gordon's
options on the date of grant was $10.49 per share.
44
<PAGE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option holdings for
1997 with respect to the Named Executive Officers. No options or stock
appreciation rights were exercised by any such individual during such year,
and no stock appreciation rights were outstanding as of January 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
END(#) FISCAL YEAR-END($)(2)
---------------------------- -------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen Gordon........... 238,000 -- $1,980,540 --
Thomas Christopher....... 457,765 -- $4,182,316 --
Thomas Low............... 113,750 -- $ 810,394 --
</TABLE>
- - --------
(1) The shares purchasable upon exercise of the options are subject to
repurchase by the Company, at the exercise price paid per share, upon the
optionee's termination of service with the Company prior to vesting in the
shares. As of January 31, 1998, the number of vested shares for which each
Named Executive Officer's option was exercisable was as follows: Mr.
Gordon--105,007 shares; Mr. Christopher--386,015 shares; and Mr. Low--
35,007 shares.
(2) Based on the deemed fair market value of the option shares as of January
31, 1998 ($10.49 per share), as determined by the Company's Board of
Directors, less the option exercise price payable for those shares.
BENEFIT PLANS
1998 STOCK INCENTIVE PLAN. The Company's 1998 Stock Incentive Plan (the
"1998 Plan") is intended to serve as the successor equity incentive program to
the Company's 1995 Stock Option Plan, as amended (the "Predecessor Plan"). The
1998 Plan was adopted by the Board and approved by the stockholders in April
1998. The 1998 Plan became effective upon its adoption by the Board (the "Plan
Effective Date"). However, the Automatic Option Grant, Salary Investment
Option Grant and Director Fee Option Grant programs will not become effective
until the date the Underwriting Agreement is executed for the Offering (the
"Underwriting Date").
A total of 3,287,662 shares of Common Stock have been authorized for
issuance under the 1998 Plan. Such share reserve consists of (i) the number of
shares available for issuance under the Predecessor Plan on the Underwriting
Date, including the shares subject to outstanding options, and (ii) an
additional increase of 980,000 shares. In addition, the number of shares of
Common Stock reserved for issuance under the 1998 Plan will automatically be
increased on the first trading day of each calendar year, beginning in
calendar year 2000, by an amount equal to the lesser of (i) three percent of
the total number of shares of Common Stock outstanding on the last trading day
of the preceding calendar year or (ii) 966,202 shares. In no event, however,
may any one participant in the 1998 Plan receive option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
250,000 shares of Common Stock in the aggregate per calendar year.
On the Underwriting Date, outstanding options and unvested shares issued
under the Predecessor Plan will be incorporated into the 1998 Plan, and no
further option grants will be made under the Predecessor Plan. The
incorporated options will continue to be governed by their existing terms,
unless the Plan Administrator elects to extend one or more features of the
1998 Plan to those options. Except as otherwise noted below, the incorporated
options have substantially the same terms as will be in effect for grants made
under the Discretionary Option Grant Program of the 1998 Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non- employee Board members
and consultants) may, at the discretion of the Plan Administrator, be
45
<PAGE>
granted options to purchase shares of Common Stock at an exercise price not
less than 100% of their fair market value on the grant date, (ii) the Stock
Issuance Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the
time of issuance or as a bonus tied to the performance of services, (iii) the
Salary Investment Option Grant Program which may, in the Plan Administrator's
sole discretion, be activated for one or more calendar years and, if so
activated, will allow executive officers and other highly compensated
employees the opportunity to apply a portion of their base salary to the
acquisition of special below-market stock option grants, (iv) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares
of Common Stock at an exercise price equal to 100% of their fair market value
on the grant date and (v) the Director Fee Option Grant Program which may, in
the Plan Administrator's sole discretion, be activated for one or more
calendar years and, if so activated, will allow non-employee Board members the
opportunity to apply a portion of the annual retainer fee otherwise payable to
them in cash each year to the acquisition of special below-market option
grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a non-
statutory stock option under the Federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. However, any discretionary
option grants or stock issuances to members of the Compensation Committee
shall be made by a disinterested majority of the Board. The Compensation
Committee will also have the exclusive authority to select the executive
officers and other highly compensated employees who may participate in the
Salary Investment Option Grant Program in the event that program is activated
for one or more calendar years, but neither the Compensation Committee nor the
Board will exercise any administrative discretion with respect to option
grants under the Salary Investment Option Grant Program or under the Automatic
Option Grant or Director Fee Option Grant Program for the non-employee Board
members. All grants under those three latter programs will be made in strict
compliance with the express provisions of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1998 Plan may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full-recourse, interest-bearing promissory note in payment of the exercise
price and any associated withholding taxes incurred in connection with such
exercise or purchase.
The Plan Administrator will have the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the Common Stock on the
new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (ii) the
aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of Common Stock. None of the
incorporated options from the Predecessor Plan contain any stock appreciation
rights.
46
<PAGE>
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not
to be assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the Discretionary Option Grant and Stock
Issuance Programs will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have complete discretion to
grant one or more options under the Discretionary Option Grant Program which
will become fully exercisable for all the option shares in the event those
options are assumed in the acquisition and the optionee's service with the
Company or the acquiring entity involuntarily terminates within a designated
period (not to exceed eighteen months) following such acquisition. The vesting
of outstanding shares under the Stock Issuance Program may be accelerated upon
similar terms and conditions. The Plan Administrator will also have the
authority to grant options which will immediately vest upon an acquisition of
the Company, whether or not those options are assumed by the successor
corporation. The Plan Administrator is also authorized under the Discretionary
Option Grant and Stock Issuance Programs to grant options and to structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in control of the
Company (whether by successful tender offer for more than 50% of the
outstanding voting stock or by a change in the majority of the Board by reason
of one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
involuntary termination of the individual's service within a designated period
(not to exceed eighteen months) following such change in control. The options
incorporated from the Predecessor Plan will immediately vest upon an
acquisition of the Company by merger or asset sale, unless those options are
assumed or replaced by, and the Company's repurchase rights assigned to, the
successor entity. The Plan Administrator will have the discretion to extend
the acceleration provisions of the 1998 Plan to options outstanding under the
Predecessor Plan.
In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer
and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of Common Stock on the grant date. The
option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the amount of salary invested in that option.
The option will become exercisable in a series of twelve (12) equal monthly
installments over the calendar year for which the salary reduction is to be in
effect and will be subject to full and immediate vesting upon certain changes
in the ownership or control of the Company.
Under the Automatic Option Grant Program, each individual who is serving as
a non-employee member of the Board on the Underwriting Date will receive at
that time an option grant for 2,000 shares of Common Stock with an exercise
price equal to the price per share at which the Common Stock is to be sold in
the Offering. Each individual who first becomes a non-employee Board member at
any time after the completion of the Offering will automatically receive an
option grant for 7,000 shares as of the date such individual joins the Board,
provided such individual has not been in the prior employ of the Company. In
addition, on the date of each annual stockholders meeting held after the Plan
Effective Date, each non-employee Board member who is to continue to serve as
a non-employee Board member will automatically be granted an option to
purchase 3,500 shares of Common Stock, provided such individual has served on
the Board for at least six months.
47
<PAGE>
Each automatic grant for the non-employee Board members will have a term of
ten years, subject to earlier termination following the optionee's cessation
of Board service. Each automatic option will be immediately exercisable for
all of the option shares; however, any unvested shares purchased under the
option will be subject to repurchase by the Company, at the exercise price
paid per share, should the optionee cease Board service prior to vesting in
those shares. The shares subject to each 2,000-share option granted on the
Underwriting Date will vest over a three-year period in successive equal
annual installments upon the individual's completion of each year of Board
service measured from the option grant date. The shares subject to each
initial 7,000 share automatic option grant made after the Underwriting Date
will vest over a three year period in successive equal annual installments
upon the individual's completion of each year of Board service measured from
the option grant date. The shares subject to each annual 3,500-share automatic
option grant will vest upon the individual's completion of three years of
Board service measured from the option grant date. However, the shares subject
to each automatic grant will immediately vest in full upon certain changes in
control or ownership of the Company or upon the optionee's death or disability
while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for
which the retainer fee would otherwise be payable in cash. The option will
have an exercise price per share equal to one-third of the fair market value
of the option shares on the grant date, and the number of shares subject to
the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of
Common Stock on the grant date. As a result, the total spread on the option
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee invested in that option. The option will become
exercisable for the option shares in a series of twelve (12) equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii)
the successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option
Grant and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile
tender offer for more than 50% of the Company's outstanding voting stock. In
return for the surrendered option, the optionee will be entitled to a cash
distribution from the Company in an amount per surrendered option share equal
to the excess of (i) the highest price per share of Common Stock paid in
connection with the tender offer over (ii) the exercise price payable for such
share.
The Board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Plan will terminate on the earliest of
(i) April 20, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
48
<PAGE>
1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board and approved by
the stockholders in April, 1998 and will become effective immediately upon the
execution of the Underwriting Agreement for the Offering. The Purchase Plan is
designed to allow eligible employees of the Company and participating
subsidiaries to purchase shares of Common Stock, at semi-annual intervals,
through their periodic payroll deductions under the Purchase Plan, and a
reserve of 475,000 shares of Common Stock has been established for this
purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the date of this Prospectus and will end on the
last business day in August 2000. The next offering period will commence on
the first business day in September 2000, and subsequent offering periods will
commence as designated by the Plan Administrator.
Individuals who are eligible employees (scheduled to work more than 20 hours
per week for more than 5 calendar months per year) on the start date of any
offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date (the first business day of March or
September each year). Individuals who become eligible employees after the
start date of the offering period may join the Purchase Plan on any subsequent
semi-annual entry date within that offering period. However, employees who
join the Company after the date of the Offering must have completed 90 days
continuous employment with the Company before they may join the Purchase Plan.
Payroll deductions may not exceed 15% of total cash earnings and the
accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase date (the
last business day in February and August each year) at a purchase price per
share equal to 85% of the lower of (i) the fair market value of the Common
Stock on the participant's entry date into the offering period or (ii) the
fair market value on the semi-annual purchase date. In no event, however, may
any one participant purchase more than 500 shares, nor may all participants in
the aggregate purchase more than 118,750 shares on any one semi-annual
purchase date.
Should the fair market value per share of Common Stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of such acquisition. The purchase price will be equal to
85% of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately
prior to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business day
of February 2008 (ii) the date on which all shares available for issuance
under the Purchase Plan shall have been sold pursuant to purchase rights
exercised thereunder or (iii) the date on which all purchase rights are
exercised in connection with an acquisition of the Company by merger or asset
sale.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require stockholder
approval.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company does not presently have any employment contracts in effect with
the Chief Executive Officer or any of the other executive officers named in
the Summary Compensation Table.
49
<PAGE>
The Company provides incentives such as salary, benefits and option grants to
attract and retain qualified employees.
In the event that the Company is acquired by merger or asset sale, each
outstanding option held by the Chief Executive Officer and the other executive
officers under the 1998 Plan will automatically accelerate in full, and all
unvested shares held by such individuals under such Plan will immediately vest
in full, except to the extent such options are to be assumed by, and the
Company's repurchase rights with respect to those shares are to be assigned
to, the successor corporation. The Plan Administrator will have the authority
to grant options which will immediately vest upon an acquisition of the
Company, whether or not those options are assumed by the successor
corporation. The Plan Administrator is also authorized under the Discretionary
Option Grant and Stock Issuance Programs to grant options and to structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in control of the
Company (whether by merger or asset sale, or successful tender offer for more
than fifty percent (50%) of the outstanding voting stock or a change in the
majority of the Board by reason of one or more contested elections for Board
membership), with such vesting to occur either at the time of such change in
control or upon the subsequent termination of the individual's service within
a designated period (not to exceed eighteen months) following such change in
control. The options incorporated from the Predecessor Plan will immediately
vest upon an acquisition of the Company by merger or asset sale, unless those
options are assumed by, and the Company's repurchase rights are assigned to,
the successor entity. The Plan Administrator will have the discretion to
extend the acceleration provisions of the 1998 Plan to options outstanding
under the Predecessor Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") eliminates, to the fullest extent permitted by
Delaware law, liability of a director to the Company or its stockholders for
monetary damages for conduct as a director. Although liability for monetary
damages has been eliminated, equitable remedies such as injunctive relief or
rescission remain available. In addition, a director is not relieved of his or
her responsibilities under any other law, including the federal securities
laws.
The Company's Certificate of Incorporation requires the Company to indemnify
its directors to the fullest extent permitted by Delaware law. The Company has
also entered into indemnification agreements with each of the Company's
directors. The Company believes that the limitation of liability provisions in
its Certificate of Incorporation and indemnification agreements may enhance
the Company's ability to attract and retain qualified individuals to serve as
directors. See "Description of Capital Stock".
50
<PAGE>
CERTAIN TRANSACTIONS
The Company believes that the transactions described below contain terms no
less favorable to the Company than would be obtained from unaffiliated third
parties. The Company obtained the requisite approval of its stockholders and
Board of Directors for the transactions described below.
RECENT FINANCINGS
In January 1996, the Company sold 2,596,825 shares of Series B Preferred
Stock at a purchase price of $2.38 per share to a group of 32 persons,
including most of the Company's then existing stockholders. The following
directors, executive officers and beneficial owners of more than five percent
of the Company's Common Stock (assuming the conversion of all shares of
Preferred Stock into Common Stock) acquired beneficial ownership of Series B
Preferred Stock in the Series B Preferred Stock offering:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS/5% STOCKHOLDERS NO. OF SHARES
-------------------------------------------- -------------
<S> <C>
Robert Camp.................................................... 10,535
Thomas Christopher............................................. 63,105
Ray Hemmig..................................................... 21,385
Michael Lazarus/Weston Presidio Capital II, L.P................ 1,175,440
Marshall Payne/Scout Ventures.................................. 79,135
E.W. Rose III.................................................. 192,605
</TABLE>
In October 1996, the Company sold 1,701,658 shares of Series C Preferred
Stock at a purchase price of $3.53 per share to a group of 37 persons,
comprised exclusively of the Company's then existing stockholders. The
following directors, executive officers and beneficial owners of more than
five percent of the Company's Common Stock (assuming the conversion of all
shares of Preferred Stock into Common Stock) acquired beneficial ownership of
Series C Preferred Stock in the Series C Preferred Stock offering:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS/5% STOCKHOLDERS NO. OF SHARES
-------------------------------------------- -------------
<S> <C>
Robert Camp.................................................... 8,274
Thomas Christopher............................................. 49,000
Ray Hemmig..................................................... 50,939
Thomas Low..................................................... 5,789
Michael Lazarus/Weston Presidio Capital II, L.P................ 402,241
Marshall Payne/Scout Ventures.................................. 188,216
E. W. Rose III................................................. 458,136
</TABLE>
In May 1997, the Company sold 2,783,795 shares of Series D Preferred Stock
to a group of 11 persons at a purchase price of $10.49 per share. The
following directors, executive officers and beneficial owners of more than
five percent of the Company's Common Stock (assuming the conversion of all
shares of Preferred Stock into Common Stock) acquired beneficial ownership of
Series D Preferred Stock in the Series D Preferred Stock offering:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS/5% STOCKHOLDERS NO. OF SHARES
-------------------------------------------- -------------
<S> <C>
Damon Ball/Desai Capital....................................... 1,035,741
David Ferguson/Chase Venture Capital Associates, L.P........... 1,430,030
</TABLE>
In May 1997, the Company also issued warrants to purchase 27,734 shares of
Series D Preferred Stock to Montgomery Securities at an exercise price of
$12.59 per share (the "Series D Warrant"). The Series D Warrant expires on May
16, 2002. Montgomery Securities acted as the placement agent to
51
<PAGE>
the Company for the Series D Preferred Stock transaction and received
customary fees for its services. Montgomery Securities is the predecessor
entity of NationsBanc Montgomery Securities LLC.
In May 1997, the Company also redeemed 1,325,541 shares of Common Stock at a
redemption price of $10.49 per share from a group of 24 stockholders. The
following directors, executive officers and beneficial owners of more than
five percent of the Company's Common Stock (assuming the conversion of all
shares of Preferred Stock into Common Stock) sold shares of the Company's
Common Stock in the redemption:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS/5% STOCKHOLDERS NO. OF SHARES
-------------------------------------------- -------------
<S> <C>
Thomas Christopher............................................. 167,951
Stephen Gordon................................................. 571,998
Ray Hemmig..................................................... 31,864
Thomas Low..................................................... 15,512
Marshall Payne/Scout Ventures.................................. 105,588
E.W. Rose III.................................................. 245,854
</TABLE>
REGISTRATION RIGHTS
Pursuant to a Restated Investors Rights Agreement (the "Investor Rights
Agreement") between the Company, the Series D Warrant holders and holders of
the Company's Series A, Series B, Series C and Series D Preferred Stock
(collectively, the "Holders"), the Holders and certain other stock and warrant
holders have certain registration rights. If, at any time after the earlier of
(i) May 9, 2000 or (ii) six months after the effective date of the first
registration statement for a public offering of securities of the Company, (A)
the Holders of at least 40% of Registrable Securities then outstanding or (B)
any Holder who purchased at least $10,000,000 of the Series D Preferred Stock,
request in writing that the Company file a registration statement for all or a
portion of the Registrable Securities then outstanding, providing that the
aggregate offering price to the public would exceed $10,000,000, the Company
will, subject to certain limitations, use its best efforts to cause such
shares to be registered within 90 days of receipt of such a request.
"Registrable Securities" consist of Common Stock issuable upon conversion of
the Company's Series A, B, C and D Preferred Stock and outstanding warrants.
The Company is not obligated to effect more than three registrations under
this demand registration provision.
In addition, if the Company receives from (A) Holders of at least 40% of the
Registrable Securities then outstanding or (B) any Holder who purchased at
least $10,000,000 of the Series D Preferred Stock, a written request or
requests that the Company effect a registration on Form S-3, providing the
anticipated aggregate offering price would exceed $500,000, the Company will,
subject to certain limitations, cause such shares to be registered as soon as
practicable. Holders also have unlimited "piggyback" registration rights which
are exercisable within 20 days of notice of the Company's proposal to register
any of its stock or other securities under the Securities Act in connection
with the public offering of such securities solely for cash. All registration
expenses, exclusive of underwriting discounts and commissions, of demand
registrations, S-3 registrations, or piggyback registrations, shall be borne
by the Company.
All registration rights terminate upon an occurrence of either (i) the
expiration of four years from date of the Company's initial public offering or
(ii) when all shares held by a Holder can be sold within a given three month
period, without compliance with the registration requirements of the
Securities Act, pursuant to Rule 144 thereunder.
52
<PAGE>
LOANS
A Loan Agreement was entered into between the Company's Chief Executive
Officer, Stephen Gordon, and his spouse ("Borrowers") and the Company in
February 1997 for $1,100,000 bearing an interest rate of six percent per
annum. The Borrowers pledged to the Company 20,697 shares of Common Stock as
collateral for any amounts funded under the agreement. The loan was repaid in
full in May 16, 1997, including $7,348 in interest. Other unsecured loans,
bearing interest at various rates, totaling $56,850 were funded at various
dates prior to 1997 and were repaid in full, including $1,144 in interest, in
May 1997.
OTHER AGREEMENTS, TRANSACTIONS AND RELATIONSHIPS
The Company leases its store at 417 Second Street, Eureka, California from
Mr. and Mrs. Gordon. Pursuant to a written lease, the Company pays
approximately $34,000 annually to Mr. and Mrs. Gordon for use of the store. In
1995, 1996, 1997 and the first quarter of 1998, such lease payments totaled
$27,900, $33,700, $33,600 and $8,400, respectively.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of May 2, 1998 and as adjusted to reflect
the sale of the Common Stock in the Offering, by (i) each person known by the
Company to own beneficially more than five percent of the Common Stock, (ii)
each director and Named Executive Officer of the Company, (iii) each of the
Selling Stockholders and (iv) all current directors and executive officers as
a group. Except as otherwise noted, the Company believes the persons listed
below have sole investment and voting power with respect to the Common Stock
owned by them.
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP NUMBER OWNERSHIP
PRIOR TO OF SHARES AFTER THE
THE OFFERING(1) TO BE SOLD OFFERING(1)
----------------------- IN THE -----------------
NUMBER PERCENT OFFERING(1) NUMBER PERCENT
------------ ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
OFFICERS, DIRECTORS AND
5% STOCKHOLDERS
Stephen Gordon(2)....... 3,524,752 25.99% -- 3,524,752 21.57%
E.W. Rose, III(3)....... 1,649,137 12.38 230,295 1,418,842 8.81
Weston Presidio Capital
II, L.P.(4)............ 1,577,681 11.84 -- 1,577,681 9.80
Chase Venture Capital
Associates, L.P.(5).... 1,430,030 10.73 -- 1,430,030 8.88
Thomas Christopher(6)... 1,154,594 8.38 -- 1,154,594 6.97
Desai Funds(7).......... 1,035,741 7.77 124,289 911,452 5.66
Marshall Payne(8)....... 711,753 5.33 99,393 612,360 3.79
Ray Hemmig(9)........... 217,210 1.63 -- 217,210 1.35
Thomas Low(10).......... 139,027 1.03 -- 139,027 *
Robert Camp(11)......... 72,359 * -- 72,359 *
Michael Lazarus(12)..... 38,500 * -- 38,500 *
Damon Ball(13).......... 7,000 * -- 7,000 *
David Ferguson(14)...... 7,000 * -- 7,000 *
All directors and
executive officers
as a group (9
persons)(15)........... 5,872,202 41.06 99,393 5,772,809 33.80
OTHER SELLING STOCKHOLD-
ERS
Marcia Aaron............ 9,240 * 1,290 7,950 *
Beck Investments, a
General
Partnership(16)........ 102,739 * 9,100 93,639 *
Peter Breck............. 6,909 * 965 5,944 *
C.J. Burgess Co.(17).... 216,874 1.63 30,286 186,588 1.16
Debbie Crady............ 16,114 * 2,250 13,864 *
Jay Eastman............. 2,765 * 386 2,379 *
Ed Fitzgerald........... 2,765 * 386 2,379 *
Mark Goodman............ 6,909 * 965 5,944 *
George Howard........... 137,585 1.03 19,213 118,372 *
K. Scott Johnson........ 1,526 * 213 1,313 *
Amy Langston............ 18,207 * 2,543 15,664 *
Don Neustadt............ 79,450 * 11,095 68,355 *
Roger Todd Rankin....... 54,908 * 7,668 47,240 *
Dave Smith.............. 3,717 * 519 3,198 *
Eric Stroud............. 36,708 * 5,126 31,582 *
Byrd Teague............. 18,207 * 2,543 15,664 *
Jeff Westmont........... 8,288 * 1,157 7,131 *
Kathleen Wright......... 18,207 * 2,543 15,664 *
</TABLE>
- - --------
* Less than 1.0%
(1) Shares that the person or group has the right to acquire within 60 days
after May 2, 1998 are deemed to be outstanding in calculating the number
of shares beneficially owned and the percentage ownership of the person
or group but are not deemed to be outstanding as to any other person or
group. Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 238,000 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998. Also includes 140,000 shares of Common
Stock held by the Christine B. Gordon 1998 Qualified Grantor Retained
Annuity Trust, of which Christine Gordon, the spouse of Stephen J.
Gordon, is the sole trustee, and 140,000 shares held by the Stephen J.
Gordon 1998 Qualified Grantor Retained Annuity Trust, of which Stephen J.
Gordon is the sole trustee. If the Underwriters' over-allotment option is
exercised, Mr. Gordon has agreed to sell up to 69,444 shares in the
option.
(3) Excludes approximately 1,260,994 shares held by persons associated with
Cardinal Investment Company, Inc., of which Mr. Rose is the sole
shareholder. Mr. Rose disclaims beneficial ownership of such shares.
54
<PAGE>
(4) Excludes 38,500 shares of Common Stock subject to options held by Mr.
Lazarus, a general partner of the general partner of Weston Presidio
Capital II, L.P.
(5) Excludes 7,000 shares of Common Stock subject to options held by David
Ferguson a general partner of the general partner of Chase Venture
Capital Associates, L.P.
(6) Includes 109,375 shares of Common Stock held by the Barbara Christopher
1997 Qualified Grantor Retained Annuity Trust, of which Barbara
Christopher, the spouse of Thomas A. Christopher, is the sole trustee,
2,625 shares held directly by Barbara Christopher and 109,375 shares of
Common Stock held by the Thomas A. Christopher 1997 Qualified Grantor
Annuity Trust, of which Thomas A. Christopher is the sole trustee. Also
includes 457,765 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998. If the Underwriters' over-allotment option
is exercised, Mr. Christopher and/or the trusts described above have
agreed to sell up to 27,778 shares in the option.
(7) Excludes 7,000 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998 held by Mr. Ball.
(8) Excludes approximately 2,335,655 shares held by persons associated with
Cardinal Investment Company Inc., of which Mr. Payne is a Vice President.
Mr. Payne disclaims beneficial ownership of such shares. Includes 137,277
shares held by Scout Ventures, a General Partnership, of which Mr. Payne
is a general partner. Includes 38,500 shares of Common Stock subject to
options exercisable within 60 days of May 2, 1998. If the Underwriters'
over-allotment option is exercised, Mr. Payne and Scout Ventures, a
General Partnership, have agreed to sell up to an aggregate of 56,685
shares in the option.
(9) Includes 38,500 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998.
(10) Includes 113,750 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998. If the Underwriters' over-allotment option
is exercised, Mr. Low has agreed to sell up to 13,889 shares in the
option.
(11) Includes 38,500 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998.
(12) Includes 38,500 shares of Common Stock subject to options exercisable
within sixty days of May 2, 1998. Excludes 1,577,681 shares of Common
Stock held by Weston Presidio Capital II, L.P. ("WPC"). Mr. Lazarus is a
general partner of the general partner of WPC. Mr. Lazarus disclaims
beneficial ownership of such shares.
(13) Includes 7,000 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998. Excludes 1,035,741 shares of Common Stock
held by Equity Linked Investors II and Private Equity Investors III, L.P.
(collectively, the "Desai Funds") Mr. Ball is a Senior Vice President of
Desai Capital Management Incorporated which manages the assets of the
Desai Funds. Mr. Ball disclaims beneficial ownership of the shares owned
by the Desai Funds.
(14) Includes 7,000 shares of Common Stock subject to options exercisable
within 60 days of May 2, 1998. Excludes 1,430,030 shares of Common Stock
held by Chase Venture Capital Associates, L.P. ("CVCA"). Mr. Ferguson
disclaims beneficial ownership of the shares owned by CVCA except to the
extent of his pecuniary interest therein.
(15) See footnotes 2, 6, 8, 9, 10, 11, 12, 13 and 14.
(16) Includes 3,500 shares and warrants to purchase 26,320 shares held by
Michael Beck individually.
(17) Mr. Gordon's father-in-law is the officer, director and sole stockholder
of C.J. Burgess Co.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $.0001 par value
per share, and 5,000,000 shares of Preferred Stock, $.0001 par value per
share.
COMMON STOCK
As of May 2, 1998, 13,324,843 shares of Common Stock were outstanding, held
of record by 61 stockholders. After the Offering, 16,103,381 shares will be
outstanding. Concurrently with the completion of the Offering, each share of
the Company's Preferred Stock will be exchanged for and converted into one
share of the Company's Common Stock. The following description of rights
assumes this conversion.
Holders of Common Stock are entitled to receive dividends as may from time
to time be declared by the Board of Directors of the Company out of funds
legally available therefor. See "Dividend Policy". Holders of Common Stock are
entitled to one vote per share on all matters on which the holders of Common
Stock are entitled to vote and do not have any cumulative voting rights.
Holders of Common Stock have no preemptive, conversion, redemption or sinking
fund rights. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share equally and ratably in
the assets of the Company, if any, remaining after the payment of all
liabilities of the Company and the liquidation preference of any outstanding
class or series of Preferred Stock. The outstanding shares of Common Stock
are, and the shares of Common Stock offered by the Company in the Offering
when issued will be, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to any series of Preferred
Stock that the Company may issue in the future, as described below.
PREFERRED STOCK
The Board of Directors has the authority to issue Preferred Stock in one or
more series and to fix the number of shares constituting any such series and
the preferences, limitations and relative rights, including dividend rights,
dividend rate, voting rights, terms of redemption, redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by the stockholders of the Company.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock.
The potential issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. The Company has no current plans to issue shares of
Preferred Stock.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law, as amended ("Section 203"), which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years following the date
that such stockholder became an interested stockholder, unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
that resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at
56
<PAGE>
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and
also officers and (y) by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combinations to include (i) any merger or
consolidation involving the corporation or any majority-owned subsidiary of
the corporation and any other person or entity, (ii) subject to certain
exceptions, any sale, transfer, pledge or other disposition of 10% or more of
the assets of the corporation or any majority-owned subsidiary of the
corporation involving the interested stockholder, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation or any majority-owned subsidiary of the corporation of any stock
of the corporation to the interested stockholder, (iv) any transaction
involving the corporation or any majority-owned subsidiary of the corporation
that has the effect of increasing the proportionate share of the stock of any
class or series of the corporation or any majority-owned subsidiary of the
corporation beneficially owned by the interested stockholder or (v) the
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation or any majority-owned subsidiary of the corporation. In general,
Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Company's Certificate of Incorporation and Bylaws include provisions
that may have the effect of discouraging, delaying or preventing a change in
control of the Company or an unsolicited acquisition proposal that a
stockholder might consider favorable, including a proposal that might result
in the payment of a premium over the market price for the shares held by
stockholders. These provisions are summarized in the following paragraphs.
CLASSIFIED BOARD OF DIRECTORS
The Certificate of Incorporation and Bylaws provide for the Board to be
divided into three classes of directors serving staggered, three year terms.
The classification of the Board has the effect of requiring at least two
annual stockholder meetings, instead of one, to replace a majority of members
of the Board.
SUPERMAJORITY VOTING
The Certificate of Incorporation requires the approval of the holders of at
least 66 2/3% of the Company's combined voting power to effect certain
amendments to the Certificate of Incorporation or to effect any business
combination (as defined in Section 203) relating to the Company. The Bylaws
may be amended by either (a) a majority of the Board or (b) the holders of a
majority of the Company's voting stock, provided that certain amendments
approved by stockholders require the approval of at least 66 2/3% of the
Company's combined voting power.
AUTHORIZED BUT UNISSUED OR UNDESIGNATED CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. No Preferred Stock will
be designated upon consummation of the
57
<PAGE>
Offering. After the Offering, the Company will have outstanding 16,103,381
shares of Common Stock. The authorized but unissued (and in the case of
Preferred Stock, undesignated) stock may be issued by the Board in one or more
transactions. In this regard, the Company's Certificate of Incorporation
grants the Board broad power to establish the rights and preferences of
authorized and unissued Preferred Stock. The issuance of shares of Preferred
Stock pursuant to the Board's authority described above could decrease the
amount of earnings and assets available for distribution to holders of Common
Stock and adversely affect the rights and powers, including voting rights, of
such holders and may have the effect of delaying, deferring or preventing a
change in control of the Company. The Board does not currently intend to seek
stockholder approval prior to any issuance of Preferred Stock, unless
otherwise required by law.
SPECIAL MEETINGS OF STOCKHOLDERS
The Bylaws provide that special meetings of stockholders of the Company may
be called only by the Board, or by the Company's Chairman of the Board or
President.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Certificate of Incorporation and the Bylaws provide that an action
required or permitted to be taken at any annual or special meeting of the
stockholders of the Company may only be taken at a duly called annual or
special meeting of stockholders. This provision prevents stockholders from
initiating or effecting any action by written consent, and thereby taking
actions opposed by the Board.
NOTICE PROCEDURES
The Bylaws establish advance notice procedures with regard to all
stockholder proposals to be brought before meetings of stockholders of the
Company, including proposals relating to the nomination of candidates for
election as directors, the removal of directors and amendments to the
Certificate of Incorporation or Bylaws. These procedures provide that notice
of such stockholder proposals must be timely given in writing to the Secretary
of the Company prior to the meeting. Generally, to be timely, notice must be
received by the Secretary of the Company not less than 120 days prior to the
meeting. The notice must contain certain information specified in the Bylaws.
OTHER ANTI-TAKEOVER PROVISIONS
See "Management--1998 Stock Incentive Plan" for a discussion of certain
provisions of the Stock Incentive Plan which may have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals.
LIMITATION OF DIRECTOR LIABILITY
The Certificate of Incorporation limits the liability of directors of the
Company (in their capacity as directors but not in their capacity as officers)
to the Company or its stockholders to the fullest extent permitted by Delaware
law. Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, which relates to
unlawful payments of dividends or unlawful stock repurchases or redemptions or
(iv) for any transaction from which the director derived an improper personal
benefit.
INDEMNIFICATION ARRANGEMENTS
The Bylaws provide that the directors and officers of the Company shall be
indemnified and provide for the advancement to them of expenses in connection
with actual or threatened proceedings
58
<PAGE>
and claims arising out of their status as such to the fullest extent permitted
by the Delaware General Corporation Law. Prior to consummation of the
Offering, the Company will enter into indemnification agreements with each of
its directors and executives officers that will provide them with rights to
indemnification and expense advancement to the fullest extent permitted under
the Delaware General Corporation Law.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Boston Equiserve
Limited Partnership.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market, or the prospect of such sales, could adversely affect prevailing
market prices.
Upon completion of the Offering, 16,103,381 shares of Common Stock will be
outstanding. Of these shares, the 3,330,000 shares sold in the Offering will
be freely tradeable without restriction under the Securities Act, unless
purchased by an "affiliate" of the Company, as that term is defined in Rule
144. The remaining 12,773,381 shares outstanding after completion of the
Offering are "restricted securities" as defined in Rule 144 and may be sold in
the public market only if registered under the Securities Act or if they
qualify for an exemption from registration, including an exemption pursuant to
Rule 144.
All holders of the Company's outstanding Common Stock as of the date hereof
have agreed that, subject to certain exceptions and consents, during the
period beginning from the date of this Prospectus, and continuing to and
including the date 180 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Company. Upon expiration of these agreements, 12,773,381 shares will be
eligible for immediate resale in the public market subject to the limitations
of Rule 144. Of such shares, approximately 7,939,595 will be eligible for
immediate resale in the public market pursuant to Rule 144(k) without regard
to the volume and manner of sale limitations in Rule 144.
In general under Rule 144, a person, including an "affiliate" of the
Company, who has beneficially owned restricted shares for at least one year is
entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 161,033 shares immediately following the Offering) or the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are subject to certain manner
of sale limitations, notice requirements and the availability of current
public information about the Company. Rule 144(k) provides that a person who
is not an "affiliate" of the issuer at any time during the three months
preceding a sale and who has beneficially owned shares for at least two years
is entitled to sell those shares at any time without compliance with the
public information, volume limitation, manner of sale and notice provisions of
Rule 144.
As of May 2, options to purchase 1,639,806 shares of Common Stock were
outstanding under the 1995 Stock Option Plan. Simultaneously with the
completion of the Offering, options to purchase 547,300 shares of Common Stock
will be granted under the 1998 Stock Incentive Plan. The Company intends to
file as soon as practicable following completion of the Offering a
registration statement on Form S-8 under the Securities Act covering shares of
Common Stock reserved for issuance under the 1995 Stock Option Plan and the
1998 Stock Incentive Plan. Based on the number of options expected to be
outstanding upon completion of the Offering and shares reserved for issuance
under the 1998 Stock Incentive Plan, the registration statement would cover
3,287,662 shares. See "Management--Benefit Plans". The registration statement
will become effective immediately upon filing, whereupon, subject to the
satisfaction of applicable exercisability periods, Rule 144 volume limitations
applicable to affiliates and, in certain cases, the agreements with the
Underwriters referred to above, shares of Common Stock to be issued upon
exercise of outstanding options granted pursuant to the 1995 Stock Option Plan
and 1998 Stock Incentive Plan will be available for immediate resale in the
open market.
60
<PAGE>
VALIDITY OF THE ISSUANCE OF THE COMMON STOCK
The validity of the issuance of the Common Stock offered in the Offering
will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. Brown & Wood LLP, San Francisco, California, will act as
counsel for the Underwriters.
EXPERTS
The Financial Statements for Restoration Hardware, Inc. as of February 1,
1997 and January 31, 1998 and for each of the three years in the period ended
January 31, 1998 and for Michael's Concepts In Wood, Inc. as of and for the
year ended January 31, 1998 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein, and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered in the
Offering. This Prospectus omits certain information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered in the
Offering, reference is made to such Registration Statement, exhibits and
schedules. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules filed therewith, may be inspected without
charge at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates and from the Commission's Internet
Web site at http://www.sec.gov.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
RESTORATION HARDWARE, INC.
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at February 1, 1997 and January 31, 1998 and
May 2, 1998 (unaudited)................................................. F-3
Statements of Consolidated Operations for the fiscal years ended January
27, 1996, February 1, 1997 and January 31, 1998 and for the unaudited
three months ended May 3, 1997 and May 2, 1998.......................... F-4
Statements of Consolidated Stockholders' Equity for the fiscal years
ended January 27, 1996, February 1, 1997 and January 31, 1998 and for
the unaudited three months ended May 2, 1998 ........................... F-5
Statements of Consolidated Cash Flows for the fiscal years ended January
27, 1996, February 1, 1997 and January 31, 1998 and for the unaudited
three months ended May 3, 1997 and May 2, 1998.......................... F-6
Notes to Consolidated Financial Statements............................... F-7
MICHAEL'S CONCEPTS IN WOOD, INC.
Independent Auditors' Report............................................. F-18
Balance Sheet at January 31, 1998........................................ F-19
Statement of Operations for the fiscal year ended January 31, 1998....... F-20
Statement of Shareholder's Equity for the fiscal year ended January 31,
1998.................................................................... F-21
Statement of Cash Flows for the fiscal year ended January 31, 1998....... F-22
Notes to Financial Statements............................................ F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders
Restoration Hardware, Inc.
Corte Madera, California:
We have audited the accompanying consolidated balance sheets of Restoration
Hardware, Inc. and its subsidiary as of February 1, 1997 and January 31, 1998,
and the related statements of consolidated operations, stockholders' equity
and cash flows for each of the three fiscal years in the period ended January
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Restoration Hardware, Inc.
and subsidiary as of February 1, 1997 and January 31, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended January 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 11, the accompanying February 1, 1997 and January 31,
1998 financial statements have been restated.
/s/ Deloitte & Touche LLP
San Francisco, California
April 6, 1998 (May 27, 1998 as to the last two paragraphs of Note 10 and June
15, 1998 as to Note 11)
F-2
<PAGE>
RESTORATION HARDWARE, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 2, 1998
PRO FORMA
FEBRUARY 1, JANUARY 31, MAY 2, AS ADJUSTED
1997 1998 1998 (NOTE 1)
----------- ----------- ----------- -----------
AS RESTATED, SEE NOTE 11
-----------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 325 $ 912 $ 1,387
Accounts receivable........... 2,017 3,820 4,495
Merchandise inventories....... 14,092 40,363 48,685
Prepaid expense and other..... 357 1,709 3,083
------- ------- --------
Total current assets......... 16,791 46,804 57,650
Property and equipment, net.... 14,841 39,009 47,508
Long-term deferred tax asset... 435 1,070 1,070
Goodwill....................... -- -- 4,029
Other assets................... 163 350 476
------- ------- --------
Total assets................. $32,230 $87,233 $110,733
======= ======= ========
LIABILITIES, REDEEMABLE
PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses..................... $ 7,236 $22,359 $ 24,352
Revolving line of credit...... 495 10,323 27,789
Current portion of capital
lease obligations............ 176 197 262
Current portion of notes
payable...................... 239 -- 1,174
Current portion of deferred
lease incentives............. 186 1,392 1,479
Deferred tax liability........ 155 607 607
Taxes payable................. 802 1,718 --
Other current liabilities..... 1,001 2,020 1,797
------- ------- --------
Total current liabilities.... 10,290 38,616 57,460
Commitments and Contingencies.. -- -- --
Long-term portion of capital
lease obligations............. 358 158 636
Long-term portion of notes
payable....................... 312 -- 3,527
Long-term portion of deferred
lease incentives.............. 5,274 15,264 16,236
Deferred rent.................. 635 1,910 2,332
------- ------- --------
Total liabilities............ 16,869 55,948 80,191
------- ------- --------
Redeemable preferred stock:
Series A, convertible, no par
value, 2,634,415 shares
authorized, 2,634,415,
2,492,686 and 2,492,686
issued and outstanding,
respectively (aggregate
liquidation preference of
$1,750, $1,656 and $1,656
(unaudited), respectively)... 1,833 2,343 2,722 $ --
Series B, convertible, no par
value, 2,596,825 shares
authorized, 2,596,825,
2,218,370 and 2,218,370
issued and outstanding,
respectively (aggregate
liquidation preference of
$6,175, $5,277 and $5,277
(unaudited), respectively)... 6,072 5,172 5,172 --
Series C, convertible, no par
value, 1,701,658 shares
authorized, 1,701,658,
1,656,431 and 1,656,431
issued and outstanding,
respectively (aggregate
liquidation preference of
$6,000, $5,840 and $5,840
(unaudited), respectively)... 5,951 5,792 5,792 --
Series D, convertible, no par
value, 2,783,795 shares
authorized, none, 2,783,795
and 2,783,795 issued and
outstanding (aggregate
liquidation preference of
$30,902 and $30,902
(unaudited), respectively)... -- 29,726 30,346 --
------- ------- -------- --------
Total redeemable preferred
stock....................... 13,856 43,033 44,032 $ --
------- ------- -------- ========
Stockholders' equity:
Common stock, no par value,
13,790,000 and 24,500,000
shares authorized,
respectively, 4,925,725,
4,171,223 and 4,173,561
(unaudited) issued and
outstanding, respectively.... 679 541 544 $ 44,576
Retained earnings(deficit).... 826 (12,289) (14,034) (14,034)
------- ------- -------- --------
Total stockholders' equity... 1,505 (11,748) (13,490) $ 30,542
------- ------- -------- ========
Total liabilities, redeemable
preferred stock and
stockholders' equity........ $32,230 $87,233 $110,733
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RESTORATION HARDWARE, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
------------------------------------ --------------------
JANUARY 27, FEBRUARY 1, JANUARY 31, MAY 3, MAY 2,
1996 1997 1998 1997 1998
----------- ----------- ----------- --------- ---------
AS RESTATED, SEE NOTE 11
---------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 13,238 $ 39,672 $ 97,872 $ 11,907 $ 32,647
Cost of sales and occu-
pancy.................. 8,540 25,299 65,728 8,752 23,634
--------- ---------- --------- --------- ---------
Gross profit.......... 4,698 14,373 32,144 3,155 9,013
Selling, general and
administrative
expenses............... 4,075 12,213 27,080 3,733 9,553
Preopening store ex-
penses................. 162 681 1,869 256 298
--------- ---------- --------- --------- ---------
Income from
operations........... 461 1,479 3,195 (834) (838)
Interest expense--net... (48) (113) (139) (79) (426)
--------- ---------- --------- --------- ---------
Income before income
taxes................ 413 1,366 3,056 (913) (1,264)
Provision for income
taxes.................. 177 570 1,308 (371) (518)
--------- ---------- --------- --------- ---------
Net income (loss)..... $ 236 $ 796 $ 1,748 $ (542) $ (746)
========= ========== ========= ========= =========
Redeemable preferred
stock repurchases in
excess of
carrying value......... -- -- 4,765 -- --
Accretion of mandatorily
redeemable preferred
stock.................. -- 168 2,268 138 999
--------- ---------- --------- --------- ---------
Income (loss)
available to common
stockholders......... $ 236 $ 628 $ (5,285) $ (680) $ (1,745)
--------- ---------- --------- --------- ---------
Earnings (loss) per
share:
Basic................. $ .05 $ .13 $ (1.20) $ (.14) $ (.42)
--------- ---------- --------- --------- ---------
Diluted............... $ .03 $ .06 $ (1.20) $ (.14) $ (.42)
--------- ---------- --------- --------- ---------
Weighted average shares
outstanding:
Basic................. 4,914,687 4,925,725 4,386,207 4,925,725 4,172,996
--------- ---------- --------- --------- ---------
Diluted............... 7,593,127 10,902,918 4,386,207 4,925,725 4,172,996
--------- ---------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RESTORATION HARDWARE, INC.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 28, 1995........ 4,910,675 $ 656 $ (25) $ 631
Issuance of common stock........... 50,050 33 -- 33
Common stock repurchased........... (35,000) (10) (13) (23)
Net income......................... -- -- 236 236
--------- ----- -------- --------
BALANCE AT JANUARY 27, 1996........ 4,925,725 679 198 877
Accretion of mandatorily redeemable
preferred stock................... -- -- (168) (168)
Net income......................... -- -- 796 796
--------- ----- -------- --------
BALANCE AT FEBRUARY 1, 1997 (AS
RESTATED, SEE NOTE 11)............ 4,925,725 679 826 1,505
Redeemable preferred stock
repurchases in excess of
carrying value.................... -- -- (4,765) (4,765)
Accretion of mandatorily redeemable
preferred stock................... -- -- (2,268) (2,268)
Common stock repurchased........... (754,502) (138) (7,830) (7,968)
Net income......................... -- -- 1,748 1,748
--------- ----- -------- --------
BALANCE AT JANUARY 31, 1998 (AS
RESTATED, SEE NOTE 11)............ 4,171,223 541 (12,289) (11,748)
Accretion of mandatorily redeemable
preferred stock (unaudited)....... -- -- (999) (999)
Issuance of common stock
(unaudited)....................... 2,338 3 -- 3
Net income (loss) (unaudited)...... -- -- (746) (746)
--------- ----- -------- --------
BALANCE AT MAY 2, 1998 (AS
RESTATED, SEE NOTE 11)
(UNAUDITED)....................... 4,173,561 $ 544 $(14,034) $(13,490)
========= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RESTORATION HARDWARE, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDING
----------------------------------- ----------------
JANUARY 27, FEBRUARY 1, JANUARY 31, MAY 3, MAY 2,
1996 1997 1998 1997 1998
----------- ----------- ----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)....... $ 236 $ 796 $ 1,748 $ (542) $ (746)
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 533 1,119 2,665 497 1,122
Deferred income taxes.. 11 (165) (183) -- --
Changes in assets and
liabilities:
Accounts receivable... (277) (1,527) (1,803) 1,220 2,080
Merchandise
inventories.......... (2,821) (10,308) (26,271) (1,658) (6,116)
Prepaid expenses and
other assets......... (74) (319) (1,539) (193) (1,319)
Accounts payable and
accrued expenses..... 2,894 3,889 15,123 109 (2,369)
Taxes payable......... 162 449 916 (1,187) (1,719)
Other current
liabilities.......... 346 655 1,019 (355) (224)
Deferred rent......... 158 336 1,275 271 423
Deferred lease
incentives and other
long-term
liabilities.......... 1,563 3,848 11,196 959 1,059
------- -------- -------- ------- -------
Net cash provided by
(used in) operating
activities.......... 2,731 (1,227) 4,146 (879) (7,809)
------- -------- -------- ------- -------
Cash flows from investing
activities
Capital expenditures.... (4,991) (10,600) (26,833) (3,415) (8,133)
Payment for purchase of
The Michaels Furniture
Company................ -- -- -- -- (5,400)
Repay shareholder
advance................ -- -- -- -- 508
------- -------- -------- ------- -------
Net cash provided by
(used in) investing
activities............. (4,991) (10,600) (26,833) (3,415) (13,025)
Cash flows from financing
activities:
Borrowings (repayments)
under revolving line of
credit--net............ 1,027 (531) 9,828 6,428 15,905
Principal payments--
capital lease
obligations............ (3) (11) (179) (56) (59)
Borrowings under term
loan................... -- 511 1,000 392 5,460
Repayments under term
loan................... (47) (100) (1,551) -- --
Loan to stockholder..... (1,100)
Issuance of redeemable
preferred stock........ 6,072 5,951 26,922 -- --
Issuance of common
stock.................. 33 -- -- -- 3
Preferred and common
stock repurchases...... (23) -- (12,746) -- --
------- -------- -------- ------- -------
Net cash provided by
financing
activities........... 7,059 5,820 23,274 5,664 21,309
------- -------- -------- ------- -------
Net increase (decrease)
in cash and cash
equivalents............. 4,799 (6,007) 587 1,370 475
------- -------- -------- ------- -------
Cash and cash equiva-
lents:
Beginning of period..... 1,533 6,332 325 325 912
------- -------- -------- ------- -------
End of period............ $ 6,332 $ 325 $ 912 $ 1,695 $ 1,387
======= ======== ======== ======= =======
Additional cash flow in-
formation:
Cash paid during the
year for interest (net
of amount
capitalized)........... $ 83 $ 191 $ 507 $ 99 $ 762
======= ======== ======== ======= =======
Cash paid during the
year for taxes......... $ 97 $ 301 $ 574 $ 732 $ 1,629
======= ======== ======== ======= =======
Supplemental schedule of
non cash investing and
financing activities:
Equipment acquired
through noncash capital
lease transactions..... $ 542 $ 169 $ -- $ 245 $ --
======= ======== ======== ======= =======
</TABLE>
The Company purchased all of the capital stock of The Michaels Furniture
Company for $5.0 million in March 1998. In conjunction with the acquisition,
liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................................... $11,036
Cash paid for the capital stock.................................. (5,400)
-------
Liabilities assumed............................................ $ 5,636
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Restoration Hardware, Inc. and its subsidiaries (the "Company") is a
specialty retailer of high-quality home furnishings, decorative accessories
and hardware. The Company operated as a sole proprietorship from 1981 to 1987
and was incorporated in the state of California in 1987. At January 31, 1998
the Company operated a total of 41 stores in 20 states. The Company operates
on a 52-53 week fiscal year ending on the Saturday closest to January 31.
PRO FORMA BALANCE SHEET AS ADJUSTED (UNAUDITED)
As discussed in Note (6), the redeemable preferred stock will be
automatically converted upon the closing of the public offering contemplated
herein. The accompanying pro forma balance sheet gives effect to this
conversion as if such event occurred on May 2, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Restoration
Hardware, Inc. and its subsidiaries. All intercompany balances and
transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid, fixed income instruments purchased with
original maturities of three months or less.
MERCHANDISE INVENTORIES
Inventories are stated at the lower of cost or market determined under the
weighted average method. Cost includes certain buying and distribution costs
related to the procurement and processing of merchandise.
PREOPENING STORE EXPENSES
Preopening store expenses, including store set-up and certain labor and
hiring costs, are expensed as incurred.
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful life of
the asset, typically ranging from five to twelve years for equipment. The cost
of leasehold improvements is amortized over the useful life of the asset or
the applicable lease term, whichever is less. Computer hardware and software
costs are included in fixtures and equipment and are amortized over estimated
useful lives of three to five years. Leasehold improvements include
capitalized interest of $20,000 and $301,000 as of February 1, 1997 and
January 31, 1998.
CAPITALIZED LEASES
Noncancellable leases which meet the criteria of capital leases are
capitalized as assets and amortized over the lease term, using the interest
method.
F-7
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-LIVED ASSETS
The Company's policy is to review long-lived assets and certain identifiable
intangibles, including goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable based on estimated future cash flows calculated on a store by
store basis. Based on the Company's reviews as of January 31, 1998 and
February 1, 1997, no adjustments were recognized to the carrying value of such
assets.
DEFERRED RENT AND DEFERRED LEASE INCENTIVES
Certain of the Company's operating leases contain predetermined fixed
escalations of the minimum rentals during the original term of the lease. For
these leases, the Company recognizes the related rental expense on a straight-
line basis over the life of the lease and records the difference between the
amount charged to operations and amounts paid as deferred rent. As part of its
lease agreements, the Company receives certain lease incentives. These
allowances have been deferred and are amortized on a straight-line basis over
the life of the lease as a reduction of rent expense.
REVENUE RECOGNITION
The Company recognizes revenue at the point of sale. Merchandise refunds are
recorded at the time of return, as the effect of returns are not significant
to the Company's operating results.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. For the fiscal years ended
January 27, 1996, February 1, 1997 and January 31, 1998, advertising costs
were $345,000, $837,000, and $2,608,000, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash
equivalents. The Company places its cash with financial institutions. At
times, such amounts may be in excess of the FDIC insurance limits.
TAXES ON INCOME
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. In estimating
future tax consequences, the Company generally considers all expected future
events other than changes in the tax law or rates.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, Accounting for Stock Issued to
Employees.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, revolving line of credit borrowings and long-term debt
approximates their estimated fair value.
At January 31, 1998 the Company had redeemable preferred stock with carrying
values totalling $43.0 million and estimated values totalling $117.7 million
based upon management's best estimate of fair value.
F-8
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings
Per Share, requires dual presentation of two earnings per share ("EPS")
amounts, basic EPS and diluted EPS, on the face of all income statements.
Basic EPS excludes dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if common stock options and warrants were exercised into
common stock.
The following is a reconciliation of the number of shares (denominator) used
in the basic and diluted EPS computations (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARES
---------------------------------------------------
EFFECT OF
CONVERTIBLE EFFECT OF DILUTED
PREFERRED STOCK OPTIONS
BASIC EPS STOCK AND WARRANTS DILUTED EPS
--------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
Fiscal year ended January
27, 1996................ 4,914,687 2,678,440 0 7,593,127
Fiscal year ended
February 1, 1997........ 4,925,725 5,720,695 256,498 10,902,918
Fiscal year ended January
31, 1998................ 4,386,207 0 0 4,386,207
</TABLE>
--------
The basic and diluted EPS share amounts assume the conversion of Series
A, B, C and D preferred stock into common stock at a ratio of one-to-one as
of January 31, 1998. Such preferred stock will automatically convert into
common stock upon the completion of the Company's initial public offering
of its common stock.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. Management believes this will have no
impact on the Company's financial position or results of operations.
SFAS No. 131, Disclosures about Segment Reporting of an Enterprise and
Related Information, establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosure about products and
services, geographic areas, and major customers. Adoption of this statement
will not impact the Company's financial position, results of operations or
cash flows and any effect will be limited to the form and content of its
disclosures. This statement is effective for fiscal years beginning after
December 15, 1997.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the fiscal
year ended January 31, 1998.
F-9
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, MAY 2
1997 1998 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements................. $12,456 $34,504 $42,439
Furniture, fixtures and equipment...... 3,495 8,435 11,803
Equipment under capital leases......... 736 736 736
------- ------- -------
Total................................ 16,687 43,675 54,978
Less accumulated depreciation and amor-
tization.............................. (1,846) (4,666) (7,470)
------- ------- -------
Property and equipment, net............ $14,841 $39,009 $47,508
======= ======= =======
</TABLE>
(3) LEASES
The Company leases certain property consisting of retail stores, the
corporate offices and distribution center and equipment. Leases expire at
various dates through 2013. The retail store, distribution center and
corporate office leases generally provide that the Company assume the
maintenance and all or a portion of the property tax obligations on the leased
property. Most store leases also provide for minimum annual rentals, with
provisions for additional rent based on a percentage of sales and for payment
of certain expenses.
The aggregate future minimum rental payments under leases in effect at
January 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES TOTAL
----------- ------- --------- --------
<S> <C> <C> <C>
1999........................................... $ 227 $ 11,378 $ 11,605
2000........................................... 164 11,740 11,904
2001........................................... 1 11,789 11,790
2002........................................... -- 11,583 11,583
2003........................................... -- 11,429 11,429
Thereafter through the year 2013............... -- 79,236 79,236
----- -------- --------
Minimum lease commitments...................... 392 $137,155 $137,547
======== ========
Less amount representing interest.............. (37)
-----
Present value of capital lease obligations..... 355
Less current portion........................... (197)
-----
Long-term portion.............................. $ 158
=====
</TABLE>
Minimum and contingent rental expense, which are based upon certain factors
such as sales volume, under operating leases, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Operating leases:
Minimum rental expense................. $ 920 $2,436 $7,041
Contingent rental expense.............. 153 408 474
------ ------ ------
Total................................ $1,073 $2,844 $7,515
====== ====== ======
</TABLE>
F-10
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) REVOLVING LINE OF CREDIT AND TERM LOAN
Revolving line of credit and notes payable consist of the following (in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, MAY 2,
1997 1998 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving line of credit................ $ 495 $10,323 $27,789
===== ======= =======
Term loan............................... $ 551 $ -- $ 4,701
Less current portion of term loan....... (239) -- (1,174)
----- ------- -------
Total................................. $ 312 $ -- $ 3,527
===== ======= =======
</TABLE>
The Company has a revolving line of credit with a commercial bank which
allows the Company to borrow up to $50,000,000 through December 1999. Interest
on the revolving line of credit is payable monthly at the bank's prime rate
(8.5% at January 31, 1998). The line allows for letters of credit of up to
$1,500,000. Letters of credit to the extent outstanding reduce available
borrowings under the line.
The line of credit agreement requires compliance with certain financial loan
covenants, including capital expenditure limits, minimum net worth and working
capital ratios, and earnings coverage ratios. The agreement also prohibits
dividend payments and sales of assets, other than inventory in the normal
course of business. As of January 31, 1998, the Company was not in compliance
with its indebtedness to net worth ratio and for the year ended January 31,
1998, the Company was not in compliance with its maximum capital expenditure
and minimum inventory turnover ratio covenants. The Company has received
waivers from its bank for each covenant with which it was in non-compliance as
of and for the year ended January 31, 1998.
(5) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current payable:
Federal............................... $125 $ 610 $1,213
State................................. 41 125 278
---- ----- ------
Total current payable............... 166 735 1,491
---- ----- ------
Deferred:
Federal............................... 8 (139) (150)
State................................. 3 (26) (33)
---- ----- ------
Total deferred...................... 11 (165) (183)
---- ----- ------
Provision for income taxes.............. $177 $ 570 $1,308
==== ===== ======
</TABLE>
F-11
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The differences between the U.S. federal statutory tax rate and the
Company's effective rate are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory tax rate........ 34.0% 34.0% 34.0%
State income taxes (net of U.S. federal
income tax benefit)................... 6.5 5.5 5.4
Other.................................. 2.4 2.2 3.4
---- ---- ----
Effective income tax rate............ 42.9% 41.7% 42.8%
==== ==== ====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current deferred tax asset (liability)
Accrued expenses..................... $ 29 $ 113 $ 103
State tax benefit.................... 14 15 24
Inventory............................ (90) (283) (562)
Other................................ -- -- (172)
---- ----- ------
Net current deferred tax
liability......................... (47) (155) (607)
---- ----- ------
Long-term deferred tax asset
(liability):
Deferred lease credits............... 129 323 790
Fixed assets......................... 49 (16) (29)
Other................................ (16) 128 309
---- ----- ------
Net long-term deferred tax asset... 162 435 1,070
---- ----- ------
Net deferred tax asset................. $115 $ 280 $ 463
==== ===== ======
</TABLE>
(6) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company had outstanding four series of convertible preferred stock at
January 31, 1998. The first series, Series A convertible preferred stock, was
issued in June 1994 at a price of $0.66 per share. The Company issued
2,634,415 shares of Series A convertible preferred stock and subsequently
redeemed 141,729 of such shares in May 1997. The second series, Series B
convertible preferred stock, was issued in January 1996 at a price of $2.38
per share. The Company issued 2,596,825 shares of Series B convertible
preferred stock and subsequently redeemed 378,455 of such shares in May 1997.
The third series, Series C convertible preferred stock, was issued in October
1996 at a price of $3.53 per share. The Company issued 1,701,658 shares of
Series C convertible preferred stock and subsequently redeemed 45,227 of such
shares in May 1997. The fourth series, Series D convertible preferred stock
was issued in May 1997 at a price of $10.49 per share. The Company issued
2,783,795 shares of such Series D preferred stock.
F-12
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The holders of convertible preferred stock are entitled to receive, if and
when declared by the Board of Directors, dividends in cash or other assets
provided that the holders of Series D preferred stock receive such dividends
in preference to any payment of any dividend on any other capital stock of the
Company. All preferred stock dividends are noncumulative.
Each share of Series A, B, C and D convertible preferred stock is
convertible into common stock at the option of the holder at a ratio of one
for one. The shares will automatically convert into common stock immediately
upon the consummation of the Company's sale of its common stock in an initial
public offering that meets certain criteria.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series D preferred stock shall be entitled to receive, prior
and in preference to any other series of preferred stock (Series A, B and C)
and the holders of common stock, an amount equal to the greater of: (i) the
original purchase price plus the payment of a 8% dividend compounded annually
or (ii) the value such holder would have received if each outstanding share of
Series D preferred stock had been converted into common stock immediately
prior to such liquidation, dissolution or winding up of the Company. If assets
and funds are insufficient to permit full payment of the preference amount of
the Series D preferred stock, any assets and funds shall be distributed
ratably among the holders of Series D preferred stock.
At any time after June 10, 1999, if the Series A and B preferred stock have
not been converted to common stock, the holders of a majority of the then
outstanding Series A and B preferred stock can elect to have the Company
redeem all of such shares of preferred stock by paying for each share the
redemption price based on the redemption formula. At any time beginning
October 11, 2001, if the Series C preferred stock has not been converted to
common stock, the holders of a majority of the then outstanding Series C
preferred stock can elect to have the Company redeem all of the shares of
preferred stock by paying for each share the redemption price based on the
redemption formula. The redemption formula is the sum of four times earnings
before depreciation, amortization, interest and taxes for the prior twelve-
month period plus working capital less long-term debt, divided by the number
of shares outstanding, defined as the aggregate number of issued and
outstanding shares of common stock, preferred stock and shares issuable upon
conversion or exercise of any options and warrants.
If (a) shares of Series D preferred stock have not been converted to common
stock on or before May 9, 2005, or (b) in the event that any other capital
stock of the Company is to be redeemed, the Company shall, in the event that
the holders of the Series D preferred stock elect to be redeemed, redeem the
Series D preferred stock for a redemption price equal to the original purchase
price, plus 8% dividend compounded annually, before any redemption payment is
made in respect to any other series of preferred stock (Series A, B and C) or
the common stock.
STOCK BASED COMPENSATION PLANS
On June 10, 1994, the Board of Directors adopted the 1994 Incentive Stock
Option Plan ("1994 Plan"). The 1994 Plan authorized the issuance of up to
754,530 shares of common stock in connection with incentive stock option
awards granted to key employees of the Company. In January 1996, the Board of
Directors approved the 1995 Stock Option Plan ("1995 Plan"), which serves as
the successor to the 1994 Plan. The 1995 Plan authorized the Board of
Directors to grant options to key employees, directors, and consultants to
purchase an aggregate of 1,624,280 shares of common stock, including those
that had been previously granted under the 1994 Plan. In 1997, the Board of
Directors amended the 1995 Plan to increase the number of shares authorized
for issuance by 685,720 shares. The vesting, exercise prices and other terms
of the options are fixed by the Board of Directors. Options are granted at
prices not less than the fair market value at the date of grant for incentive
stock options and not less than 85% of the fair market value for nonstatutory
stock options. These options generally
F-13
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expire ten years from the date of grant and vest ratably over a three-year
period. The options are generally exercisable upon grant but, if any options
are exercised before becoming vested, the holder can not sell or vote the
shares until such shares have vested. If the holder leaves the Company before
the options are fully vested, the Company has the right to repurchase unvested
options at the employee's original exercise price. In the event of an initial
public offering, certain outstanding options shall immediately become fully
vested.
A summary of activity under the above option Plans is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding and exercis-
able at January 28,
1995..................... 377,265 $ 0.66
Granted (weighted aver-
age fair value of
$0.10)................. 376,250 0.66
Exercised............... --
Canceled................ --
---------
Outstanding and exercis-
able at January 27,
1996..................... 753,515 0.66
Granted (weighted aver-
age fair value of
$0.24)................. 483,735 1.55
Exercised............... --
Canceled................ (31,640) 1.43
---------
Outstanding and exercis-
able, February 1, 1997... 1,205,610 1.00
Granted (weighted aver-
age fair value of
$1.95)................. 489,104 10.55
Exercised............... --
Canceled................ (55,965) 3.51
---------
Outstanding and exercis-
able, January 31, 1998... 1,638,749 3.76
=========
Vested at January 31,
1998..................... 742,518 0.80
=========
Available for future grant
at January 31, 1998...... 671,251
=========
</TABLE>
Additional information regarding options outstanding as of January 31, 1998
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
------------------------ ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.66.................. 753,515 7.0 $ 0.66 753,515 $ 0.66
1.43.................. 344,330 8.5 1.43 344,330 1.43
2.12.................. 63,105 8.8 2.12 63,105 2.12
10.49-11.54............ 477,799 9.6 10.55 477,799 10.49
--------- --- ------ --------- ------
$ 0.66-$11.54........... 1,638,749 8.2 $ 3.76 1,638,749 $ 3.75
========= === ====== ========= ======
</TABLE>
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles
Board No. 25 ("APB 25"), Accounting for Stock Issued to Employees and its
related interpretations. As all stock based awards have been granted at their
then fair market value, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
F-14
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS 123"), requires the disclosure of pro forma net
income had the Company adopted the fair value method as of the beginning of
fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees
is calculated through the use of option pricing models, even though such
models were developed to estimate the fair value of freely traded, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 54 months; stock
volatility considered to be 0% since the Company is a private company; risk
free interest rates, 5.7%, 5.7% and 7.0% in 1996, 1997 and 1998; and no
dividends during the expected term. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the awards had been amortized to expense
over the vesting period of the awards, pro forma net income and per share
amounts would have been as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income...................... $ 234 $ 779 $ 1,655
Pro forma net income (loss) per share
available to common stockholders......... $ 234 $ 611 $ (5,378)
Pro forma net income (loss) per share:
Basic.................................... $0.05 $0.12 $ (1.23)
Diluted.................................. $0.03 $0.06 $ (1.23)
</TABLE>
However, the impact of outstanding nonvested stock options granted prior to
1995 has been excluded from the pro forma calculation.
In June 1994, the Company issued 131,705 warrants to purchase shares of
common stock at $0.90 per share. The warrants were issued in connection with a
stockholder agreement and management believes such warrants were issued at
fair market value on the date of grant. The warrants were immediately
exercisable and expire on June 10, 2000. At January 31, 1998, 127,036 of the
warrants were outstanding.
In May 1997, the Company issued 27,734 warrants at $12.59 per share in
connection with the Series D preferred stock. The warrants, which management
believes were issued at fair market value at the date of grant, were
immediately exercisable and expire on May 16, 2002.
In April 1998, the Board of Directors adopted the 1998 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan is designed to allow
eligible employees, based on specified length of service requirements, of the
Company and participating subsidiaries to purchase shares of common stock, at
semi-annual intervals, through their periodic payroll deductions under the
Purchase Plan. A reserve of 475,000 shares of common stock has been
established for this purpose. Individuals who are eligible employees may enter
the Purchase Plan twice yearly and payroll deductions may not exceed 15% of
total cash earnings. The purchase price per share will equal 85% of the lower
of (i) the fair market value of the common stock on the participant's entry
date into the offering period or (ii) the fair market value on the semi-annual
purchase date. The Board may at any time alter, suspend or discontinue the
Purchase Plan. However, certain amendments to the Purchase Plan may require
stockholder approval.
F-15
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for its employees who meet certain service and
age requirements. Participants may contribute up to 15% of their salaries to a
maximum of $10,000 and qualify for favorable tax treatment under Section
401(k) of the Internal Revenue Code. In November 1997, the Company began
matching 10% of the employees' contributions up to a maximum of 4% of their
base salary. The Company contributed $3,700.
(8) RELATED PARTY TRANSACTIONS
The Company leases a store from the chief executive officer and a
partnership of which the chief executive officer is a partner. For the fiscal
years ended February 1, 1997 and January 31, 1998, rents of $33,700 and
$33,600 were paid to the chief executive officer and the partnership,
respectively.
A Loan Agreement was entered into between the Company's Chief Executive
Officer, Stephen Gordon, and his spouse ("Borrowers") and the Company in
February 1997 for $1,100,000 bearing an interest rate of six percent per
annum. The Borrowers pledged to the Company 20,697 shares of common stock of
the Company as collateral for any amounts funded under the agreement. The loan
was repaid in full in May 16, 1997, including $7,348 in interest. Other
unsecured loans, bearing interest at various rates, totaling $56,850 were
funded at various dates prior to 1997 and were repaid in full, including
$1,144 in interest, in May 1997.
(9) COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal claims, actions and complaints.
Although the ultimate resolution of legal proceedings cannot be predicted with
certainty, management believes that disposition of these matters will not have
a material adverse effect on the Company's consolidated financial statements.
(10) SUBSEQUENT EVENTS
On March 20, 1998, the Company acquired 100% of the outstanding stock of The
Michaels Furniture Company, Inc. ("Michaels"), a privately owned manufacturer
of wood furniture, from its sole shareholder. The Michaels acquisition will be
accounted for under the purchase method of accounting and all acquired assets
and liabilities will be recorded at their estimated fair market values.
Payment for the Michaels' stock consisted of an initial cash payment of $5
million at March 20, 1998, date of close. The Company will also pay cash
contingent consideration for the stock equal to 35% of Michaels' earnings
before interest, taxes, depreciation and amortization ("EBITDA") for the
fiscal year ending January 30, 1999 and 25% of Michaels' EBITDA for years
ending January 29, 2000 and January 27, 2001. Additionally, the Company will
transfer to the former sole shareholder of Michaels 3.3% of Michaels' common
stock in the fiscal years ending January 30, 1999 and January 29, 2000 and
3.4% in the fiscal year ending January 27, 2001 if Michaels' EBITDA exceeds
certain agreed-upon amounts in each of those years. Michael Vermillion, the
sole owner of Michaels, remained the President of Michaels.
The total estimated purchase price to be recorded by Restoration Hardware is
approximately $5.4 million and consists of the $5 million initial purchase
price paid for Michaels shares acquired and approximately $400,000 in
transaction costs directly related to the acquisition.
The purchase price will be allocated to assets acquired and liabilities
assumed based on their estimated fair values in accordance with the purchase
method of accounting for business combinations.
F-16
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Pro forma unaudited results of operations for the year ended January 31,
1998 as if the acquisition had occurred on February 2, 1997 and based upon a
preliminary allocation of the purchase price are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31, 1998
----------------
(UNAUDITED)
<S> <C>
Pro forma sales................................................ $114,045
Pro forma income before income taxes........................... 3,162
Pro forma net income........................................... 1,846
</TABLE>
In May 1998, the Board of Directors of the Company effected a seven-for-one
stock split of the Company's common stock. All share and per share data in the
accompanying financial statements have been retroactively adjusted to reflect
the split.
On May 27, 1998, the Company reincorporated in the state of Delaware.
(11) RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's consolidated financial
statements as of and for the fiscal year ended January 31, 1998, the Company
determined that the carrying value of the outstanding redeemable preferred
stock should have been increased by periodic accretions so that the carrying
amount would equal the mandatory redemption amount at the mandatory redemption
date. As a result, the financial statements for the fiscal years ended
February 1, 1997, and January 31, 1998 and the three months ended May 3, 1997
(unaudited) and May 2, 1998 (unaudited) have been restated from the amounts
previously reported as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 JANUARY 31, 1998 MAY 3, 1997 MAY 2, 1998
------------------- ------------------- ------------------- -------------------
AS AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- -------- ---------- --------
AS OF:
- - ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Redeemable preferred
stock:
Series A............... $1,665 $1,833 $1,571 $ 2,343 $ 1,571 $ 2,722
Series B............... 6,072 6,072 5,172 5,172 5,172 5,172
Series C............... 5,951 5,951 5,792 5,792 5,792 5,792
Series D............... 28,075 29,726 28,075 30,346
Total redeemable
preferred stock....... 13,688 13,856 40,610 43,033 40,610 44,032
Stockholders equity:
Common stock........... 679 679 541 541 544 544
Retained earnings...... 994 826 (9,866) (12,289) (10,612) (14,034)
Total stockholders'
equity................ 1,673 1,505 (9,325) (11,748) (10,068) (13,490)
<CAPTION>
FOR THE PERIOD ENDED:
- - ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Redeemable preferred
stock repurchases in
excess of carrying
value.................. -- -- 4,778 4,765 -- -- -- --
Accretion of mandatorily
redeemable preferred
stock.................. -- 168 -- 2,268 -- 138 -- 999
Income (loss) available
to common stockhold-
ers.................... 796 628 (3,030) (5,285) (542) (680) (746) (1,745)
Earnings (loss) per
share:
Basic.................. $ 0.16 $ 0.13 $(0.69) $ (1.20) $(0.11) $(0.14) $ (0.18) $ (0.42)
------ ------ ------ ------- ------ ------ ------- -------
Diluted................ $ 0.07 $ 0.06 $(0.69) $ (1.20) $(0.11) $(0.14) $ (0.16) $ (0.42)
------ ------ ------ ------- ------ ------ ------- -------
</TABLE>
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Michael's Concepts In Wood, Inc.
Sacramento, California
We have audited the accompanying balance sheet of Michael's Concepts In
Wood, Inc. ("Michaels") as of January 31, 1998, and the related statements of
operations, shareholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Michaels' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Michael's Concepts In Wood, Inc. as of
January 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
April 16, 1998
F-18
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ --
Accounts receivable......................................... 2,741
Inventories................................................. 1,908
Advance to shareholder...................................... 495
Prepaid expense and other................................... 82
------
Total current assets...................................... 5,226
Property and equipment, net................................... 1,487
Other assets.................................................. 35
------
Total assets.............................................. $6,748
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................ $2,273
Accrued expenses............................................ 500
Current portion of notes payable............................ 1,435
Current portion of capital lease obligations................ 83
Income taxes payable........................................ 298
------
Total current liabilities................................. 4,589
Notes payable................................................. 163
Capital lease obligations..................................... 533
------
Total liabilities......................................... 5,285
------
Shareholder's equity:
Common stock--no par value, 1,000 shares authorized, issued
and outstanding............................................ 10
Additional paid-in-capital.................................. 80
Retained earnings........................................... 1,373
------
Total shareholder's equity................................ 1,463
------
Total liabilities and shareholder's equity................ $6,748
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31, 1998
-----------------
<S> <C>
Net sales..................................................... $21,529
Cost of goods sold............................................ 16,113
-------
Gross profit................................................ 5,416
Selling, general and administrative expenses.................. 4,439
-------
Income from operations...................................... 977
Interest expense.............................................. (232)
-------
Income before income taxes.................................. 745
Provision for income taxes.................................... 264
-------
Net income.................................................. $ 481
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN- RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1997.... 1,000 $10 $80 $ 892 $ 982
Net income..................... 481 481
----- --- --- ------ ------
BALANCE AT JANUARY 31, 1998.... 1,000 $10 $80 $1,373 $1,463
===== === === ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JANUARY 31,
1998
-----------
<S> <C>
Cash flows from operating activities:
Net Income........................................................ $481
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization.................................... 298
Deferred income taxes............................................ (64)
Change in assets and liabilities:
Accounts receivable............................................. (801)
Inventories..................................................... (565)
Advance to shareholder.......................................... (362)
Prepaid expenses and other assets............................... (33)
Accounts payable and accrued expenses........................... 944
----
Net cash used in operating activities.......................... (102)
----
Cash flows from investing activities:
Capital expenditures.............................................. (370)
----
Cash flows from financing activities:
Borrowings on revolving line of credit, net....................... 559
Principal payments under capital lease obligations................ (73)
Borrowings under term loans....................................... 36
Payments under vehicle loans...................................... (50)
----
Net cash provided by financing activities...................... 472
----
Net increase (decrease) in cash and equivalents.................... --
Cash and cash equivalents:
Beginning of period............................................... --
----
End of period..................................................... $ --
====
Additional cash flow information:
Cash paid during the year for interest............................ $232
====
Cash paid during the year for taxes............................... $ --
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Michael's Concepts In Wood, Inc., a California corporation ("Michaels")
manufactures wood furniture. Michaels' fiscal year ends on the Saturday
closest to January 31.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid, fixed income instruments purchased with
original maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost (first-in, first out) or market.
Costs include certain buying and distribution costs related to the procurement
and processing of inventory.
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line and declining balance methods over their estimated useful
lives, generally five to seven years. Leasehold improvements are amortized on
a straight-line basis over the lesser of the related lease terms or useful
lives.
TAXES ON INCOME
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
Michaels' financial statements or tax returns. In estimating future tax
consequences, all expected future events are considered other than changes in
the tax law.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable, notes
receivable, accounts payable, notes payable and capital lease obligations
approximate their estimated fair values.
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Based on Michaels' review
as of January 31, 1998, no adjustments were recognized to the carrying value
of such assets.
F-23
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment, as the effect of
returns are not significant to the Company's operating results.
IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. In addition, this statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from the retained earnings and additional paid in capital in
the equity section of a statement of financial position. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes this will have no impact on Michaels' financial position or results
of operations.
SFAS No. 131, "Disclosures about Segment Reporting of an Enterprise and
Related Information" establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosure about products and
services, geographic areas, and major customers. Adoption of this statement
will not impact Michaels' consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and
content of its disclosures. This statement is effective for fiscal years
beginning after December 15, 1997.
(2) INVENTORIES
Inventories consist of the following at January 31, 1998 (in thousands):
<TABLE>
<S> <C>
Raw materials......................................................... $ 836
Work in progress...................................................... 815
Finished goods........................................................ 257
------
$1,908
======
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at January 31, 1998 (in
thousands):
<TABLE>
<S> <C>
Machinery........................................................... $ 1,653
Leasehold improvements.............................................. 588
Equipment, furniture and fixtures................................... 175
Machinery under capital leases...................................... 711
Vehicles............................................................ 31
-------
Total............................................................. 3,158
Less accumulated depreciation....................................... (1,671)
-------
Property and equipment, net....................................... $ 1,487
=======
</TABLE>
F-24
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) LEASES
Michaels leases its manufacturing facility which includes its corporate
offices and certain manufacturing equipment. The manufacturing facility and
corporate office lease provides for Michaels to assume the maintenance of and
all of the property tax obligations on the leased property.
The minimum rental payments required under capital leases (with interest
rates ranging from 13.0% to 13.9%) and noncancellable operating leases with an
initial lease term in excess of one year at January 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
JANUARY 31, LEASES LEASES TOTAL
----------- ------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1999............................................. $154 $ 647 $ 801
2000............................................. 154 509 663
2001............................................. 154 501 655
2002............................................. 145 496 641
2003............................................. 136 493 629
Thereafter....................................... 115 7,134 7,249
---- ------ -------
Minimum lease commitments........................ 858 $9,780 $10,638
====== =======
Less amount representing interest................ 242
----
Present value of capital lease obligations....... 616
Less current portion............................. 83
----
Long-term portion................................ $533
====
</TABLE>
For the year ended January 31, 1998, minimum rental expense under operating
leases was approximately $627,000. The net book value for machinery under
capital leases was $617,000 as of January 31, 1998.
(5) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Federal............................................... $296 $(53) $243
State................................................. 32 (11) 21
---- ---- ----
Provision for income taxes............................ $328 $(64) $264
==== ==== ====
</TABLE>
The differences between the U.S. federal statutory tax rate and Michaels'
effective rate are as follows:
<TABLE>
<S> <C>
U.S. federal statutory tax rate........................................ 34.0%
State income taxes (net of U.S. federal income tax benefit)............ 6.7
Manufacturers investment tax credit.................................... (5.6)
Other.................................................................. 0.3
----
Effective income tax rate............................................ 35.4%
====
</TABLE>
F-25
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of Michaels' deferred tax assets and liabilities at
January 31, 1998 (in thousands) are as follows:
<TABLE>
<S> <C>
Long-term deferred tax asset (liability):
Fixed assets........................................................ $(34)
State tax........................................................... 10
Vacation accrual.................................................... 29
----
Net deferred tax asset............................................ $ 5
====
</TABLE>
(6) NOTES PAYABLE
The following loans are outstanding (in thousands):
<TABLE>
<S> <C>
$2,500,000 revolving line of credit, principal due on April 30, 1998.
Interest at Bank's base loan rate plus 0.75% per annum, currently at
9.25%, payable monthly, secured by all assets of Michaels........... $1,236
Equipment purchase line of credit, due April 30, 1998. Interest
payable at Bank's base loan rate, plus 1.25% per annum, currently
9.75%, secured by all assets of Michaels............................ 109
Term loan. Monthly principal payments of $6,667, plus interest at
Bank's base loan rate plus 1.5% per annum, currently at 10.0%,
secured by all assets of Michaels. Remaining principal due at
maturity on November 1, 2000 ....................................... 227
Vehicle loan. Monthly payments of $565, including interest at 8.56%
per annum, secured by vehicle....................................... 17
Machinery loan. Monthly payments of $408 including interest at 11.5%
per annum, secured by machinery..................................... 9
------
Total notes payable................................................ 1,598
Less: current portion.............................................. 1,435
------
Total long-term notes payable...................................... $ 163
======
</TABLE>
The revolving line of credit agreement, equipment purchase line of credit
agreement and term loan agreement require compliance with certain financial
loan covenants, including net worth, debt to net worth ratio, current ratio,
debt service coverage ratio, minimum net income, and capital expenditure
limits. The agreements also prohibit Michaels from making dividend payments or
loans. As of January 31, 1998, Michaels was not in compliance with its debt to
net worth ratio and current ratio covenants. For the year ended January 31,
1998, Michaels was not in compliance with its maximum capital expenditures
covenants. Michaels has received waivers from its bank through April 29, 1998
for each covenant with which it was in non-compliance as of and for the year
ended January 31, 1998.
Principal payments on notes payable at January 31, 1998 are due as follows
(in thousands):
<TABLE>
<S> <C>
FISCAL YEAR
-----------
1999................................. $1,435
2000................................. 91
2001................................. 72
------
$1,598
Total................................
======
</TABLE>
F-26
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(7) RELATED PARTY TRANSACTIONS
Michaels leases its manufacturing and warehousing facilities from the sole
officer and shareholder of Michaels. Rent expense for such leases was $362,000
for the year ended January 31, 1998.
Substantially all assets of Michaels were pledged as collateral for personal
debt of the sole shareholder of Michaels (see note 8 Subsequent Event).
(8) SUBSEQUENT EVENT
On March 20, 1998, 100% of Michaels' outstanding stock was purchased by
Restoration Hardware, Inc. ("Restoration"), a specialty retailer of home
furnishings, decorative accessories and hardware, and the largest customer of
Michaels. Sales to Restoration Hardware represented $5,356,000, or 25%, of
total sales for the year ended January 31, 1998.
As a result of this transaction, the former owner will become the President
of Michaels. Additionally, the former owner was required to pay off his
Advance to Shareholder note and to remove all Michaels assets as collateral on
his personal debt. Michaels continues to lease the facilities and certain
equipment from the former owner. The lease terms are at current fair market
rents and the lease rate will remain constant through the ten year term of the
lease.
F-27
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters has severally agreed
to purchase from the Company and the Selling Stockholders, the respective
number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co.............................................
BancAmerica Robertson Stephens..................................
NationsBanc Montgomery Securities LLC...........................
Piper Jaffray Inc...............................................
---------
Total....................................................... 3,330,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the Underwriters.
Certain stockholders of the Company have granted the Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 499,500 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise their over-allotment option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
3,330,000 shares of Common Stock offered.
The Company, the Selling Stockholders, the Company's directors and officers
and certain other holders of the Company's outstanding Common Stock as of the
date hereof have agreed with the Underwriters that, subject to certain
exceptions, during the period beginning from the date of this Prospectus and
continuing to and including the date 180 days after the date of this
Prospectus, they will not offer, sell, contract to sell or otherwise dispose
of any shares of Common Stock or any securities of the Company that are
substantially similar to the shares of the Common Stock or which are
convertible into or exchangeable for securities that are substantially similar
to the shares of the Common Stock without the prior written consent of the
Underwriters.
The Underwriters have informed the Company that they do not expect sales to
accounts over which the Underwriters exercise discretionary authority to
exceed five percent of the total number of shares of Common Stock offered by
them.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company and the Underwriters. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to
U-1
<PAGE>
prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
The Underwriters may reserve, for sale at the initial public offering price,
up to approximately 300,000 shares of Common Stock which may be sold to
directors, employees and persons having business relationships with the
Company. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares of Common Stock not so purchased will be
offered by the Underwriters on the same basis as the other shares of Common
Stock offered in the Offering.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "RSTO".
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Common Stock; and short
positions created by the Underwriters involve the sale by the Underwriters of
a greater number of shares of Common Stock than they are required to purchase
from the Company and the Selling Stockholders in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to broker-dealers in respect of the Common Stock sold in the Offering
may be reclaimed by the Underwriters if such securities are repurchased by the
Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be effected on the Nasdaq National Market, in the over-
the-counter market or otherwise.
Two affiliates of BancAmerica Robertson Stephens, in the aggregate,
beneficially own 4.8% of the Company's Common Stock outstanding on a fully
diluted basis.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
U-2
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Dilution................................................................. 15
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Pro Forma Combined Condensed Financial Information....................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 27
Management............................................................... 38
Certain Transactions..................................................... 51
Principal and Selling Stockholders....................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 60
Validity of the Issuance of the Common Stock............................. 61
Experts.................................................................. 61
Additional Information................................................... 61
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
---------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
3,330,000 SHARES
[LOGO OF RESTORATION HARDWARE]
COMMON STOCK
($.0001 PAR VALUE)
---------------
PROSPECTUS
---------------
GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts, payable by the Registrant in connection with the offer
and sale of the Common Stock being registered. All amounts are estimates
except the registration fee, the NASD filing fee and the Nasdaq National
Market entry and application fee.
<TABLE>
<S> <C>
Registration fee.................................................... $ 20,355
NASD filing fee..................................................... 7,400
Blue Sky fees and expenses (including legal fees)................... 10,000
Nasdaq National Market entry and application fee.................... 95,000
Accounting fees and expenses........................................ 400,000
Other legal fees and expenses....................................... 350,000
Transfer agent and registrar fee.................................... 35,000
Printing and engraving.............................................. 175,000
Miscellaneous....................................................... 207,245
----------
Total............................................................. $1,300,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers
and permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. The Registrant's
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into Indemnity
Agreements with its officers and directors, a form of which is attached as
Exhibit 10.4 hereto and incorporated herein by reference. The Indemnification
Agreements provide the Registrant's officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. The Registrant maintains directors and officers liabilities
insurance. Reference is made to Section 8 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since April 1, 1995, the Company has issued and sold the following
securities:
II-1
<PAGE>
1. On October 29, 1995, the Company issued and sold 35,000 shares of its
Common Stock at an aggregate purchase price of $23,250 to Thomas Low.
2. On January 19, 1996 and January 26, 1996, the Company offered, issued
and sold an aggregate of 2,596,825 shares of its Series B Preferred
Stock at an aggregate purchase price of $6,175,250 to 32 investors, all
of whom the Company believes were "accredited investors".
3. On October 18, 1996, the Company offered, issued and sold an aggregate
of 1,701,658 shares of its Series C Preferred Stock at an aggregate
purchase price of $5,999,560 to 37 investors, all of whom the Company
believes were "accredited investors".
4. On May 16, 1997, the Company issued and sold an aggregate of 2,783,795
shares of its Series D Preferred Stock at an aggregate purchase price of
$29,200,021 to 11 investors, all of whom the Company believes were
"accredited investors". Montgomery Securities, the predecessor entity of
NationsBanc Montgomery Securities LLC, acted as the placement agent for
this transaction and received customary fees for its services.
5. On May 16, 1997, the Company issued warrants to purchase 27,734 shares
of its Series D Preferred Stock, at an exercise price of $12.59 per
share, to Montgomery Securities.
6. On May 30, 1997, the Company issued 4,669 shares of Common Stock upon
the exercise of certain warrants, at an aggregate exercise price of
$4,188, to two investors.
7. On February 23, 1998, the Company issued 2,338 shares of Common Stock to
an employee at an aggregate purchase price of $3,340 pursuant to an
exercise of options under the Company's 1995 Stock Option Plan.
The issuances described in paragraphs 1, 2, 3 and 6 were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act. No placement agent was utilized in connection with these
sales. The issuances described in paragraphs 4 and 5 were deemed exempt from
registration under the Securities Act in reliance on Regulation D of the
Securities Act. The issuance described in paragraph 7 was deemed exempt from
registration under the Securities Act in reliance upon rule 701 promulgated
under the Securities Act. In addition, the recipients of the securities in
each transaction listed in paragraphs 1 through 8 represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates issued in such transactions. All recipients
had access, through their relationships with the Company, to information about
the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Second Amended and Restated Certificate of Incorporation
*3.2 Bylaws, as amended to date
*4.1 Reference is made to Exhibit 3.1
*4.2 Reference is made to Exhibit 3.2
*4.3 Specimen Common Stock Certificate
*5.1 Opinion of Brobeck, Phleger & Harrison LLP
*10.1 Form of 1995 Stock Option Plan
*10.2 Form of 1998 Stock Incentive Plan
*10.3 Form of 1998 Employee Stock Purchase Plan
*10.4 Form of Indemnity Agreement for Officers and Directors
*10.5 Restated Investors Rights Agreement dated May 16, 1997 among the
Company, the founders and Common Stock Warrantholders, Series D
Warrantholders and Common Stock holders and Investors.
*10.6 Stock Purchase Agreement dated March 20, 1998 between the Company and
Michael Vermillion.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
*10.7 Supply Agreement dated March 20, 1998 between the Company, Michaels
Concepts in Wood, Inc. and Michael Vermillion.
*10.8 Lease Agreement dated May 4, 1994 between the Company and Stephen and
Christine Gordon.
*10.9 Commercial Lease and Deposit Receipt dated October 18, 1994 and
Addendums dated October 20, 1994 and November 21, 1994 between the
Company and H. Koch and Sons.
*10.10 Office Lease dated February 21, 1997 between the Company and Paradise
Point Partners.
*10.11 Standard Industrial/Commercial Multi-Tenant Lease dated May 12, 1997
between the Company and Mortimer B. Zuckerman.
*10.12 Fourth Amended and Restated Loan and Security Agreement dated April,
1998
*21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1)
*24.1 Power of Attorney (included on signature page)
*27.1 Financial Data Schedule
</TABLE>
- - --------
*Previously filed.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF SAN FRANCISCO, STATE OF CALIFORNIA, ON JUNE 15, 1998.
Restoration Hardware, Inc.
/s/ Stephen Gordon
By: _________________________________
STEPHEN GORDON CHAIRMAN OF THE
BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE FOLLOWING CAPACITIES.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Stephen Gordon Chairman of the June 15, 1998
- - ------------------------------------- Board, President
STEPHEN GORDON and Chief Executive
Officer (Principal
Executive Officer)
* Director, Executive June 15, 1998
- - ------------------------------------- Vice President and
THOMAS CHRISTOPHER Chief Operating
Officer
* Chief Financial June 15, 1998
- - ------------------------------------- Officer, Senior
THOMAS LOW Vice President and
Secretary
(Principal
Financial Officer
and Principal
Accounting Officer)
* Director June 15, 1998
- - -------------------------------------
ROBERT CAMP
* Director June 15, 1998
- - -------------------------------------
RAYMOND HEMMIG
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director June 15, 1998
- - -------------------------------------
MICHAEL LAZARUS
* Director June 15, 1998
- - -------------------------------------
MARSHALL PAYNE
* Director June 15, 1998
- - -------------------------------------
DAMON BALL
* Director June 15, 1998
- - -------------------------------------
DAVID FERGUSON
</TABLE>
*Pursuant to Power of Attorney previously filed with the Commission.
/s/ Stephen Gordon Attorney-in-Fact
- - -------------------------------------
II-5
<PAGE>
EXHIBIT INDEX
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Certificate of Incorporation
*3.2 Bylaws, as amended to date
*4.1 Reference is made to Exhibit 3.1
*4.2 Reference is made to Exhibit 3.2
*4.3 Specimen Common Stock Certificate
*5.1 Opinion of Brobeck, Phleger & Harrison LLP
*10.1 Form of 1995 Stock Option Plan
*10.2 Form of 1998 Stock Incentive Plan
*10.3 Form of 1998 Employee Stock Purchase Plan
*10.4 Form of Indemnity Agreement for Officers and Directors
*10.5 Restated Investors Rights Agreement dated May 16, 1997 among the
Company, the founders and Common Stock Warrantholders, Series D
Warrantholders and Common Stock holders and Investors.
*10.6 Stock Purchase Agreement dated March 20, 1998 between the Company and
Michael Vermillion.
*10.7 Supply Agreement dated March 20, 1998 between the Company, Michaels
Concepts in Wood, Inc. and Michael Vermillion.
*10.8 Lease Agreement dated May 4, 1994 between the Company and Stephen and
Christine Gordon.
*10.9 Commercial Lease and Deposit Receipt dated October 18, 1994 and
Addendums dated October 20, 1994 and November 21, 1994 between the
Company and H. Koch and Sons.
*10.10 Office Lease dated February 21, 1997 between the Company and Paradise
Point Partners.
*10.11 Standard Industrial/Commercial Multi-Tenant Lease dated May 12, 1997
between the Company and Mortimer B. Zuckerman.
*10.12 Fourth Amended and Restated Loan and Security Agreement dated April,
1998
*21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1)
*24.1 Power of Attorney (included on signature page)
*27.1 Financial Data Schedule
</TABLE>
- - --------
*Previously filed.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 4 to
Registration Statement No. 333-51027 of our report dated April 16, 1998 for
Michael's Concepts in Wood, Inc., and of our report dated April 6, 1998,
May 27, 1998, as to the last two paragraphs of Note 10, and June 15, 1998, as
to Note 11 which expresses an unqualified opinion and includes an explanatory
paragraph relating to the restatement described in Note 11 for Restoration
Hardware, Inc., and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche llp
San Francisco, California
June 17, 1998
