<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998.
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 5719 68-0140361
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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, $.001 par value................... $69,000,000(2) $20,355
</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.
---------------
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 APRIL 24, 1998
SHARES
RESTORATION HARDWARE, INC.
COMMON STOCK
($.001 PAR VALUE)
-----------
Of the shares of Common Stock offered, shares are being sold by
Restoration Hardware, Inc. ("Restoration Hardware" or the "Company") and
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 $ and $ . 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 $ 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 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) gives retroactive
effect to the conversion of all outstanding shares of the Company's Preferred
Stock, par value $.001 per share (the "Preferred Stock"), into shares of the
Company's Common Stock, par value $.001 per share (the "Common Stock"), to be
effected upon the completion of the Offering and (iii) gives retroactive effect
to a -for- -split of the Common Stock immediately prior to the Offering.
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 currently operates 44 stores in 21 states.
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..................... $ 583
Average 1997 store-level operating income.......................... $468,910
Average 1997 store-level operating margin.......................... 15.5%
</TABLE>
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 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
4
<PAGE>
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 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.
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 % of the Company's outstanding Common Stock.
5
<PAGE>
RECENT DEVELOPMENTS
In March 1998, the Company acquired all of the outstanding capital stock of
The Michaels Furniture Company, Inc. ("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 7.0% 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.............................. shares
Selling Stockholders................. shares
Total Common Stock Offered........... shares
Common Stock to be Outstanding After
the Offering.......................... shares(2)
Use of Proceeds........................ To repay approximately $ 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 shares that are subject to the over-allotment option
granted to the Underwriters by certain stockholders of the Company. See
"Underwriting".
(2) Excludes shares reserved for issuance under the Company's 1995 Stock
Option Plan (the "1995 Plan"), of which shares were subject to
outstanding options at , 1998 at a weighted average exercise price of
$ per share, shares reserved for issuance under the Company's 1998
Stock Incentive Plan (the "Stock Incentive Plan"), of which shares will
be issuable upon exercise of options to be granted concurrently with the
Offering at the initial public offering price, and 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
(DOLLARS IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED
JANUARY 28, PRO FORMA
1995(1) 1995 1996(2) 1997 COMBINED (3)
----------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF CONSOLIDATED
OPERATIONS DATA:
Net sales.............. $ 4,666 $ 13,238 $ 39,672 $ 97,872 $114,045
Gross profit........... 1,842 4,698 14,373 32,144 37,130
Selling, general and
administrative
expenses.............. 1,300 4,075 12,213 27,080 31,188
Preopening store
expenses.............. -- 162 681 1,869 1,869
Income from
operations............ 542 461 1,479 3,195 4,073
Net income............. 328 236 796 1,748 1,846
Earnings per share(4)..
Basic ..............
Diluted ............
Weighted average shares
outstanding(4)(5).....
Basic...............
Diluted.............
OPERATING DATA:
Number of stores open
at end of period...... 5 10 20 41
Average net sales per
selling square
foot(6)............... $ 349 $ 636 $ 651 $ 583
Comparable store net
sales increase(7)..... N/A 12.9% 24.5% 11.1%
Average selling square
footage per store(8).. 4,463 5,056 6,225 6,908
Total selling square
footage at year end... 13,369 38,650 100,897 247,454
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1998
-----------------------
ACTUAL AS ADJUSTED(9)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 8,188 $
Total assets........................................... 87,233
Total debt, including capital lease obligations........ 10,678
Redeemable preferred stock............................. 40,610
Stockholders' equity (deficit)......................... (9,325)
</TABLE>
- --------
(1) Although the Company commenced operations in 1980, there are no financial
statements of the Company available for any period prior to the seven
months ended January 28, 1995 and, therefore, no financial information
related to any such prior period is presented above.
(2) 1996 was a 53-week fiscal year. For purposes of comparable store net sales
increase and average net sales per selling square foot, 1996 results were
calculated to correspond with 52-week years.
(3) Reflects the acquisition of The Michaels Furniture Company, Inc. See Pro
Forma Combined Condensed Financial Information.
(4) Gives retroactive effect to (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 -for- -split of the Common Stock
immediately prior to the Offering. See "Description of Capital Stock--
Common Stock". Computed based on income available to common stockholders
which represents net income less a cash premium over carrying cost of $4.78
million paid in connection with the redemption of certain Preferred Stock.
The impact of such redemption decreased basic and diluted earnings per
share by $ per share. The remaining Preferred Stock will convert into
Common Stock upon the completion of the Offering.
(5) See Note 1 of Notes to Consolidated Financial Statements.
(6) 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.
(7) 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 and 18 comparable stores
at the end of 1994, 1995, 1996 and 1997, respectively.
(8) 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.
(9) Adjusted to reflect the sale of the shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $ per
share and the application of the estimated net proceeds therefrom after
deducting the estimated underwriting discount and estimated expenses of the
Offering. See "Use of Proceeds". Also gives effect to the conversion of all
outstanding Preferred Stock into Common Stock upon completion of the
Offering.
8
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be carefully considered in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus.
IMPLEMENTATION AND MANAGEMENT OF AGGRESSIVE GROWTH STRATEGY
The Company's net sales and net income have grown significantly during the
past several years, primarily as a result of the opening of new stores. The
Company intends to continue to pursue an aggressive growth strategy for the
foreseeable future, and its future operating results will depend largely upon
its ability to open and operate stores and manage a larger business
successfully. The Company intends to open approximately 25 new stores in 1998
(of which three stores have been opened as of March 31, 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, and several of its stores
planned to be opened in 1998 and 1999 are targeted for new markets. 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 operates 44 stores. Ten of the Company's stores were opened in
1996, 21 of the Company's stores were opened in 1997 and three 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 and 1997 were 12.9%, 24.5% and 11.1%,
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 three quarters of 1998 as compared to 1997.
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends largely on the efforts and abilities of
senior management, particularly Stephen Gordon, the Company's President, Chief
Executive Officer and founder, Thomas Christopher, the Company's Chief
Operating Officer, and Thomas Low, the Company's Chief Financial Officer. The
loss of Mr. Gordon's services or the services of other members of the
management team could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company's performance will depend upon its ability to attract and retain
qualified management, merchandising and sales personnel. There can be no
assurance that Mr. Gordon and the Company's existing management team will be
able to manage the Company or its growth or that the Company will be able to
attract and retain additional qualified personnel as needed in the future.
10
<PAGE>
DEPENDENCE ON KEY VENDORS
The Company's performance depends on its ability to purchase its merchandise
in sufficient quantities at competitive prices. Although the Company has many
sources of merchandise, three of its vendors (including The Michaels Furniture
Company, Inc. ("Michaels")) 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 7.0% 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 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 will
continue to own beneficially shares of the Company's capital stock
constituting approximately % of the voting power of the outstanding capital
stock. As a result, the Company's current stockholders 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 shares of Common Stock outstanding. Of these shares, the
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), shares will
be eligible for immediate resale subject to the limitations of Rule 144. As of
March 31, 1998, options to purchase 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 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 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 shares of Common
Stock by the Company in the Offering (assuming an initial public offering
price of $ per share and after deducting an assumed underwriting discount
and estimated offering expenses) are estimated to be $ million. The Company
intends to use the net proceeds (i) to repay approximately $ 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 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 January 31, 1998, the Company had a net tangible book value of
approximately $ million or $ 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 then outstanding. Without taking into account any adjustment in net
tangible book value attributable to operations after January 31, 1998, after
giving effect to the sale by the Company of shares in the Offering at an
assumed initial public offering price of $ , the pro forma net tangible book
value of the Company as of January 31, 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 $ million or $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate dilution of $ per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......................... $
Net tangible book value per share as of January 31, 1998................ $
Increase per share attributable to new investors........................
---
Pro forma net tangible book value per share after the Offering.......... $
---
Dilution per share to new investors..................................... $
===
</TABLE>
The following table summarizes on a pro forma basis as of January 31, 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 $ 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................... % $ % $
New investors...........................
--- --- ---- ---
Total................................. 100% $ 100%
=== === ==== ===
</TABLE>
The above information assumes no exercise of any outstanding options or
warrants after January 31, 1998. As of January 31, 1998, there were
outstanding options and warrants to purchase an aggregate of shares of
Common Stock at exercise prices ranging from $ to $ per share.
Purchasers of shares of Common Stock offered in the Offering will incur
additional dilution to the extent outstanding stock options 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 January 31, 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>
JANUARY 31, 1998
---------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term obligations,
including current portion
of long-term
obligations(1)........... $ $
=========== ===========
Long-term obligations, net
of current portion(1).... $ $
----------- -----------
Redeemable preferred
stock....................
Stockholders' equity:
Preferred stock,
shares authorized, as
adjusted; no shares
issued and outstanding,
as adjusted.............
Common stock, shares
authorized; shares
issued and outstanding,
actual; shares issued
and outstanding, as
adjusted(2).............
Additional paid-in capi-
tal.....................
Retained earnings........ ( ) ( )
----------- -----------
Total stockholders' equi-
ty......................
----------- -----------
Total capitalization.... $ $
=========== ===========
</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 January 31, 1998.
(2) Excludes (i) shares reserved for issuance upon exercise of outstanding
warrants at January 31, 1998, (ii) shares reserved for issuance under the
1995 Stock Option Plan, of which shares were subject to outstanding
options at January 31, 1998 at a weighted average exercise price of $
per share and (iii) shares reserved for issuance under the 1998 Stock
Incentive Plan, of which shares will be issuable upon exercise of
options to be granted concurrently with the Offering. See "Management--
Benefit Plans" and Note 6 of Notes to Consolidated Financial Statements.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT OPERATIONS AND PER SHARE DATA)
The Statements of Consolidated Operations Data and Balance Sheet Data
presented below as of and for the seven months ended January 28, 1995 and as
of and for each of the fiscal years in the three-year period ended January 31,
1998 have been derived from the audited financial statements of the Company.
Although the Company commenced operations in 1980, there are no financial
statements of the Company available for any period prior to the seven months
ended January 28, 1995 and, therefore, no financial information related to any
such prior period is presented below. The financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED
JANUARY 28,
1995(1) 1995 1996(2) 1997
----------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENTS OF CONSOLIDATED OPERATIONS
DATA:
Net sales.............................. $4,666 $13,238 $39,672 $97,872
Cost of sales and occupancy............ 2,824 8,540 25,299 65,728
------ ------- ------- -------
Gross profit........................... 1,842 4,698 14,373 32,144
Selling, general and administrative
expenses.............................. 1,300 4,075 12,213 27,080
Preopening store expenses.............. -- 162 681 1,869
------ ------- ------- -------
Income from operations................. 542 461 1,479 3,195
------ ------- ------- -------
Net interest income (expense).......... 6 (48) (113) (139)
------ ------- ------- -------
Provision for income taxes............. 220 177 570 1,308
------ ------- ------- -------
Net income............................. $ 328 $ 236 $ 796 $ 1,748
====== ======= ======= =======
Earnings per share(3)
Basic................................. $ $ $ $
Diluted...............................
Weighted average shares outstanding
(3)(4)
Basic.................................
Diluted...............................
OPERATING DATA:
Number of stores open at end of
period................................ 5 10 20 41
Average net sales per selling square
foot(5)............................... $ 349 $ 636 $ 651 $ 583
Comparable store net sales
increase(6)........................... N/A 12.9% 24.5% 11.1%
Average selling square footage per
store(7).............................. 4,463 5,056 6,225 6,908
Total selling square footage at year
end................................... 13,369 38,650 100,897 247,454
</TABLE>
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 27, FEBRUARY 1, JANUARY 31,
1995 1996 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $2,093 $ 5,260 $ 6,501 $ 8,188
Total assets.................. 3,280 16,330 32,230 87,233
Total debt, including capital
lease obligations............ 199 1,710 1,580 10,678
Redeemable preferred stock.... 1,665 7,737 13,688 40,610
Stockholders' equity
(deficit).................... 631 877 1,673 (9,325)
</TABLE>
- --------
(1) Although the Company commenced operations in 1980, there are no financial
statements of the Company available for any period prior to the seven
months ended January 28, 1995 and, therefore, no financial information
related to any such prior period is presented above.
(2) 1996 was a 53-week fiscal year. For purposes of comparable store net sales
increase and average net sales per selling square foot, 1996 results were
calculated to correspond with 52-week years.
(3) Gives retroactive effect to (i) the conversion of all outstanding shares
of the Preferred Stock into shares of Common Stock to be effected upon
completion of the Offering and (ii) a -for- -split of the Common
Stock immediately prior to the Offering. See "Description of Capital
Stock--Common Stock". Computed based on income available to common
stockholders which represents net income less a cash premium over carrying
cost of $4.78 million paid in connection with the redemption of certain
Preferred Stock. The impact of such redemption decreased basic and diluted
earnings per share by $ per share. The remaining preferred stock will
convert into Common Stock upon the completion of the offering.
(4) See Note 1 of Notes to Consolidated Financial Statements.
(5) Average net sales per selling square foot is calculated by dividing total
net sales by the weighted average selling square footage of stores open
during the period indicated.
(6) A store becomes comparable at the beginning of the 14th month of
operation. The comparable store percentage in 1997 includes two stores
which were renovated in 1997. The Company had four, five, ten and 18
comparable stores at the end of 1994, 1995, 1996 and 1997, respectively.
(7) Average selling square footage per store is calculated by dividing total
selling square footage by the number of stores open at the end of the
period indicated.
17
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
The Company's acquisition of Michaels will be accounted for under the
"purchase" method of accounting which requires the purchase price to be
allocated to the acquired assets and liabilities of Michaels on the basis of
their estimated fair values as of the date of acquisition. The following pro
forma combined condensed balance sheet gives effect to the acquisition of
Michaels as if it occurred on January 31, 1998, and the pro forma combined
condensed statement of income gives effect to the acquisition as if it
occurred on February 2, 1997, and includes 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
consolidated financial position or 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 INCOME
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO
HISTORICAL HISTORICAL PRO FORMA FORMA
COMPANY MICHAELS ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net sales........................ $97,872 $21,529 $(5,356)(1) $114,045
Cost of goods sold and
occupancy....................... 65,728 16,113 (4,926)(1) 76,915
------- ------- ------- --------
Gross profit..................... 32,144 5,416 (430) 37,130
Selling, general and
administrative 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
======= ======= ======= ========
Net income per common
share(5)(6):
Basic.......................... $ $
Diluted........................ $ $
Weighted average shares
outstanding(5)(6):
Basic..........................
Diluted........................
</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 (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 -for- -split of the Common
Stock immediately prior to the Offering. See "Description of Capital
Stock--Common Stock". Computed based on income available to common
stockholders which represents net income less a cash premium over carrying
cost of $4.78 million paid in connection with the redemption of certain
Preferred Stock. The impact of such redemption decreased basic and diluted
earnings per share by $ per share. The remaining Preferred Stock will
convert into Common Stock upon the completion of the Offering.
(6) See Note 1 of Notes to Consolidated Financial Statements.
19
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
JANUARY 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
COMPANY MICHAELS ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash............................ $ 912 $ -- $ 495 (1) $ 1,407
Accounts receivable............. 3,820 2,741 (1,248)(2) 5,312
Inventories..................... 40,363 1,908 42,271
Other current assets............ 1,709 577 (495)(1) 1,791
Property, plant and equipment... 39,009 1,487 40,496
Other assets.................... 1,420 35 3,937 (3) 5,392
------- ------ ------- -------
Total......................... $87,233 $6,748 $ 2,689 $96,670
======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities............. $38,616 $4,589 $(1,248)(2) $41,957
Long-term debt.................. -- 696 5,400 (4) 6,096
Deferred items.................. 17,332 -- 17,332
Redeemable preferred stock...... 40,610 40,610
Stockholders' equity............ (9,325) 1,463 (1,463)(5) (9,325)
------- ------ ------- -------
Total......................... $87,233 $6,748 $ 2,689 $97,670
======= ====== ======= =======
</TABLE>
- --------
(1) Reflects the repayment of an advance to the shareholder of Michaels paid at
the date of acquisition.
(2) Reflects the elimination of accounts receivable and payable between the
Company and Michaels.
(3) Records goodwill relating to the acquisition of Michaels.
(4) Reflects issuance of note payable in connection with the acquisition of
Michaels.
(5) Reflects the elimination of Michaels' shareholder's equity due to the
acquisition.
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 44 stores operating in 21
states as of March 31, 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% and 11.1% in 1995, 1996 and 1997,
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 three 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.
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.
21
<PAGE>
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JANUARY 28, 1995 1995 1996 1997
---------------- ----- ----- -----
<S> <C> <C> <C> <C>
STATEMENTS OF CONSOLIDATED OPERATIONS DA-
TA:
Net sales............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy............. 60.5 64.5 63.8 67.2
Gross profit............................ 39.5 35.5 36.2 32.8
Selling, general and administrative ex-
penses................................. 27.9 30.8 30.8 27.7
Preopening store expenses............... -- 1.2 1.7 1.9
Income from operations.................. 11.6 3.5 3.7 3.3
Interest income (expense)--net.......... 0.1 (0.4) (0.3) (0.2)
Income before income taxes.............. 11.7 3.1 3.4 3.1
Comparable store net sales increase..... N/A 12.9% 24.5% 11.1%
Total number of stores at end of peri-
od..................................... 5 10 20 41
</TABLE>
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, and the Company's
test catalog contributed $18.1 million of the increase in net 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 121.8% 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.
22
<PAGE>
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.
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>
1997
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF CONSOLIDATED OPERATIONS
DATA:
Net Sales.............................. $11,907 $15,462 $23,544 $46,959
As a % of full year.................... 12.2% 15.8% 24.0% 48.0%
Gross profit........................... $ 3,155 $ 4,626 $ 7,050 $17,313
As a % of full year.................... 9.8% 14.4% 21.9% 53.9%
As a % of net sales.................... 26.5% 29.9% 29.9% 36.9%
Income (loss) from operations.......... $ (834) $(1,222) $ (153) $ 5,404
As a % of full year.................... (26.1)% (38.2)% (4.8)% 169.1%
As a % of net sales.................... (7.0)% (7.9)% (0.6)% 11.5%
Comparable store net sales increase.... 20.5% 8.5% 16.6% 6.9%
</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
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 three quarters of 1998 as compared to the prior fiscal year.
23
<PAGE>
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 1997 and 1996 was $4.1 million
and $(1.1) million, respectively. Net cash used in investing activities for
1997 and 1996 was $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 the short term borrowings. Net cash provided by
(used in) financing activities for 1997 and 1996 was $23.3 million and $5.7
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. Net borrowings
under the Company's credit facilities totalled $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). 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. 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 1.5%.
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
24
<PAGE>
sales. 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.
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.
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.
25
<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 currently operates 44 stores
in 21 states.
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..................... $ 583
Average 1997 store-level operating income.......................... $468,910
Average 1997 store-level operating margin.......................... 15.5%
</TABLE>
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
26
<PAGE>
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, 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
27
<PAGE>
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 $11,990. 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.
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
28
<PAGE>
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.
[PICTURES DEPICTING EXAMPLES OF 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.
29
<PAGE>
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
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.
30
<PAGE>
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.
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 7.0% 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.
31
<PAGE>
ADVERTISING AND MARKETING
The Company has traditionally focused its advertising efforts and
expenditures in the third and fourth quarters. Print campaigns are conducted
in October, November and December featuring full page advertisements in major
market and regional newspapers. Print advertising is focused on line drawings
of specific products, accompanied by the Company's distinctive product
descriptions. The Company runs both a "Famous Fall Lighting Sale" campaign and
a "Holiday Wit & Wisdom" campaign. In connection with the latter campaign, the
Company also direct mails a holiday gift guide with holiday gift suggestions
and a response card designed to increase store traffic.
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.
32
<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 March 31, 1998, the Company operated 44 stores in 21 states throughout
the United States. The following map shows the locations of the Company's
stores as of such date.
[STORE MAP SHOWING LOCATION OF COMPANY'S STORES]
33
<PAGE>
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
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
</TABLE>
34
<PAGE>
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.
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.
35
<PAGE>
The Company believes that the ability to compete successfully is determined
by several factors, including breadth and quality of product selection,
effective merchandise presentation, customer service, pricing and store
location. The Company believes that it competes favorably on the basis of
these factors.
TRADEMARKS
The Company has registered its trademark "Restoration Hardware" in the
United States and Mexico, and has applied for registration of such trademark
in Canada. Such application in Canada is pending and there can be no assurance
that such application will be granted.
EMPLOYEES
At March 31, 1998, the Company had 918 full-time employees and 433 part-time
employees. The Company believes it maintains good employee relations.
GOVERNMENT REGULATION
Many of the Company's imports are subject to existing or potential duties,
tariffs or quotas that may limit the quantity of certain types of goods which
may be imported into the United States and other countries. In addition, the
Company is subject to currency fluctuations, work stoppages, economic
uncertainties including inflation, foreign government regulations, political
unrest and trade restrictions, including United States retaliation against
foreign practices.
PROPERTIES
The Company currently leases two properties located in Corte Madera,
California which are used as its headquarters. One property consists of
approximately 3,600 square feet of office space and approximately 11,000
square feet of warehouse space. The lease expires on November 30, 1999, with
an option to extend the lease for one additional three year term. The second
property consists of approximately 11,000 square feet of office space. The
Company has exercised an option for approximately an additional 4,000 square
feet of office space in this facility beginning September 1998. The lease
expires on May 15, 2002. The Company leases approximately 160,000 square feet
of warehouse space in Hayward, California for use as its distribution center.
The lease expires on July 31, 2004, with an option to extend the lease for one
additional five year term. The Company also leases an approximately 50,000
square foot distribution center in Oakland, California which is subleased for
the duration of the lease.
As of March 31, 1998, the Company leased approximately 475,000 gross square
feet for its stores. Most of the existing stores are leased by the Company
with lease terms ranging from 10 to 15 years. Most leases for the Company's
stores provide for a minimum rent plus a percentage rent based upon sales
after certain minimum thresholds are achieved. The leases generally require
the Company to pay insurance, utilities, real estate taxes and repair and
maintenance expenses.
36
<PAGE>
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............. 36 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 (2)
Raymond Hemmig........... 48 Director (2)(3)
Michael Lazarus.......... 42 Director (1)
Marshall Payne........... 41 Director (2)
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Real Estate Committee.
STEPHEN GORDON founded the Company in 1981 and has served as President,
Chief Executive Officer and a Director since that time. Mr. Gordon has
successfully led the Company through a long period of comparable store net
sales growth and consistent profitability at the store level. Until the
recruitment of a professional management team in 1994 and 1995, Mr. Gordon
actively managed all aspects of the business. He obtained his B.A. at Drew
University and his M.A. in Psychology from Humboldt State University.
THOMAS CHRISTOPHER joined the Company as Executive Vice President, Chief
Operating Officer and a Director in June 1994. Prior to joining Restoration
Hardware, Mr. Christopher was with Barnes & Noble, Inc. for five years where
he served in various capacities, including Chief Executive Officer of Bookstop
Inc. and President of Barnes & Noble Superstores. Previously, Mr. Christopher
worked for 19 years at Pier 1 Imports, a national chain of home furnishing
retail stores, where he served in a variety of roles, including Executive Vice
President of Operations. He obtained his B.B.A. in Economics from Kent State
University.
THOMAS LOW joined the Company as Chief Financial Officer in April 1995. From
July 1986 to March 1995, Mr. Low served in various capacities with Home
Express, Inc., a retailer of home furnishings, including Controller from June
1990 to March 1995. Home Express, Inc. filed Chapter 11
37
<PAGE>
bankruptcy proceedings in January 1990 and again in February 1996. Prior to
joining Home Express, Inc., Mr. Low served as a financial analyst with W.R.
Grace & Co. in its restaurant division. He obtained his B.S. in Resource
Science from the University of California, Davis and his M.B.A. with a Finance
Concentration from the University of California, Irvine.
BILL ASHTON joined the Company as Director of Distribution in August 1997.
Mr. Ashton served as Director of Distribution for Polo/Ralph Lauren from April
1984 until July 1997. From January 1979 until March 1984, he served as Manager
of Auditing for Federated Department Stores. Prior to that, Mr. Ashton served
six years as Logistics Officer and Aviator in the United States Marine Corps.
He received his B.S. from Muskingum College.
MARTA BENSON joined the Company as a Merchandise Manager in August 1995 and
was promoted to Director of Catalog in January 1998. Prior to that, she was
associated with Smith & Hawken, a specialty retailer focusing on garden
merchandise for eight years. At Smith & Hawken she served most recently as
Manager, Catalog Merchandise from May 1993 until joining the Company and as
Senior Buyer, Catalog Captain from February 1991 to April 1993. Ms. Benson
received her B.A. from Wesleyan University.
DALE DOMBROWSKI joined the Company as Director of Visual Merchandising in
July 1993. From September 1992 until joining the Company, Mr. Dombrowski
served as Design Director of Filamento, a single specialty retail store. Prior
to that, he was associated with Pottery Barn for 13 years, most recently from
1986 to 1992 as Manager of Visual Merchandising. Mr. Dombrowski received his
A.A.S. from the Fashion Institute of Technology.
NINA JOHNSON joined the Company as a Merchandise Manager in March 1995. She
was promoted to General Merchandise Manager of the Company in December 1996.
Ms. Johnson served as Senior Buyer, Decorative Home at Mervyn's, a department
store chain, from April 1993 until December 1994 and as Retail Marketing and
Merchandising Manager at Ghirardelli Chocolate Co. from April 1992 until April
1993. From July 1991 until April 1992, Ms. Johnson served as Buyer, Tabletop
for the Pottery Barn division of Williams Sonoma, Inc., a specialty retail
chain. Previously, Ms. Johnson served in various capacities at Bloomingdale's,
a department store chain, from 1984 until 1991, including Buyer, Food Division
Housewares from 1989 until 1991. Ms. Johnson received her B.A. in Economics
from William Smith College.
KELLIE KRUG joined the Company as Director of Marketing in March 1998. Ms.
Krug served as Marketing Director at Gymboree Corporation from March 1997 to
February 1998 and at Imaginarium Toy Stores from March 1990 to June 1994. She
also served in various marketing positions at Ross Stores, Inc. from April
1986 to June 1988. Ms. Krug received her B.A. from San Jose State University.
DAVID LORETTA joined the Company as Senior Financial Analyst and Accounts
Payable Supervisor in March 1996. Mr. Loretta was promoted to the position of
Manager of Financial Planning and Analysis in February 1997, and currently
serves as Director of Planning and Analysis. From March 1994 to March 1996, he
served in various accounting and finance capacities at Home Express, Inc., a
retailer of home furnishings. Previously, Mr. Loretta served as an Assistant
Bank Examiner for the Federal Deposit Insurance Corporation in Southern
California. He received his B.A. in Economics from the University of
California, Riverside and his M.B.A. in International Business/Entrepreneurial
Studies from San Diego State University.
MARY NESS joined the Company as Director of Inventory Management in April
1995. From October 1993 to April 1995, Ms. Ness served as Merchant, Gifts at
Gump's, a department store chain. Ms. Ness served as Buyer, Baskets,
Christmas, Paper/Party for Cost Plus, Inc., a specialty retail chain from
October 1991 until October 1993. From August 1986 until October 1991, she
served as Director, Inventory Management for the Pottery Barn and Hold
Everything divisions of Williams Sonoma, Inc., a
38
<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
Equity-Linked Investors, LP and Equity-Linked Investors II and a public mutual
fund. He serves as Chairman and Chief Executive Officer of Northstar
Television Group, Inc., an operator of a television station, and is a director
of Community Care of America, Inc., Finlay Enterprises Inc. and several
privately held portfolio companies. 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
39
<PAGE>
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.
DAVID FERGUSON is a general partner of Chase Capital Partners, the sole
general partner of Chase Ventures and an affiliate of Chase Securities. He has
been a director of the Company since May 1997. Prior to joining Chase Capital,
Mr. Ferguson was a member of the mergers and acquisitions groups of Bankers
Trust New York Corporation and Prudential Securities, Inc. Mr. Ferguson
currently serves as a director of Thompson PBE and Wild Oats Markets, Inc. 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 is currently
Chairman of the Board of Ace Cash Express, Inc., a chain of retail financial
services stores ("ACE") and Chairman, Chief Executive Officer and General
Partner of Retail & Restaurant Growth Capital, L.P., a private investment
partnership. 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
and Partner. Mr. Payne also serves on the board of several private and the
following public companies: Osprey Holdings, Inc., a holding company in the
plastics manufacturing business, Ace, 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, commencing with the
first election of directors to occur after the completion of the Offering, the
Board of Directors will be classified into three classes, each with three
directors. At the first annual meeting of stockholders after the Offering, one
class will be elected for a one year term, one class will be elected for a two
year term and one class will be elected for a three year term. All directors
hold office until the annual meeting of stockholders at which their terms
expire and the election and qualification of their successors. 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
40
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Compensation Committee reviews the compensation levels of the Company's
executive officers and 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 500 shares of Common Stock and to each
of Messrs. Ball and Ferguson an option to purchase 1,000 shares of Common
Stock, at an exercise price of $73.43 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 2,000 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.
41
<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 4,000 $183
Chairman of the Board, 1996 111,536 37,260 16,110 10,000 --
President and Chief 1995 100,160 20,000 9,600 20,000 --
Executive Officer
Thomas Christopher...... 1997 $133,038 23,862 $11,400 4,000 $157
Executive Vice 1996 101,538 28,350 12,000 7,500 --
President and Chief 1995 87,769 15,000 7,200 -- --
Operating Officer
Thomas Low.............. 1997 $103,562 17,712 $ 9,700 4,000 $116
Senior Vice President 1996 83,846 22,950 7,200 6,000 --
and Chief Financial Of-
ficer 1995 57,621 8,800 2,400 6,250 --
</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.
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<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.......... 4,000 5.7% $80.77(4) 9/2/07 $ 155,326 $ 438,702
Thomas Christopher...... 4,000 5.7% $73.43 9/2/07 $ 184,706 $ 468,082
Thomas Low.............. 4,000 5.7% $73.43 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) 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 $73.43 per share.
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<PAGE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option holdings for
1997 with respect to the Named Executive Officers. No options or stock
appreciation rights were exercised by any such individual during such year,
and no stock appreciation rights were outstanding on January 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
END(#) FISCAL YEAR-END($)(2)
---------------------------- -------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen Gordon........... 34,000 -- $1,980,370 --
Thomas Christopher....... 65,395 -- $4,182,316 --
Thomas Low............... 16,250 -- $ 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--15,001 shares; Mr. Christopher--55,145 shares; and Mr. Low--5,001
shares.
(2) Based on the deemed fair market value of the option shares as of January
31, 1998 ($73.43 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 469,666 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 140,000 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) percent of the total number of
shares of Common Stock outstanding on the last trading day of the preceding
calendar year or (ii) 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 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
44
<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.
45
<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 first becomes
a non-employee Board member at any time after the completion of the Offering
will automatically receive an option grant for 1,000 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 500 shares of Common Stock,
provided such individual has served on the Board for at least six months.
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
46
<PAGE>
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 initial share automatic option
grant 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 -
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 , 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.
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.
47
<PAGE>
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. 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
48
<PAGE>
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".
49
<PAGE>
CERTAIN TRANSACTIONS
RECENT FINANCINGS
In January 1996, the Company sold 370,975 shares of Series B Preferred Stock
at a purchase price of $16.65 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.................................................... 1,505
Thomas Christopher............................................. 9,015
Ray Hemmig..................................................... 3,055
Michael Lazarus/Weston Presidio Capital II, L.P................ 167,920
Marshall Payne/Scout Ventures.................................. 11,305
E.W. Rose III.................................................. 27,515
</TABLE>
In October 1996, the Company sold 243,094 shares of Series C Preferred Stock
at a purchase price of $24.68 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.................................................... 1,182
Thomas Christopher............................................. 7,000
Ray Hemmig..................................................... 7,277
Thomas Low..................................................... 827
Michael Lazarus/Weston Presidio Capital II, L.P................ 57,463
Marshall Payne/Scout Ventures.................................. 26,888
E. W. Rose III................................................. 65,448
</TABLE>
In May 1997, the Company sold 397,685 shares of Series D Preferred Stock to
a group of 11 persons at a purchase price of $73.425 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....................................... 147,963
David Ferguson/Chase Venture Capital Associates, L.P........... 204,290
</TABLE>
In May 1997, the Company also issued warrants to purchase 3,962 shares of
Series D Preferred Stock to Montgomery Securities at an exercise price of
$88.11 per share (the "Series D Warrant"). The Series D Warrant expires on May
16, 2002. Montgomery Securities acted as the placement agent to 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.
50
<PAGE>
In May 1997, the Company also redeemed 189,363 shares of Common Stock at a
redemption price of $73.425 per share from a group of 26 stockholders. The
following directors, executive officers and beneficial owners of more than
five percent of the Company's Common Stock (assuming the conversion of all
shares of Preferred Stock into Common Stock) sold shares of the Company's
Common Stock in the redemption:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS/5% STOCKHOLDERS NO. OF SHARES
-------------------------------------------- -------------
<S> <C>
Thomas Christopher............................................. 23,993
Stephen Gordon................................................. 81,714
Ray Hemmig..................................................... 4,552
Thomas Low..................................................... 2,216
Marshall Payne/Scout Ventures.................................. 15,084
E.W. Rose III.................................................. 35,122
</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 Holders can be sold within a given three month
period, without compliance with the registration requirements of the
Securities Act, pursuant to Rule 144 thereunder.
LOANS
At various dates through April 1997 the Company loaned an aggregate of
$1,156,850 to Mr. Gordon, the Chairman of the Board, Chief Executive Officer
and President of the Company. Of such loans, $1,140,000 bore interest at a
rate of six percent per annum and $16,850 bore no interest. Mr. Gordon repaid
the loans in full, including accrued interest, in May 1997.
51
<PAGE>
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, and 1997, such lease payments totaled $27,900, $33,700, and
$33,600 respectively.
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of March 31, 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>
SHARES PERCENTAGE OF COMMON STOCK(1)
BENEFICIALLY ------------------------------
NAME OWNED(1) BEFORE OFFERING AFTER OFFERING
---- ------------ --------------- --------------
<S> <C> <C> <C>
Stephen Gordon(2)................. 503,536
E.W. Rose, III(3)................. 235,591
Weston Presidio Capital II,
L.P.(4).......................... 225,383
Chase Venture Capital Associates,
L.P.(5).......................... 204,290
Thomas Christopher(6)............. 164,942
Desai Funds(7).................... 147,963
Marshall Payne(8)................. 82,068
Ray Hemmig(9)..................... 31,031
Thomas Low(10).................... 19,861
Robert Camp(11)................... 10,337 *
Michael Lazarus(12)............... 5,500
Damon Ball(13).................... 1,000
David Ferguson(14)................ 1,000
All directors and executive
officers as a group (9
persons)(15).....................
</TABLE>
- -------
* Less than 1.0%
(1) Shares that the person or group has the right to acquire within 60 days
after March 31, 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.
(2) Includes 34,000 shares of Common Stock subject to options exercisable
within 60 days of March 31, 1998. Also includes 20,000 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 20,000 shares held by the Stephen J.
Gordon 1998 Qualified Grantor Retained Annuity Trust, of which Stephen J.
Gordon is the sole trustee.
(3) Excludes approximately 180,142 shares held by persons associated with
Cardinal Investment Company, Inc., of which Mr. Rose is a partner. Mr.
Rose disclaims beneficial ownership of such shares.
(4) Excludes 5,500 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 1,000 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 16,000 shares of Common Stock held by the Barbara Christopher
1997 Qualified Grantor Retained Annuity Trust, of which Barbara
Christopher, the spouse of Thomas A. Christopher, is the sole trustee,
and 16,000 shares of Common Stock held by the Thomas A. Christopher 1997
Qualified Grantor Annuity Trust, of which Thomas A. Christopher is the
sole trustee. Also includes 65,395 shares of Common Stock subject to
options exercisable within 60 days of March 31, 1998.
(7) Excludes 1,000 shares of Common Stock subject to options exercisable
within 60 days of March 31, 1998 held by Mr. Ball.
(8) Excludes approximately 333,665 shares held by persons associated with
Cardinal Investment Group, of which Mr. Payne is a Vice President and
partner. Mr. Payne disclaims beneficial ownership of such shares;
however, Mr. Payne has voting control over all such shares. Includes
shares held by Scout Ventures, a General Partnership, of which Mr. Payne
is a general partner. Includes 5,500 shares of Common Stock subject to
options exercisable within 60 days of March 31, 1998.
(9) Includes 5,500 shares of Common Stock subject to options exercisable
within 60 days of March 31, 1998.
(10) Includes 16,250 shares of Common Stock subject to options exercisable
within 60 days of March 31, 1998.
(11) Includes 5,500 shares of Common Stock subject to options exercisable
within 60 days of March 31, 1998.
(12) Includes 5,500 shares of Common Stock subject to options exercisable
within sixty days of March 31, 1998. Excludes 225,383 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 1,000 shares of Common Stock subject to options exercisable
within 60 days of March 31, 1998. Excludes 147,963 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
Desi Capital Management Incorporated which manages the assets of the
Desai Funds.
(14) Includes 1,000 shares of Common stock subject to options exercisable
within 60 days of March 31, 1998. Excludes 204,290 shares of Common Stock
held by Chase Venture Capital Associates, L.P.
(15) See footnotes 2, 6, 8, 9, 10, 11, 12, 13 and 14.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of shares of Common Stock, $.001 par value per share,
and shares of Preferred Stock, $.001 par value per share.
COMMON STOCK
As of March 31, 1998, shares of Common Stock were outstanding, held of
record by stockholders. After the Offering, shares will be outstanding.
Concurrently with the completion of the Offering, (i) each share of the
Company's Preferred Stock will be exchanged for and converted into one share
of the Company's Common Stock, and (ii) each converted share of the Company's
Common Stock will be subsequently converted into shares of Common Stock
pursuant to a stock split. The following description of rights assumes these
conversions and split.
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
54
<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, beginning with the
first annual meeting of stockholders following the Offering, 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 shares of Common
Stock and shares of Preferred Stock. No Preferred Stock will be designated
upon consummation of the Offering.
55
<PAGE>
After the Offering, the Company will have outstanding 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
56
<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.
57
<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, shares of Common Stock will be
outstanding. Of these shares, the 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 shares outstanding after completion of the Offering are
"restricted securities" as defined in Rule 144 and may be sold in the public
market only if registered under the Securities Act or if they qualify for an
exemption from registration, including an exemption pursuant to Rule 144.
The Company, the Selling Stockholders, the Company's directors and officers
and each holder of % or more of the Company's outstanding Common Stock as of
the date hereof have agreed that, subject to certain exceptions, during the
period beginning from the date of this Prospectus, and continuing to and
including the date 180 days after the date of this Prospectus (or earlier with
the consent of the Underwriters), they will not offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities of the
Company that are substantially similar to the shares of the Common Stock or
which are convertible into or exchangeable for securities that are
substantially similar to the shares of the Common Stock without the prior
written consent of the Underwriters. Upon expiration of these agreements,
of these shares will be eligible for immediate resale in the public market
subject to the limitations of Rule 144.
In general under Rule 144, a person, including an "affiliate" of the
Company, who has beneficially owned restricted shares for at least one year is
entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 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 , options to purchase shares of Common Stock were outstanding
under the 1995 Stock Option Plan. Simultaneously with the completion of the
Offering, options to purchase 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 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.
58
<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.
59
<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..... F-3
Statements of Consolidated Operations for the fiscal years ended January
27, 1996, February 1, 1997 and January 31, 1998......................... F-4
Statements of Consolidated Stockholders' Equity for the fiscal years
ended January 27, 1996, February 1, 1997 and January 31, 1998........... F-5
Statements of Consolidated Cash Flows for the fiscal years ended January
27, 1996, February 1, 1997 and January 31, 1998......................... F-6
Notes to Consolidated Financial Statements............................... F-7
MICHAEL'S CONCEPTS IN WOOD, INC.
Independent Auditors' Report............................................. F-17
Balance Sheet at January 31, 1998........................................ F-18
Statement of Operations for the fiscal year ended January 31, 1998....... F-19
Statement of Shareholder's Equity for the fiscal year ended January 31,
1998.................................................................... F-20
Statement of Cash Flows for the fiscal year ended January 31, 1998....... F-21
Notes to Financial Statements............................................ F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders
Restoration Hardware, Inc.
Corte Madera, California:
We have audited the accompanying consolidated balance sheets of Restoration
Hardware, Inc. and its subsidiary as of February 1, 1997 and January 31, 1998,
and the related statements of consolidated operations, stockholders' equity
and cash flows for each of the three fiscal years in the period ended January
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Restoration Hardware, Inc.
and subsidiary as of February 1, 1997 and January 31, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended January 31, 1998 in conformity with generally accepted
accounting principles.
San Francisco, California
April 6, 1998 (June , 1998 as to the last two paragraphs of Note 10)
The accompanying consolidated financial statements will give effect to the
reincorporation of the Company in Delaware, an increase in the number of
authorized shares into a to be determined amount and the related exchange of
each share of common stock of the Company into a to be determined amount of
shares of common stock of the Delaware Corporation in May 1998. Accordingly,
certain share and per share amounts in the accompanying financial statements
have been left blank pending determination of such amounts. The above opinion
is in the form which will be signed by Deloitte & Touche LLP upon completion
of such exchange of the Company's outstanding common stock described in Note
10 to the consolidated financial statements and assuming that from April 24,
1998 to the date of such completion, no other material events have occurred
that would affect the accompanying consolidated financial statements or
required disclosure therein.
Deloitte & Touche llp
San Francisco, California
April 24, 1998
F-2
<PAGE>
RESTORATION HARDWARE, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 325 $ 912
Accounts receivable................................... 2,017 3,820
Merchandise inventories............................... 14,092 40,363
Prepaid expense and other............................. 357 1,709
------- -------
Total current assets................................. 16,791 46,804
Property and equipment, net............................ 14,841 39,009
Long-term deferred tax asset........................... 435 1,070
Other assets........................................... 163 350
------- -------
Total assets......................................... $32,230 $87,233
======= =======
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................. $ 7,236 $22,359
Revolving line of credit.............................. 495 10,323
Current portion of capital lease obligations.......... 176 197
Current portion of term loan.......................... 239 --
Current portion of deferred lease incentives.......... 186 1,392
Deferred tax liability................................ 155 607
Taxes payable......................................... 802 1,718
Other current liabilities............................. 1,001 2,020
------- -------
Total current liabilities............................ 10,290 38,616
Commitments and Contingencies.......................... -- --
Long-term portion of capital lease obligations......... 358 158
Long-term portion of term loan......................... 312 --
Long-term portion of deferred lease incentives......... 5,274 15,264
Deferred rent.......................................... 635 1,910
------- -------
Total liabilities.................................... 16,869 55,948
------- -------
Redeemable preferred stock:
Series A, convertible, no par value, 376,345 shares
authorized, 376,345 and 356,098 issued and
outstanding, respectively (aggregate liquidation
preference of $1,750 and $1,656, respectively)....... 1,665 1,571
Series B, convertible, no par value, 370,975 shares
authorized, 370,975 and 316,910 issued and
outstanding, respectively (aggregate liquidation
preference of $6,175 and $5,277, respectively)....... 6,072 5,172
Series C, convertible, no par value, 243,094 shares
authorized, 243,094 and 236,633 issued and
outstanding, respectively (aggregate liquidation
preference of $6,000 and $5,840, respectively)....... 5,951 5,792
Series D, convertible, no par value 397,685 shares
authorized, none and 397,685 issued and outstanding
(aggregate liquidation preference of $30,902)........ -- 28,075
------- -------
Total redeemable preferred stock..................... 13,688 40,610
------- -------
Stockholders' equity:
Common stock, no par value, 1,970,000 and 3,500,000
shares authorized, respectively, 703,675 and 595,889
issued and outstanding, respectively................. 679 541
Retained earnings(deficit)............................ 994 (9,866)
------- -------
Total stockholders' equity........................... 1,673 (9,325)
------- -------
Total liabilities, redeemable preferred stock and
stockholders' equity................................ $32,230 $87,233
======= =======
</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
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................. $13,238 $39,672 $97,872
Cost of sales and occupancy................ 8,540 25,299 65,728
------- ------- -------
Gross profit............................. 4,698 14,373 32,144
Selling, general and administrative ex-
penses.................................... 4,075 12,213 27,080
Preopening store expenses.................. 162 681 1,869
------- ------- -------
Income from operations................... 461 1,479 3,195
Interest expense--net...................... (48) (113) (139)
------- ------- -------
Income before income taxes............... 413 1,366 3,056
Provision for income taxes................. 177 570 1,308
------- ------- -------
Net income............................... $ 236 $ 796 $ 1,748
======= ======= =======
Redeemable preferred stock repurchases in
excess of
carrying value............................ -- -- 4,778
------- ------- -------
Income (loss) available to common
stockholders............................ $ 236 $ 796 $(3,030)
------- ------- -------
Earnings (loss) per share:
Basic.................................... $ $ $
------- ------- -------
Diluted.................................. $ $ $
------- ------- -------
Weighted average shares outstanding:
Basic....................................
------- ------- -------
Diluted..................................
------- ------- -------
</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.......... 701,525 $656 $ (25) $ 631
Issuance of common stock............. 7,150 33 -- 33
Common stock repurchased............. (5,000) (10) (13) (23)
Net income........................... -- -- 236 236
-------- ---- ------- -------
BALANCE AT JANUARY 27, 1996.......... 703,675 679 198 877
Net income........................... -- -- 796 796
-------- ---- ------- -------
BALANCE AT FEBRUARY 1, 1997.......... 703,675 679 994 1,673
Redeemable preferred stock
repurchases in excess of
carrying value...................... -- -- (4,778) (4,778)
Common stock repurchased............. (107,786) (138) (7,830) (7,968)
Net income........................... -- -- 1,748 1,748
-------- ---- ------- -------
BALANCE AT JANUARY 31, 1998.......... 595,889 $541 $(9,866) $(9,325)
======== ==== ======= =======
</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>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 236 $ 796 $ 1,748
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............. 533 1,119 2,665
Deferred income taxes..................... 11 (165) (183)
Changes in assets and liabilities:
Accounts receivable...................... (277) (1,527) (1,803)
Merchandise inventories.................. (2,821) (10,308) (26,271)
Prepaid expenses and other assets........ (74) (319) (1,539)
Accounts payable and accrued expenses.... 2,894 3,889 15,123
Taxes payable............................ 162 449 916
Other current liabilities................ 346 655 1,019
Deferred rent............................ 158 336 1,275
Deferred lease incentives and other long-
term liabilities........................ 1,563 3,848 11,196
------- -------- --------
Net cash provided by (used in) operating
activities............................. 2,731 (1,227) 4,146
------- -------- --------
Cash flows from investing activities
Capital expenditures....................... (4,991) (10,600) (26,833)
------- -------- --------
Cash flows from financing activities:
Borrowings (repayments) under revolving
line of credit--net....................... 1,027 (531) 9,828
Principal payments--capital lease
obligations............................... (3) (11) (179)
Borrowings under term loan................. -- 511 1,000
Repayments under term loan................. (47) (100) (1,551)
Issuance of redeemable preferred stock..... 6,072 5,951 26,922
Issuance of common stock................... 33 -- --
Preferred and common stock repurchases..... (23) -- (12,746)
------- -------- --------
Net cash provided by financing
activities.............................. 7,059 5,820 23,274
------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................ 4,799 (6,007) 587
------- -------- --------
Cash and cash equivalents:
Beginning of period........................ 1,533 6,332 325
------- -------- --------
End of period.............................. $ 6,332 $ 325 $ 912
======= ======== ========
Additional cash flow information:
Cash paid during the year for interest (net
of amount capitalized).................... $ 83 $ 191 $ 507
======= ======== ========
Cash paid during the year for taxes........ $ 97 $ 301 $ 574
======= ======== ========
Supplemental schedule of non cash investing
and financing
activities:
Equipment acquired through noncash capital
lease transactions........................ $ 542 $ 169 $ --
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Restoration Hardware, Inc. and its subsidiary (together the "Company") is a
specialty retailer of high-quality home furnishings, decorative accessories
and hardware. The Company operated as a sole proprietorship from 1981 to 1987
and was incorporated in the state of California in 1987. At January 31, 1998
the Company operated a total of 41 stores in 20 states. The Company operates
on a 52-53 week fiscal year ending on the Saturday closest to January 31.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Restoration
Hardware, Inc. and its subsidiary, Restoration Hardware of Blackhawk, Inc. 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 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, primarily
construction allowances. 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.
F-8
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings
Per Share, requires dual presentation of two earnings per share ("EPS")
amounts, basic EPS and diluted EPS, on the face of all income statements.
Basic EPS excludes dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if common stock options and warrants were exercised into
common stock.
The following is a reconciliation of the number of shares (denominator) used
in the basic and diluted EPS computations (shares in thousands):
<TABLE>
<CAPTION>
EFFECT OF DILUTED
STOCK OPTIONS
WEIGHTED AVERAGE SHARES BASIC EPS AND WARRANTS DILUTED EPS
----------------------- --------- ----------------- -----------
<S> <C> <C> <C>
Fiscal year ended January 27, 1996....
Fiscal year ended February 1, 1997....
Fiscal year ended January 31, 1998....
</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.
The diluted EPS share amount applies the treasury stock method in
determining the dilutive effect of options and warrants issued. This
approach considers the actual proceeds and the number of shares repurchased
using an assumed initial public offering price of $ .
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,
1997 1998
----------- -----------
<S> <C> <C>
Leasehold improvements............................... $12,456 $34,504
Furniture, fixtures and equipment.................... 3,495 8,435
Equipment under capital leases....................... 736 736
------- -------
Total.............................................. 16,687 43,675
Less accumulated depreciation........................ (1,846) (4,666)
------- -------
Property and equipment, net.......................... $14,841 $39,009
======= =======
</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,
1997 1998
----------- -----------
<S> <C> <C>
Revolving line of credit............................. $ 495 $10,323
===== =======
Term loan............................................ $ 551 $ --
Less current portion of term loan.................... (239) --
----- -------
Total.............................................. $ 312 $ --
===== =======
</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 $4.65 per share. The Company issued 376,345
shares of Series A convertible preferred stock and subsequently redeemed
20,247 of such shares in May 1997. The second series, Series B convertible
preferred stock, was issued in January 1996 at a price of $16.65 per share.
The Company issued 370,975 shares of Series B convertible preferred stock and
subsequently redeemed 54,065 of such shares in May 1997. The third series,
Series C convertible preferred stock, was issued in October 1996 at a price of
$24.68 per share. The Company issued 243,094 shares of Series C convertible
preferred stock and subsequently redeemed 6,461 of such shares in May 1997.
The fourth series, Series D convertible preferred stock was issued in May 1997
at a price of $73,425 per share. The Company issued 397,685 shares of such
Series D preferred stock.
F-12
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The holders of convertible preferred stock are entitled to receive, if and
when declared by the Board of Directors, dividends in cash or other assets
provided that the holders of Series D preferred stock receive such dividends
in preference to any payment of any dividend on any other capital stock of the
Company. All preferred stock dividends are noncumulative.
Each share of Series A, B, C and D convertible preferred stock is
convertible into common stock at the option of the holder at a ratio of one
for one. The shares will automatically convert into common stock immediately
upon the consummation of the Company's sale of its common stock in an initial
public offering that meets certain criteria.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series D preferred stock shall be entitled to receive, prior
and in preference to any other series of preferred stock (Series A, B and C)
and the holders of common stock, an amount equal to the greater of: (i) the
original purchase price plus the payment of a 8% dividend compounded annually
or (ii) the value such holder would have received if each outstanding share of
Series D preferred stock had been converted into common stock immediately
prior to such liquidation, dissolution or winding up of the Company. If assets
and funds are insufficient to permit full payment of the preference amount of
the Series D preferred stock, any assets and funds shall be distributed
ratably among the holders of Series D preferred stock.
At any time after June 10, 1999, if the Series A and B preferred stock have
not been converted to common stock, the holders of a majority of the then
outstanding Series A and B preferred stock can elect to have the Company
redeem all of such shares of preferred stock by paying for each share the
redemption price based on the redemption formula. At any time beginning
October 11, 2001, if the Series C preferred stock has not been converted to
common stock, the holders of a majority of the then outstanding Series C
preferred stock can elect to have the Company redeem all of the shares of
preferred stock by paying for each share the redemption price based on the
redemption formula. The redemption formula is the sum of four times earnings
before depreciation, amortization, interest and taxes for the prior twelve-
month period plus working capital, divided by the number of shares
outstanding.
If (a) shares of Series D preferred stock have not been converted to common
stock on or before May 9, 2005, or (b) in the event that any other capital
stock of the Company is to be redeemed, the Company shall, in the event that
the holders of the Series D preferred stock elect to be redeemed, redeem the
Series D preferred stock for a redemption price equal to the original purchase
price, plus 8% dividend compounded annually, before any redemption payment is
made in respect to any other series of preferred stock (Series A, B and C) or
the common stock.
STOCK BASED COMPENSATION PLANS
On June 10, 1994, the Board of Directors adopted the 1994 Incentive Stock
Option Plan ("1994 Plan"). The 1994 Plan authorized the issuance of up to
107,790 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 232,040 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 97,960 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 exercisable at January 28, 1995... 53,895 $ 4.65
Granted (weighted average fair value of $.72)..... 53,750 4.65
Exercised....................................... --
Canceled........................................ --
Outstanding and exercisable at January 27, 1996... 107,645 4.65
Granted (weighted average fair value of $1.68).... 69,105 10.83
Exercised....................................... --
Canceled........................................ (4,520) 10.00
-------
Outstanding and exercisable, February 1, 1997..... 172,230 6.99
Granted (weighted average fair value of $13.66)... 69,872 73.85
Exercised....................................... --
Canceled........................................ (7,995) 24.57
-------
Outstanding and exercisable, January 31, 1998..... 234,107 26.35
=======
Vested at January 31, 1998........................ 106,074 5.57
=======
Available for future grant at January 31, 1998.... 95,893
=======
</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>
$ 4.65.................. 107,645 7.0 $ 4.65 107,645 $ 4.65
10.00.................. 49,190 8.5 10.00 49,190 10.00
14.83.................. 9,015 8.8 14.83 9,015 14.83
73.43-80.77............ 68,257 9.6 73.85 68,257 73.43
------- --- ------ ------- ------
$ 4.65-$80.77........... 234,107 8.2 $26.35 234,107 $26.22
======= === ====== ======= ======
</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 (Yen)EAR ENDED
-----------------------------------
JANUARY 27, FEBRUARY 1, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income...................... $234 779 1,655
Pro forma net income (loss) per share
available to common stockholders......... $234 779 (3,123)
Pro forma net income (loss) per share:
Basic....................................
Diluted..................................
</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 18,815 warrants to purchase shares of
common stock at $6.28 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, 18,148 of the
warrants were outstanding.
In May 1997, the Company issued 3,962 warrants at $88.11 per share in
connection with the Series D preferred stock. The warrants were deemed to have
nominal value at the date of grant. The warrants were immediately exercisable
and expire on May 16, 2002.
(7) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for its employees who meet certain service and
age requirements. Participants may contribute up to 15% of their salaries to a
maximum of $10,000 and qualify for favorable tax treatment under Section
401(k) of the Internal Revenue Code.
(8) RELATED PARTY TRANSACTIONS
The Company leases a store from the chief executive officer and a
partnership of which the chief executive officer is a partner. For the fiscal
years ended February 1, 1997 and January 31, 1998, rents of $33,700 and
$33,600 were paid to the chief executive officer and the partnership,
respectively.
F-15
<PAGE>
RESTORATION HARDWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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
Michael's Concepts In Wood, 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.
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.
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>
On May , 1998, the Company reincorporated in the state of Delaware.
On , the Board of Directors of the Company approved a -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.
* * * * * *
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Michael's Concepts In Wood, Inc.
Sacramento, California
We have audited the accompanying balance sheet of Michael's Concepts In
Wood, Inc. ("Michaels") as of January 31, 1998, and the related statements of
operations, shareholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Michaels' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Michael's Concepts In Wood, Inc. as of
January 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Deloitte & Touche llp
San Francisco, California
April 16, 1998
F-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<PAGE>
MICHAEL'S CONCEPTS IN WOOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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-26
<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.......................................................
===
</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 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
shares of Common Stock offered.
The Company, the Selling Stockholders, the Company's directors and officers
and each holder of % or more of the Company's outstanding Common Stock as
of the date hereof have agreed that, subject to certain exceptions, during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, 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 shares of Common Stock which may be sold to directors, employees and
persons having business relationships with the Company. The number of shares
of Common Stock available for sale to the general public will be reduced to
the extent such persons purchase such reserved shares. Any reserved shares of
Common Stock not so purchased will be offered by the Underwriters on the same
basis as the other shares of Common Stock offered in the Offering.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "RSTO".
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Common Stock; and short
positions created by the Underwriters involve the sale by the Underwriters of
a greater number of shares of Common Stock than they are required to purchase
from the Company and the Selling Stockholders in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to broker-dealers in respect of the Common Stock sold in the Offering
may be reclaimed by the Underwriters if such securities are repurchased by the
Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be effected on the Nasdaq National Market, in the over-
the-counter market or otherwise.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Dilution................................................................. 15
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 26
Management............................................................... 37
Certain Transactions..................................................... 50
Principal and Selling Stockholders....................................... 53
Description of Capital Stock............................................. 54
Shares Eligible for Future Sale.......................................... 58
Validity of the Issuance of the Common Stock............................. 59
Experts.................................................................. 59
Additional Information................................................... 59
Index to Consolidated 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
RESTORATION HARDWARE, INC.
COMMON STOCK
($.001 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 fee.
<TABLE>
<S> <C>
Registration fee....................................................... $20,355
NASD filing fee........................................................ 7,400
Blue Sky fees and expenses (including legal fees)...................... *
Nasdaq National Market entry fee....................................... 5,000
Accounting fees and expenses........................................... *
Other legal fees and expenses.......................................... *
Transfer agent and registrar fee....................................... *
Printing and engraving................................................. *
Miscellaneous.......................................................... *
-------
Total................................................................ *
=======
</TABLE>
- --------
* To be supplied by amendment.
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 , Section , 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 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 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 5,000 shares of its
Common Stock at an aggregate purchase price of $23,250 to Thomas Low.
2. On January 19, 1996 and January 26, 1996, the Company issued and sold an
aggregate of 370,975 shares of its Series B Preferred Stock at an
aggregate purchase price of $6,175,250 to various investors.
3. On October 18, 1996, the Company issued and sold an aggregate of 243,094
shares of its Series C Preferred Stock at an aggregate purchase price of
$5,999,560 to various investors.
4. On May 16, 1997, the Company issued and sold an aggregate of 397,685
shares of its Series D Preferred Stock at an aggregate purchase price of
$29,200,021 to various 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 3,962 shares of
its Series D Preferred Stock, at an exercise price of $88.11 per share,
to Montgomery Securities.
6. On May 30, 1997, the Company issued 667 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 334 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. 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 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>
- --------
*To be filed by amendment.
**Confidential treatment has been requested for certain portions thereof.
(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 REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
FRANCISCO, STATE OF CALIFORNIA, ON APRIL 23, 1998.
Restoration Hardware, Inc.
/s/ Stephen Gordon
By: _________________________________
STEPHEN GORDON CHAIRMAN OF THE
BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH SUCH PERSON WHOSE SIGNATURE
APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS STEPHEN GORDON AND THOMAS LOW,
OR ANY OF THEM, HIS OR HER TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, EACH
WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM OR HER AND IN HIS
OR HER NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY
AMENDMENTS (WHETHER PRE-EFFECTIVE OR POST-EFFECTIVE) TO THIS REGISTRATION
STATEMENT AND ANY REGISTRATION STATEMENT FOR THE SAME OFFERING THAT IS TO BE
EFFECTIVE UPON FILING PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND TO FILE THE SAME WITH ALL EXHIBITS THERETO AND OTHER
DOCUMENTS IN CONNECTION THEREWITH WITH THE SECURITIES AND EXCHANGE COMMISSION,
GRANTING UNTO EACH OF SAID ATTORNEYS-IN-FACT AND AGENTS FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT EACH OF SAID ATTORNEYS-IN-FACT AND AGENTS, OR THEIR
SUBSTITUTE OR SUBSTITUTES, MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
FOLLOWING CAPACITIES.
SIGNATURE TITLE DATE
/s/ Stephen Gordon Chairman of the April 23, 1998
- ------------------------------------- Board, President
STEPHEN GORDON and Chief Executive
Officer (Principal
Executive Officer)
/s/ Thomas Christopher Director, Executive April 23, 1998
- ------------------------------------- Vice President and
THOMAS CHRISTOPHER Chief Operating
Officer
/s/ Thomas Low Chief Financial April 23, 1998
- ------------------------------------- Officer, Senior
THOMAS LOW Vice President and
Secretary
(Principal
Financial Officer
and Principal
Accounting Officer)
II-4
<PAGE>
SIGNATURE TITLE DATE
/s/ Robert Camp Director April 23, 1998
- -------------------------------------
ROBERT CAMP
/s/ Raymond Hemmig Director April 23, 1998
- -------------------------------------
RAYMOND HEMMIG
/s/ Michael Lazarus Director April 23, 1998
- -------------------------------------
MICHAEL LAZARUS
/s/ Marshall Payne Director April 23, 1998
- -------------------------------------
MARSHALL PAYNE
/s/ Damon Ball Director April 23, 1998
- -------------------------------------
DAMON BALL
/s/ David Ferguson Director April 23, 1998
- -------------------------------------
DAVID FERGUSON
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>
- --------
*To be filed by amendment.
**Confidential treatment has been requested for certain portions thereof.
(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 10.1
RESTORATION HARDWARE, INC. 1995 STOCK OPTION PLAN
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1995 Stock Option Plan is intended to promote the interests
of Restoration Hardware, Inc., a California corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or
all administrative functions otherwise exercisable by the Board may be delegated
to the Committee. Members of the Committee shall serve for such period of time
as the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of, the Plan and any
outstanding options as it may deem necessary or advisable. Decisions of the
Plan Administrator shall be final and binding on all parties who have an
interest in the Plan or any option or shares issued thereunder.
III. ELIGIBILITY
A. The persons eligible to receive option grants under the Plan
are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-
employee members of the board of directors of any Parent or
Subsidiary, and
<PAGE>
(iii) consultants who provide services to the
Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to
determine which eligible persons are to receive option grants under the Plan,
the time or times when such option grants are to be made, the number of shares
to be covered by each such grant, the status of the granted option as either an
Incentive Option or a Non-Statutory Option, the time or times at which each
option is to become exercisable, the vesting schedule (if any) applicable to the
option shares and the maximum term for which the option is to remain
outstanding.
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. The maximum number of shares
of Common Stock which may be issued over the term of the Plan shall not exceed
330,000/1/ shares. Such authorized share reserve is comprised of the number of
shares which remained available for issuance, as of the Plan Effective Date,
under the Predecessor Plan as last approved by the Corporation's shareholders
prior to such date, including the shares subject to the outstanding options
incorporated into the Plan and any other shares which would have been available
for future option grants under the Predecessor Plan.
B. Shares of Common Stock subject to outstanding options shall
be available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to exercise in full or (ii) the
options are cancelled in accordance with the cancellation-regrant provisions of
Article Two. All shares issued under the Plan, whether or not those shares are
subsequently repurchased by the Corporation pursuant to its repurchase rights
under the Plan, shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent issuance under the Plan.
C. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan and (ii) the number and/or class of securities and the
exercise price per share in effect under each outstanding option in order to
prevent the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive. In
no event shall any such adjustments be made in connection with the conversion of
one or more outstanding shares of the Corporation's preferred stock into shares
of Common Stock.
___________________
/1/This number reflects the 5-for-1 split of the Common Stock effected after the
adoption of the Plan by the Board.
2.
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
--------
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The exercise price per share shall not be less
than eighty-five percent (85%) of the Fair Market Value per share of
Common Stock on the option grant date.
(ii) If the person to whom the option is granted is a
10% Shareholder, then the exercise price per share shall not be less
than one hundred ten percent (110%) of the Fair Market Value per share
of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Three and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12(g) of the 1934 Act at the time the option is exercised, then
the exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable written
instructions (a) to a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate exercise price payable
for the purchased shares plus all applicable Federal, state and local
income and employment taxes required to be withheld by the Corporation
3.
<PAGE>
by reason of such exercise and (b) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be
----------------------------
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option grant. However, (i) each option, other than an
option granted to an individual who is an officer of the Corporation or a non-
employee Board member or independent consultant, must become exercisable for at
least twenty percent (20%) of the total number of option shares subject to the
grant each year measured from a date no later than the option grant date and
(ii) no option shall have a term in excess of ten (10) years measured from the
option grant date.
C. EFFECT OF TERMINATION OF SERVICE. The following provisions
--------------------------------
shall govern the exercise of any options held by the Optionee at the time of
cessation of Service or death:
(i) Should the Optionee cease to remain in Service
for any reason other than Disability or death, then the Optionee shall
have a period of three (3) months following the date of such cessation
of Service during which to exercise each outstanding option held by
such Optionee.
(ii) Should such Service terminate by reason of
Disability, then the Optionee shall have a period of six (6) months
following the date of such cessation of Service during which to
exercise each outstanding option held by such Optionee. However,
should such Disability be deemed to constitute Permanent Disability,
then the period during which each outstanding option held by the
Optionee is to remain exercisable shall be extended by an additional
six (6) months so that the exercise period shall be the twelve (12)-
month period following the date of the Optionee's cessation of Service
by reason of such Permanent Disability.
(iii) Should the Optionee die while holding one or more
outstanding options, then the personal representative of the
Optionee's estate or the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution shall have a period of twelve (12)
months following the date of the Optionee's death during which to
exercise each such option.
(iv) Under no circumstances, however, shall any such
option be exercisable after the specified expiration of the option
term.
4.
<PAGE>
(v) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.
D. SHAREHOLDER RIGHTS. The holder of an option shall have no
------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock under the Plan. Should the Optionee cease Service while holding such
unvested shares, the Corporation shall have the right to repurchase, at the
exercise price paid per share, all or (at the discretion of the Corporation and
with the consent of the Optionee) any of those unvested shares. The terms upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the purchased
shares) shall be established by the Plan Administrator and set forth in the
document evidencing such repurchase right. The Plan Administrator may not
impose a vesting schedule upon any option grant or any shares of Common Stock
subject to the option which is more restrictive than twenty percent (20%) per
year vesting, with the initial vesting to occur no later than one (1) year after
the option grant date. However, this minimum vesting requirement shall not be
applicable with respect to any option granted to an individual who is an officer
of the Corporation or a non-employee Board member or consultant. In addition,
all outstanding repurchase rights under the Plan shall terminate automatically
in the event of any Corporate Transaction, except to the extent those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction.
F. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the
document evidencing such right.
G. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
5.
<PAGE>
H. WITHHOLDING. The Corporation's obligation to deliver shares of
-----------
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of the Plan shall be applicable to Incentive Options. Options which
are specifically designated as Non-Statutory Options shall not be subject to the
---
terms specified in this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-----------
B. EXERCISE PRICE. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% SHAREHOLDER. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the option grant date.
III. CORPORATE TRANSACTION
A. The shares subject to each option outstanding under the Plan at
the time of a Corporate Transaction shall automatically vest in full so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, the shares subject to
an outstanding option shall NOT vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and the Corporation's repurchase rights
with respect to the unvested option shares are concurrently assigned to such
successor corporation (or parent thereof) or (ii) such option is to be replaced
with a cash incentive program of the successor corporation which preserves the
spread existing on the unvested option shares at the time of the Corporate
Transaction and
6.
<PAGE>
provides for subsequent payout in accordance with the same vesting schedule
applicable to those unvested option shares or (iii) the acceleration of such
option is subject to other limitations imposed by the Plan Administrator at the
time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in the consummation of such Corporate Transaction,
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
--------
securities shall remain the same.
E. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
7.
<PAGE>
ARTICLE THREE
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee to pay the option
exercise price by delivering a promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. Promissory notes may be authorized with or without
security or collateral. However, any promissory notes delivered by a consultant
must be secured by property other than the purchased shares of Common Stock. In
all events, the maximum credit available to each Optionee may not exceed the sum
---
of (i) the aggregate option exercise price payable for the purchased shares plus
(ii) any Federal, state and local income and employment tax liability incurred
by the Optionee in connection with the option exercise.
II. ADDITIONAL AUTHORITY
A. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding:
(i) to extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service or death
from the limited period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate;
provided, that in no event shall such option be exercisable after the
--------
specified expiration of the option term, and/or
(ii) to permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of
vested shares of Common Stock for which such option is exercisable at the
time of the Optionee's cessation of Service or death but also with respect
to one or more additional installments in which the Optionee would have
vested under the option had the Optionee continued in Service.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective on the Plan Effective Date, but
no option granted under the Plan may be exercised until the Plan is approved by
the Corporation's shareholders. If such shareholder approval is not obtained
within twelve (12) months after the Plan Effective Date, then all options
previously granted under the Plan shall terminate and cease to be outstanding,
and no further options shall be granted. Subject to such limitation, the Plan
8.
<PAGE>
Administrator may grant options under the Plan at any time after the Plan
Effective Date and before the date fixed herein for termination of the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants shall be made under the Predecessor Plan after the
Plan Effective Date. All options outstanding under the Predecessor Plan as of
such date shall, immediately upon approval of the Plan by the Corporations's
shareholders, be incorporated into the Plan and treated as outstanding options
under the Plan. However, each outstanding option so incorporated shall continue
to be governed solely by the terms of the documents evidencing such option, and
no provision of the Plan shall be deemed to affect or otherwise modify the
rights or obligations of the holders of such incorporated options with respect
to their acquisition of shares of Common Stock.
C. The Plan shall terminate upon the earliest of (i) the expiration
--------
of the ten (10)-year period measured from the Plan Effective Date, (ii) the date
on which all shares available for issuance under the Plan shall have been issued
or (iii) the termination of all outstanding options in connection with a
Corporate Transaction. Upon such Plan termination, all options and unvested
stock issuances outstanding under the Plan shall continue to have full force and
effect in accordance with the provisions of the documents evidencing such
options or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall, without the consent of the Optionees, adversely affect
their rights and obligations under their outstanding options. In addition, the
Board shall not, without the approval of the Corporation's shareholders, (i)
increase the maximum number of shares issuable under the Plan, except for
permissible adjustments in the event of certain changes in the Corporation's
capitalization, (ii) materially modify the eligibility requirements for Plan
participation or (iii) materially increase the benefits accruing to Plan
participants.
B. Options may be granted under the Plan to purchase shares of
Common Stock in excess of the number of shares then available for issuance under
the Plan, provided any such options actually granted may not be exercised until
there is obtained shareholder approval of an amendment sufficiently increasing
the number of shares of Common Stock available for issuance under the Plan. If
such shareholder approval is not obtained within twelve (12) months after the
date the excess grants are first made, then any options granted on the basis of
such excess shares shall terminate and cease to be outstanding.
9.
<PAGE>
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option hereunder
and the issuance of any shares of Common Stock upon the exercise of any option
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
options granted under it and the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining Optionee) or of the Optionee, which rights are
hereby expressly reserved by each, to terminate the Optionee's Service at any
time for any reason, with or without cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under the
Plan, unless such individual is a key Employee whose duties in connection with
the Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information.
10.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
-----
B. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
C. COMMITTEE shall mean a committee of two (2) or more Board members
---------
appointed by the Board to exercise one or more administrative functions under
the Plan.
D. COMMON STOCK shall mean the Corporation's common stock.
------------
E. CORPORATE TRANSACTION shall mean either of the following shareholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which the Corporation's
outstanding voting securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. CORPORATION shall mean Restoration Hardware, Inc., a California
-----------
corporation.
G. DISABILITY shall mean the inability of an individual to engage in any
----------
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Plan Administrator on the basis
of such medical evidence as the Plan Administrator deems warranted under the
circumstances. Disability shall be deemed to constitute PERMANENT DISABILITY in
the event that such Disability is expected to result in death or has lasted or
can be expected to last for a continuous period of twelve (12) months or more.
H. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
J. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
A-1
<PAGE>
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Plan Administrator after taking
into account such factors as the Plan Administrator shall deem appropriate.
K. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.
L. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------
M. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
N. OPTIONEE shall mean any person to whom an option is granted under the
--------
Plan.
O. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
P. PLAN shall mean the Corporation's 1995 Stock Option Plan, as set forth
----
in this document.
Q. PLAN ADMINISTRATOR shall mean either the Board or the Committee, to
------------------
the extent the Committee is at the time responsible for the administration of
the Plan.
A-2
<PAGE>
R. PLAN EFFECTIVE DATE shall mean the date the Board adopts the Plan.
-------------------
S. PREDECESSOR PLAN shall mean the Corporation's Incentive Stock Option
----------------
Plan, as adopted effective June 10, 1994.
T. SERVICE shall mean the provision of services to the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant, except to the extent
otherwise specifically provided in the documents evidencing the option grant.
U. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
V. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
W. 10% SHAREHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-3
<PAGE>
EXHIBIT 10.2
RESTORATION HARDWARE, INC.
1998 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1998 Stock Incentive Plan is intended to promote the interests of
Restoration Hardware, Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
- the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special option grants,
- the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock, and
- the Director Fee Option Grant Program under which non-
employee Board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special option grant.
<PAGE>
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board.
Beginning with the Section 12 Registration Date, the Primary Committee shall
have sole and exclusive authority to administer the Discretionary Option Grant
and Stock Issuance Programs with respect to Section 16 Insiders.
B. Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions
of any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
E. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
F. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
2.
<PAGE>
G. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. Only non-employee Board members shall be eligible to participate
in the Automatic Option Grant and Director Fee Option Grant Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open
3.
<PAGE>
market. The maximum number of shares of Common Stock initially reserved for
issuance over the term of the Plan shall not exceed 469,666 shares, which shall
consist of (i) the number of shares which are estimated to remain available for
issuance, as of the Section 12 Registration Date, under the Predecessor Plan as
last approved by the Corporation's stockholders, including the shares subject to
outstanding options under that Predecessor Plan, and (ii) an additional increase
of 140,000 shares authorized by the Board and the stockholders prior to the
Section 12 Registration Date. In addition, the number of shares of Common Stock
reserved for issuance under the Plan will automatically be increased on the
first trading day of each calendar year, beginning in calendar year 2000, by an
amount equal to the lesser of three percent 3% of the total number of shares of
------
Common Stock outstanding on the last trading day of the preceding calendar year,
or (ii) [_______________] shares.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 250,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1998 calendar year.
C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation, at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section V of Article Two of the Plan shall NOT be
available for subsequent issuance under the Plan.
D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year, (iii) the number and/or
class of securities for which grants are subsequently to be made under the
Automatic Option Grant Program to new and continuing non-employee Board members,
(iv) the number and/or class of securities and the
4.
<PAGE>
exercise price per share in effect under each outstanding option under the Plan
and (v) the number and/or class of securities and price per share in effect
under each outstanding option incorporated into this Plan from the Predecessor
Plan. Such adjustments to the outstanding options are to be effected in a
manner which shall preclude the enlargement or dilution of rights and benefits
under such options. The adjustments determined by the Plan Administrator shall
be final, binding and conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Six and the documents evidencing the option, be payable in cash or check
made payable to the Corporation. Should the Common Stock be registered under
Section 12 of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
6.
<PAGE>
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
1. The following provisions shall govern the exercise of
any options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution.
(iii) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
7.
<PAGE>
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
---
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-----------
B. EXERCISE PRICE. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
8.
<PAGE>
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CHANGE IN CONTROL
A. Each option outstanding at the time of a Change in Control but
not otherwise fully exercisable shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not become
exercisable on such an accelerated basis if and to the extent: (i) such option
is, in connection with the Change in Control, to be assumed or otherwise
continued in full force or effect by the successor corporation (or parent
thereof) pursuant to the terms of the Change in Control transaction, (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing at the time of the Change in
Control transaction on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) or (ii) such accelerated vesting is precluded by
other limitations imposed by the Plan Administrator at the time the repurchase
right is issued.
C. Immediately following the consummation of the Change in Control,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control transaction.
9.
<PAGE>
D. Each option which is assumed in connection with a Change in
Control (or is otherwise to continue in effect) shall be appropriately
adjusted, immediately after such Change in Control, to apply to the number and
class of securities or other property which would have been issuable to the
Optionee in consummation of such Change in Control had the option been exercised
immediately prior to such Change in Control. Appropriate adjustments to reflect
such Change in Control shall also be made to (i) the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same, (ii) the maximum number
and/or class of securities available for issuance over the remaining term of the
Plan and (iii) the maximum number and/or class of securities for which any one
person may be granted stock options and direct stock issuances under the Plan
per calendar year.
E. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the accelerated vesting of one or
more outstanding options under the Discretionary Option Grant Program upon the
occurrence of a Change in Control, whether or not those options are to be
assumed or otherwise continued in full force and effect pursuant to the terms of
the Change in Control transaction. In addition, the Plan Administrator may
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall immediately
terminate, in whole or in part, at the time of a Change in Control and shall not
be assignable to the successor corporation (or parent thereof), and the shares
subject to those terminated repurchase rights shall accordingly vest in full at
the time of such Change in Control.
F. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the accelerated vesting, in whole or
in part, of one or more outstanding options under the Discretionary Option Grant
Program upon the Involuntary Termination of the Optionee's Service within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control in which those options do not otherwise
accelerate. In addition, the Plan Administrator may structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights will immediately terminate at the time of such Involuntary
Termination, and the shares subject to those terminated repurchase rights shall
accordingly vest in full at that time.
G. The portion of any Incentive Option accelerated in connection
with a Change in Control shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is
not exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
H. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
10.
<PAGE>
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then
the distribution to which the Optionee shall be entitled may be made in
shares of Common Stock valued at Fair Market Value on the option surrender
date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
-----
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.
11.
<PAGE>
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the time
exercisable for vested shares of Common Stock. In return for the
surrendered option, the Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (A) the Take-Over Price of
the shares of Common Stock which are at the time vested under each
surrendered option (or surrendered portion thereof) over (B) the aggregate
exercise price payable for such shares. Such cash distribution shall be
paid within five (5) days following the option surrender date.
(iii) The Plan Administrator shall, at the time the option with
such limited stock appreciation right is granted under the Discretionary
Option Grant Program, pre-approve any subsequent exercise of that right in
accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Plan Administrator or the Board shall be required at the
time of the actual option surrender and cash distribution.
(iv) The balance of the option (if any) shall remain
outstanding and exercisable in accordance with the documents evidencing
such option.
12.
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for those calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete
discretion to determine whether to approve the filed authorization in whole or
in part. To the extent the Primary Committee approves the authorization, the
individual who filed that authorization shall automatically be granted an option
under the Salary Investment Grant Program on the first trading day in January of
the calendar year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
13.
<PAGE>
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A divided by (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the approved reduction in the
Optionee's base salary for the calendar year, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
----------------------------
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
-------
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
- -------
(3)-year period measured from the date of the Optionee's cessation of Service.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control while the Optionee remains
in Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become fully exercisable with respect to the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. The successor corporation
14.
<PAGE>
(or parent thereof) in the Change in Control transaction shall assume each such
outstanding option so that each option under the Salary Investment Option Grant
Program shall remain exercisable for the fully-vested shares until the earliest
--------
to occur of (i) the expiration of the ten (10)-year option term, (ii) the
expiration of the three (3)-year period measured from the date of the Optionee's
cessation of Service or (iii) the surrender of the option in connection with a
Hostile Take-Over.
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph B. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
C. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
15.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. PURCHASE PRICE.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. VESTING PROVISIONS.
------------------
1. The Plan Administrator may issue shares of Common Stock
under the Stock Issuance Program which are fully and immediately vested upon
issuance or which are to vest in one or more installments over the Participant's
period of Service or upon attainment of specified performance objectives.
Alternatively, the Plan Administrator may issue share right awards under the
Stock Issuance Program which shall entitle the recipient to receive a specified
number of shares of Common Stock upon the attainment of one or more performance
goals established by the Plan Administrator. Upon the attainment of such
performance goals, fully-vested shares of Common Stock shall be issued in
satisfaction of those share right awards.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the
16.
<PAGE>
Participant's unvested shares of Common Stock and (ii) such escrow arrangements
as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
II. CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Change in Control, except to the extent (i) those repurchase
rights are to be assigned to the successor corporation (or parent thereof) in
connection with such Change in Control transaction or are otherwise to continue
in full force and effect pursuant to the terms of the Change in Control
transaction or (ii) such accelerated vesting is precluded by other limitations
imposed in the Stock Issuance Agreement.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate upon the
occurrence of a Change in Control and shall not be assignable to the successor
corporation (or parent thereof), and the shares of Common Stock subject to those
terminated rights shall immediately vest at the time of such Change in Control.
17.
<PAGE>
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate, in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof) or are otherwise continued in effect.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
18.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
-----------
below:
1. Each individual serving as a non-employee Board member
on the Underwriting Date shall automatically be granted at that time a Non-
Statutory Option to purchase 2,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase [________] shares of Common Stock, provided
that individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
3. On the date of each Annual Stockholders Meeting held
after the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, whether or not that individual is standing for re-election to
the Board at that particular Annual Meeting, shall automatically be granted a
Non-Statutory Option to purchase 500 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 500-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received a stock
option grant from the Corporation prior to the Underwriting Date shall be
eligible to receive one or more such annual option grants over their period of
continued Board service.
B. EXERCISE PRICE.
--------------
1. The exercise price per share shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall be payable in one or more of
the alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
19.
<PAGE>
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial 2,000-share grant shall vest,
and the Corporation's repurchase right shall lapse, in a series of three (3)
successive equal annual installments over the Optionee's period of continued
service as a Board member, with the first such installment to vest upon the
Optionee's completion of one (1) year of Board service measured from the option
grant date. Each annual 500-share automatic option shall vest, and the
Corporation's repurchase right shall lapse, in a series of three (3) successive
equal annual installments over the Optionee's period of continued service as a
Board member, with the first such installment to vest upon the Optionee's
completion of one (1) year of Board service measured from the option grant date.
E. TERMINATION OF BOARD SERVICE. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution) shall have a twelve
(12)-month period following the date of such cessation of Board service in
which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the option
may not be exercised in the aggregate for more than the number of vested
shares of Common Stock for which the option is exercisable at the time of
the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-
month exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service for any
reason other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
20.
<PAGE>
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. The shares of Common Stock subject to each option outstanding at
the time of a Change in Control but not otherwise vested shall automatically
vest in full so that each such option shall, immediately prior to the effective
date of such Change in Control, become exercisable for all of those shares as
fully-vested shares of Common Stock and may be exercised for all or any portion
of those vested shares. Immediately following the consummation of the Change in
Control, each automatic option grant shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof) or otherwise continued in full force and effect pursuant to the
terms of the Change in Control transaction.
B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Change in Control.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or
consent of the Board or any Plan Administrator shall be required in connection
with such option surrender and cash distribution.
D. Each option which is assumed in connection with a Change in
Control (or otherwise continued in full and effect) shall be appropriately
adjusted, immediately after such Change in Control, to apply to the number and
class of securities or other property which would have been issuable to the
Optionee in consummation of such Change in Control had the option been exercised
immediately prior to such Change in Control. Appropriate adjustments shall also
be made to the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same.
E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
21.
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Plan Administrator shall have the sole and exclusive authority to
determine the calendar year or years (if any) the Director Fee Option Grant
Program is to be in effect. When the Director Fee Option Grant Program is in
effect, each non-employee Board member may elect to apply all or any portion of
the annual retainer fee otherwise payable in cash for his or her service on the
Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to first day of the calendar year for which the annual
retainer fee which is the subject of that election is otherwise payable. Each
non-employee Board member who files such a timely election shall automatically
be granted an option under this Director Fee Option Grant Program on the first
trading day in January in the calendar year for which the annual retainer fee
which is the subject of that election would otherwise be payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A divided by (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
22.
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
----------------------------
exercisable in a series of twelve (12) equal monthly installments upon the
Optionee's completion of each month of Board service over the twelve (12)-month
period measured from the grant date. Each option shall have a maximum term of
ten (10) years measured from the option grant date.
D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution. Such right of exercise shall lapse,
and the option shall terminate, upon the earlier of (i) the expiration of the
-------
ten (10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee's cessation of Board service.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control while the Optionee remains
a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Change in
Control, become fully exercisable with respect to the total number of shares of
Common Stock at the time subject to such option and may be exercised for any or
23.
<PAGE>
all of those shares as fully-vested shares of Common Stock. The successor
corporation (or parent thereof) in the Change in Control transaction shall
assume each such outstanding option so that each option under the Director Fee
Option Grant Program shall remain exercisable for the fully-vested shares until
the earliest to occur of (i) the expiration of the ten (10)-year option term,
--------
(ii) the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Board service or (iii) the surrender of the option in
connection with a Hostile Take-Over.
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required in connection with such option surrender and
cash distribution.
C. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
24.
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options or the vesting of their
shares. Such right may be provided to any such holder in either or both of the
following formats:
Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
25.
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately at the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date. However, no
options granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders.
If such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Section 12 Registration Date. All options
outstanding under the Predecessor Plan on the Section 12 Registration Date shall
be incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Changes in Control, may, in the Plan Administrator's discretion, be extended
to one or more options incorporated from the Predecessor Plan which do not
otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i) April
--------
19, 2008, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully-vested shares or (iii) the termination of
all outstanding options in connection with a Change in Control. Should the Plan
terminate on April 19, 2008, then all option grants and unvested stock issuances
outstanding at that time shall continue to have force and effect in accordance
with the provisions of the documents evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
26.
<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained
within twelve (12) months after the date the first such excess issuances are
made, then (i) any unexercised options granted on the basis of such excess
shares shall terminate and cease to be outstanding and (ii) the Corporation
shall promptly refund to the Optionees and the Participants the exercise or
purchase price paid for any excess shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for
the period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
27.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
------------------------------
program in effect under Article Two of the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
-----
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
-----------------
Corporation effected through any of the following transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction;
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation;
(iii) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders; or
(iv) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
E. COMMON STOCK shall mean the Corporation's common stock.
------------
A-1.
<PAGE>
F. CORPORATION shall mean Restoration Hardware, Inc., a Delaware
-----------
corporation, and its successors.
G. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option
---------------------------------
grant in effect for non-employee Board members under Article Six of the Plan.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
----------------------------------
grant program in effect under Article Two of the Plan.
I. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
-----------------
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
J. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.
A-2.
<PAGE>
M. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
-----------------
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
N. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.
O. INVOLUNTARY TERMINATION shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
P. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------
R. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
S. OPTIONEE shall mean any person to whom an option is granted under the
--------
Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
A-3.
<PAGE>
T. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
U. PARTICIPANT shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
V. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
--------------------------------------------
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant and Director
Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall
mean the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.
W. PLAN shall mean the Corporation's 1998 Stock Incentive Plan, as set
----
forth in this document.
X. PLAN ADMINISTRATOR shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Y. PLAN EFFECTIVE DATE shall mean April 19, 1998, the date on which the
-------------------
Board adopted the Plan.
Z. PREDECESSOR PLAN shall mean the Corporation's 1995 Stock Option Plan in
----------------
effect immediately prior to the Plan Effective Date hereunder.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-
-----------------
employee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and
to administer the Salary Investment Option Grant Program solely with respect to
the selection of the eligible individuals who may participate in such program.
AB. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.
A-4.
<PAGE>
AC. SECONDARY COMMITTEE shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
AD. SECTION 12 REGISTRATION DATE shall mean the date on which the Common
----------------------------
Stock is first registered under Section 12 of the 1934 Act.
AE. SECTION 16 INSIDER shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AF. SERVICE shall mean the performance of services for the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
AG. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
AH. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under Article Four of the Stock Issuance Program.
AI. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
----------------------
under the Plan.
AJ. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AK. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
--------------- -------
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
AL. TAXES shall mean the Federal, state and local income and employment
-----
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
AM. 10% STOCKHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-5.
<PAGE>
AN. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
AO. UNDERWRITING DATE shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
A-6.
<PAGE>
EXHIBIT 10.3
RESTORATION HARDWARE, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of Restoration Hardware, Inc. by providing eligible employees with the
opportunity to acquire a proprietary interest in the Corporation through
participation in a payroll-deduction based employee stock purchase plan designed
to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed Four Hundred
Seventy-Five Thousand (475,000) shares.
B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the aggregate maximum number and class of securities
issuable under the Plan, (ii) the maximum number and class of securities
issuable under the Plan on each individual Purchase Date, (iii) the maximum
number and class of securities purchasable per Participant on any one Purchase
Date and (iv) the number and class of securities and the price per share in
effect under each outstanding purchase right in order to prevent the dilution or
enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of
<PAGE>
shares of Common Stock available for issuance under the Plan shall have been
purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in August
2000. The next offering period shall commence on the first business day in
September 2000, and subsequent offering periods shall commence as designated by
the Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in March each year to the last business day in August of the same
year and from the first business day in September each year to the last business
day in February of the following year. However, the first Purchase Interval in
effect under the initial offering period shall commence at the Effective Time
and terminate on the last business day in February 1999.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
the initial offering period under the Plan may enter that offering period on
such start date or on any subsequent Semi-Annual Entry Date within that offering
period, provided he or she remains an Eligible Employee.
B. Each individual who is an Eligible Employee on the start date of
any subsequent offering period under the Plan may enter that offering period on
such start date or on any subsequent Semi-Annual Entry Date within that offering
period, provided in each case that he or she has completed at least 90 days of
continuous employment with the Corporation or a Corporate Affiliate prior to
such date.
C. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee, provided he or she has completed at least 90 days of
continuous employment with the Corporation or a Corporate Affiliate prior to
such Semi-Annual Entry Date.
D. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
2.
<PAGE>
E. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become effective as soon as
possible after filing the appropriate form with the Plan Administrator.
The Participant may not, however, effect more than one (1) such reduction
per Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent
(15%) maximum) shall become effective on the start date of the first
Purchase Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be required
to be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
-----------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.
C. PURCHASE PRICE. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
-----
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
----------------------------
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed Five Hundred (500) shares, subject to periodic adjustments in the event
of certain changes in the Corporation's capitalization. In addition, the maximum
aggregate number of shares of Common Stock purchasable by all Participants on
any one Purchase Date shall not exceed One Hundred Eighteen Thousand Seven
Hundred Fifty (118,750) shares, subject to periodic adjustments in the event of
certain changes in the Corporation's capitalization.
4.
<PAGE>
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such purchase right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the offering
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before his or her scheduled Entry Date into that
offering period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions collected to date on
his or her behalf for that Purchase Interval or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll deductions
be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service within (i) ninety (90) days
following the commencement of such leave or, if longer, the period during
which such Participant's right to reemployment with the Corporation is
guaranteed by either statute or contract, his or her payroll
5.
<PAGE>
deductions under the Plan shall automatically resume at the rate in effect
at the time the leave began, unless the Participant withdraws from the Plan
prior to his or her return. If the Participant's leave of absence, whether
paid or unpaid, (i) exceeds ninety (90) days and (ii) is not guaranteed by
either statute or contract, then the Participant's status as an Eligible
Employee will be deemed to have terminated on the ninety-first (91st) day
of such leave, and such Participant's purchase right for the offering
period in which such leave began shall thereupon terminate. An individual
who returns to active employment following such a leave shall be treated as
a new employee for purposes of participating in the Plan (but shall not
have to complete a new ninety (90)-day period of continuous employment
prior to participation) and shall accordingly have a new Entry Date. Such
an individual must re-enroll in the Plan (by making a timely filing of the
prescribed enrollment forms) on or before his or her scheduled Entry Date
into the offering period.
G. CORPORATE TRANSACTION. Each outstanding purchase right shall
---------------------
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Interval in which such Corporate Transaction occurs to the
purchase of whole shares of Common Stock at a purchase price per share equal to
eighty-five percent (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 Corporate Transaction occurs or (ii) the Fair Market Value per share of
Common Stock immediately prior to the effective date of such Corporate
Transaction. However, the applicable limitation on the number of shares of
Common Stock purchasable per Participant and in the aggregate shall continue to
apply to any such purchase.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Corporate Transaction,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased
6.
<PAGE>
on the Participant's behalf in accordance with the provisions of the Plan and
the Participant has become a holder of record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis
of the Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on April 20, 1998 and shall
become effective at the Effective Time, provided no purchase rights granted
--------
under the Plan shall be
7.
<PAGE>
exercised, and no shares of Common Stock shall be issued hereunder, until (i)
the Plan shall have been approved by the stockholders of the Corporation and
(ii) the Corporation shall have complied with all applicable requirements of the
1933 Act (including the registration of the shares of Common Stock issuable
under the Plan on a Form S-8 registration statement filed with the Securities
and Exchange Commission), all applicable listing requirements of any stock
exchange (or the Nasdaq National Market, if applicable) on which the Common
Stock is listed for trading and all other applicable requirements established by
law or regulation. In the event such stockholder approval is not obtained, or
such compliance is not effected, within twelve (12) months after the date on
which the Plan is adopted by the Board, the Plan shall terminate and have no
further force or effect, and all sums collected from Participants during the
initial offering period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in February 2008, (ii) the date
--------
on which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction.
No further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan or the
maximum number of shares purchasable per Participant on any one Purchase Date,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify eligibility requirements for participation in the
Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
8.
<PAGE>
B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
9.
<PAGE>
SCHEDULE A
----------
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
------------------------
Restoration Hardware, Inc.
The Michaels Company, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
-----
B. CASH EARNINGS shall mean the (i) base salary payable to a
-------------
Participant by one or more Participating Corporations during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, current profit-sharing
distributions and other incentive-type payments. Such Cash Earnings shall be
calculated before deduction of (A) any income or employment tax withholdings or
(B) any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. However,
Cash Earnings shall NOT include any contributions (other than Code Section
401(k) or Code Section 125 contributions) made on the Participant's behalf by
the Corporation or any Corporate Affiliate to any employee benefit or welfare
plan now or hereafter established.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
D. COMMON STOCK shall mean the Corporation's common stock.
------------
E. CORPORATE AFFILIATE shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. CORPORATE TRANSACTION shall mean either of the following
---------------------
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation.
G. CORPORATION shall mean Restoration Hardware, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Restoration Hardware, Inc. which shall by appropriate
action adopt the Plan.
A-1.
<PAGE>
H. EFFECTIVE TIME shall mean the time at which the Underwriting
--------------
Agreement is executed and finally priced. Any Corporate Affiliate which becomes
a Participating Corporation after such Effective Time shall designate a
subsequent Effective Time with respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. ENTRY DATE shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 ACT shall mean the Securities Act of 1933, as amended.
--------
M. PARTICIPANT shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
A-2.
<PAGE>
N. PARTICIPATING CORPORATION shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. PLAN shall mean the Corporation's 1998 Employee Stock Purchase
----
Plan, as set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be February 26, 1999.
R. PURCHASE INTERVAL shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in March
----------------------
and September each year on which an Eligible Employee may first enter an
offering period.
T. STOCK EXCHANGE shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
EXHIBIT 10.4
RESTORATION HARDWARE, INC.
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into this ____ day of __________, 199_, between Restoration Hardware, Inc., a
Delaware corporation (the "Company"), and _____________________ ("Indemnitee").
WHEREAS, Indemnitee, a member of the Board of Directors or an officer,
employee or agent of the Company, performs a valuable service in such capacity
for the Company;
WHEREAS, the stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
employees and agents of the Company to the maximum extent authorized by Section
145 of the Delaware General Corporation Law, as amended (the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature,
permit contracts between the Company and the members of its Board of Directors,
officers, employees or agents with respect to indemnification of such directors,
officers, employees or agents;
WHEREAS, in accordance with the authorization as provided by the Code,
the Company either has purchased and presently maintains or intends to purchase
and maintain a policy or policies of Directors and Officers Liability Insurance
("D & O Insurance") covering certain liabilities which may be incurred by its
directors and officers in the performance of their duties as directors and
officers of the Company;
WHEREAS, as a result of developments affecting the terms, scope and
availability of D & 0 Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors or officers,
employees or agents by such D & O Insurance and by statutory and bylaw
indemnification provisions; and
WHEREAS, in order to induce Indemnitee to continue to serve as a
member of the Board of Directors, officer, employee or agent of the Company, the
Company has determined and agreed to enter into this contract with Indemnitee
<PAGE>
NOW, THEREFORE, in consideration of Indemnitee's continued service as
a director, officer, employee or agent after the date hereof, and for other good
and valid consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Indemnification of Indemnitee. The Company hereby agrees to hold
harmless and indemnify Indemnitee to the fullest extent authorized or permitted
by the provisions of the Code, as may be amended from time to time.
2. Additional Indemnity. Subject only to the exclusions set forth in
Sections 3 and 6(c) hereof, the Company hereby further agrees to hold harmless
and indemnify Indemnitee:
(a) against any and all expenses (including attorneys' fees), witness
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by Indemnitee in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Company) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Indemnitee is, was or at any time becomes a
director, officer, employee or agent of the Company or any subsidiary of the
Company, or is or was serving or at any time serves at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and
(b) otherwise to the fullest extent as may be provided to Indemnitee
by the Company under the non-exclusivity provisions of Article VII, Section 6 of
the Bylaws of the Company and the Code.
3. Limitations on Additional Indemnity.
(a) No indemnity pursuant to Section 2 hereof shall be paid by the
Company:
i) in respect to remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
ii) on account of any suit in which judgment is rendered against
Indemnitee for an accounting of profits made from the purchase or sale by
Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
2
<PAGE>
iii) on account of Indemnitee's conduct which is finally adjudged
to have been knowingly fraudulent or deliberately dishonest or to constitute
willful misconduct;
iv) on account of Indemnitee's conduct which is the subject of an
action, suit or proceeding described in Section 6(c)(ii) hereof,
v) on account of any action, claim or proceeding (other than a
proceeding referred to in Section 7(b) hereof) initiated by the Indemnitee
unless such action, claim or proceeding was authorized in the specific case by
action of the Board of Directors;
vi) if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful (and, in this
respect, both the Company and Indemnitee have been advised that the Securities
and Exchange Commission believes that indemnification for liabilities arising
under the federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication); and
vii) except to the extent the aggregate of losses to be indemnified
thereunder exceeds the sum of (a) such losses for which the Indemnitee is
indemnified pursuant to Section 1 hereof and (b) any additional amount paid to
the Indemnitee pursuant to any D & 0 Insurance purchased and maintained by the
Company.
(b) No indemnity pursuant to Section 1 or 2 hereof shall be paid by
the Company if the action, suit or proceeding with respect to which a claim for
indemnity hereunder is made arose from or is based upon any of the following:
i) Any solicitation of proxies by Indemnitee, or by a group of
which he was or became a member consisting of two or more persons that had
agreed (whether formally or informally and whether or not in writing) to act
together for the purpose of soliciting proxies, in opposition to any
solicitation of proxies approved by the Board of Directors.
ii) Any activities by Indemnitee that constitute a breach of or
default under any agreement between Indemnitee and the Company.
4. Contribution. If the indemnification provided in Sections 1 and 2
hereof is unavailable by reason of a Court decision described in Section
3(a)(vi) hereof based on grounds other than any of those set forth in paragraphs
(i) through (v) of Section 3 (a) hereof, then in respect of any threatened,
pending or completed action, suit or proceeding in which the Company is jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), the Company shall contribute to the amount of expenses (including
3
<PAGE>
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and Indemnitee on the other hand from the transaction from which such
action, suit or proceeding arose, and (ii) the relative fault of the Company on
the one hand and of Indemnitee on the other in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the Company
on the one hand and of Indemnitee on the other shall be determined by reference
to, among other things, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent the circumstances resulting in
such expenses, judgments, fines or settlement amounts. The Company agrees that
it would not be just and equitable if contribution pursuant to this Section 4
were determined by pro rata allocation or any other method of allocation which
does not take account of the foregoing equitable considerations.
5. Notification and Defense of Claim. Not later than thirty (30) days
after receipt by Indemnitee of notice of the commencement of any action, suit or
proceeding, Indemnitee shall, if a claim in respect thereof is to be made
against the Company under this Agreement, notify the Company of the commencement
thereof, but Indemnitee's omission so to notify the Company will not relieve the
Company from any liability which it may have to Indemnitee otherwise than under
this Agreement. With respect to any such action, suit or proceeding as to which
Indemnitee notifies the Company of the commencement thereof:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, to the extent that it may
wish, the Company shall, jointly with any other indemnifying party similarly
notified, be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee After notice from the Company to Indemnitee of its
election to assume the defense thereof, the Company will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof, other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its own counsel in such action, suit or
proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of the Company's assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Company; (ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and Indemnitee in
the conduct of the defense of such action; or (iii) the Company shall not in
fact have employed counsel to assume the defense of such action; in each of
which cases the fees and expenses of Indemnitee's separate counsel shall be paid
by the Company. The Company shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of the Company or as to which
Indemnitee shall have made the conclusion provided for in (ii) above.
4
<PAGE>
(c) The Company shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. The Company shall be permitted to settle any action
except that it shall not settle any action or claim in any manner which would
impose any penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the Company nor Indemnitee will unreasonably withhold its
consent to any proposed settlement.
6. Advancement and Repayment of Expenses.
(a) In the event that Indemnitee employs his or her own counsel
pursuant to Sections 5(b)(i) through (iii) above, the Company shall advance to
Indemnitee, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving from Indemnitee copies of invoices presented to Indemnitee
for such expenses.
(b) Indemnitee agrees that Indemnitee will reimburse the Company for
all reasonable expenses paid by the Company in investigating or defending any
civil or criminal action, suit or proceeding against Indemnitee in the event and
only to the extent it shall be ultimately determined by a final judicial
decision (from which there is no right of appeal) that Indemnitee is not
entitled, under the provisions of the Code, the Bylaws, this Agreement or
otherwise, to be indemnified by the Company for such expenses.
(c) Notwithstanding the foregoing, the Company shall not be required
to advance such expenses to Indemnitee in respect of any action arising from or
based upon any of the matters set forth in subsection (b) of Section 3 or if
Indemnitee (i) commences any action, suit or proceeding as a plaintiff unless
such advance is specifically approved by a majority of the Board of Directors or
(ii) is a party to an action, suit or proceeding brought by the Company and
approved by a majority of the Board which alleges willful misappropriation of
corporate assets by Indemnitee, disclosure of confidential information in
violation of Indemnitee's fiduciary or contractual obligations to the Company,
or any other willful and deliberate breach in bad faith of Indemnitee's duty to
the Company or its shareholders.
7. Enforcement.
(a) The Company expressly confirms and agrees that it has entered into
this Agreement and assumed the obligations imposed on the Company hereby in
order to induce Indemnitee to continue as a director, officer, employee or other
agent of the Company, and acknowledges that Indemnitee is relying upon this
Agreement in continuing in such capacity.
5
<PAGE>
(b) In the event Indemnitee is required to bring any action to enforce
rights or to collect moneys due under this Agreement and is successful in such
action, the Company shall reimburse Indemnitee for all Indemnitee's reasonable
fees and expenses, including attorney's fees, in bringing and pursuing such
action.
8. Subrogation. In the event of payment under this agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
9. Continuation of Obligations. All agreements and obligations of the
Company contained herein shall commence upon the date that Indemnitee first
became a member of the Board of Directors or an officer, employee or agent of
the Company, as the case may be, and shall continue during the period Indemnitee
is a director, officer, employee or agent of the Company (or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) and shall continue thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal or investigative, by reason of the fact
that Indemnitee was a director, officer, employee or agent of the Company or
serving in any other capacity referred to herein.
10. Survival of Rights. The rights conferred on Indemnitee by this
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of the Company and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
11. Non-Exclusivity of Rights. The rights conferred on Indemnitee by
this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of the Company's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office; provided, however, that this
Agreement shall supersede and replace any prior indemnification agreements
entered into by and between the Company and Indemnitee and that any such prior
indemnification agreement shall be terminated upon the execution of this
Agreement.
12. Separability. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the Company
to indemnify the Indemnitee to the full extent provided by the Bylaws or the
Code.
6
<PAGE>
13. Governing Law. This Agreement shall be interpreted and enforced
in accordance with the laws of the State of Delaware.
14. Binding Effect. This Agreement shall be binding upon Indemnitee
and upon the Company, its successors and assigns, and shall inure to the benefit
of Indemnitee, his or her heirs, personal representatives and assigns and to the
benefit of the Company, its successors and assigns.
15. Amendment and Termination. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless it is in
writing and is signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
RESTORATION HARDWARE, INC.
a Delaware corporation
By: _________________________________
, Secretary
INDEMNITEE
______________________________________
Address: ___________________________
___________________________
___________________________
7
<PAGE>
Exhibit 10.5
RESTATED
INVESTORS RIGHTS AGREEMENT
THIS RESTATED INVESTORS RIGHTS AGREEMENT, dated as of May 16, 1997,
amends and restates that certain Restated Investors Rights Agreement dated as of
October 18, 1996 (this "Agreement") and is made by and among Restoration
---------
Hardware, Inc., a California corporation (the "Company"), Thomas Christopher and
-------
Stephen Gordon (collectively, the "Founders" and each a "Founder"), Mark
-------- -------
Masinter, Joseph Harberg, Michael Beck, J. Eric Lawrence and K. Scott Johnson,
the holders of warrants (the "Warrants") to purchase 18,815 shares of the
--------
Company's Common Stock (the "Warrantholders"), the holders of warrants (the
--------------
"Series D Warrants") to purchase 3,977 shares of Series D Preferred Stock (the
-----------------
"Series D Warrantholders"), CJ Burgess Co., Inc., Vanessa Burgess, Robert Camp
-----------------------
and Thomas Low (the "Common Holders") and those persons who may execute this
--------------
Agreement from time to time and whose names are thereupon listed on Schedule A
hereto (each an "Investor" and collectively, the "Investors"). For purposes of
-------- ---------
this Agreement, the terms Investor and Investors shall be deemed to include all
assignees and successors thereof.
Certain of the Investors (the "Series A Investors") purchased 376,345
------------------
shares of the Company's Series A Preferred Stock, no par value ("Series A
--------
Preferred Stock"), pursuant to the terms of that certain Stock Purchase
- ---------------
Agreement dated as of June 10, 1994 (the "Series A Purchase Agreement"), between
---------------------------
the Company, such Series A Investors and certain other persons named therein.
Certain of the Investors (the "Series B Investors") purchased 370,975
------------------
shares of the Company's Series B Preferred Stock, no par value (the "Series B
--------
Preferred Stock"), pursuant to the terms of that certain Series B Preferred
- ---------------
Stock Purchase Agreement dated as of January 19, 1996 (the "Series B Purchase
-----------------
Agreement") between the Company and such Series B Investors.
- ---------
Certain of the Investors (the "Series C Investors") purchased 243,094
------------------
shares of Series C Preferred Stock, no par value (the "Series C Preferred
------------------
Stock") pursuant to the Series C Purchase Agreement dated as of October 18, 1996
(the "Series C Agreement") between the Company and such Series C Investors.
------------------
Certain of the Investors (the "Series D Investors") are willing to
------------------
complete the purchase of up to 397,685 shares of Series D Senior Preferred
Stock, no par value (the "Series D Preferred Stock") pursuant to the Series D
------------------------
Senior Preferred Stock Purchase Agreement dated as of the date hereof (the
"Series D Purchase Agreement") if the Company, the Series A Investors, the
---------------------------
Series B Investors, the Series C Investors, the Warrantholders, the Common
Holders and the Founders execute this Agreement.
B-1.
<PAGE>
Each of the Founders owns that number of shares, or options to
purchase that number of shares, of the Company's Common Stock, no par value, set
forth opposite his name on Schedule 2.2 of the Disclosure Schedule to the Series
D Purchase Agreement.
As an inducement to the Series D Investors to complete such purchase,
the Founders, the Warrantholders, the Series A Investors, the Series B
Investors, the Series C Investors, the Common Holders and the Company desire to
enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements of the parties contained herein, the parties agree as
follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following
-------------------
terms shall have the meanings set forth below:
"Affiliate" of a Person, shall mean any Person which, directly or
---------
indirectly, controls, is controlled by, or is under common control with, such
Person. The term "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, whether
through the ownership of voting securities or by contract or otherwise.
"Common Stock" shall mean the Company's Common Stock, no par
------------
value.
"CVCA" shall mean Chase Venture Capital Associates, L.P.
----
"Desai Capital" shall mean Equity-Linked Investors-II, and
-------------
Private Equity Investors III, L.P.
"Equity Securities" shall mean any shares of, or securities
-----------------
convertible into or exercisable or exchangeable for any shares of, any class of
the Company's capital stock, including, without limitation, its Common Stock and
Preferred Stock.
"Event of Default" shall mean a default by the Company in the
----------------
payment of any promissory note issued to the holders of the Series D Preferred
Stock upon a redemption of such stock in accordance with the terms of the
Company's Restated Articles of Incorporation.
"Investor Directors" shall mean the directors designated by the
------------------
Series A Investors, the Series B Investors and the Series D Investors pursuant
to Sections 5.1(a)(i), 5.1(a)(ii) and 5.1(a)(iii) hereof.
"Percentage Share" shall mean the percentage that the number of
----------------
shares of Equity Securities (treating the Equity Securities as having been
converted into, exchanged
B-2.
<PAGE>
for or exercised for Common Stock) held by such Other Founder or Investor is of
the total number of shares of Equity Securities (treating the Equity Securities
as having been converted into, exchanged for or exercised for Common Stock) held
by all Other Founders and Investors.
"Person" shall mean an individual, a partnership, a joint
------
venture, a corporation, a trust, a joint-stock company, a union, a business
association, a firm, an unincorporated organization, a government or any
department or agency thereof, or other entity.
"Preferred Stock" shall mean the Company's Series A Preferred
---------------
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock.
"Public Offering" shall mean a firm commitment underwritten
---------------
public offering pursuant to an effective registration statement on Form S-1
under the Securities Act covering the offer and sale of the Company's Common
Stock for its own account where (a) with respect to the Series A Investors, the
Series B Investors and the Series C Investors, (i) the gross proceeds to the
Company are not less than $15,000,000 and (ii) the price per share to the public
of the Common Stock is at least $54.30 (adjusted to reflect any stock split,
dividend, combination, reclassification or similar event) and (b) with respect
to the Series D Investors, (i) the gross proceeds to the Company are not less
than $20,000,000 and (ii) the price per share to the public of the Common Stock
is at least $73.425 (adjusted to reflect any stock split, dividend, combination
or similar event).
"Securities Act" shall mean the Securities Act of 1933, as
--------------
amended.
"Series A Investor Directors" shall mean the directors designated
---------------------------
by the Series A Investors pursuant to Section 5.1(a)(i) hereof.
"Series B Investor Director" shall mean the director designated
--------------------------
by the Series B Investors pursuant to Section 5.1(a)(ii) hereof.
"Series D Investor Directors" shall mean the directors designated
---------------------------
by the Series D Investors pursuant to Section 5.1(a)(iii) hereof.
"Stockholders" shall mean any of the Investors, Founders, the
------------
Common Holders, and, in the event a Warrant or Series D Warrant is exercised,
the applicable Warrantholder or Series D Warrantholder and, in each case, their
respective successors and assigns.
"Subsidiary" shall have the meaning set forth in the Series D
----------
Purchase Agreement.
B-3.
<PAGE>
"Voting Stock" shall mean any class or classes of the capital
------------
stock of the Company, the holders of which are entitled to participate generally
in the election of directors of the Company, including, but not limited to, the
Common Stock, the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock.
"1934 Act" shall mean the Securities and Exchange Act of 1934, as
--------
amended.
2. EFFECTIVENESS OF THIS AGREEMENT; SUPERSEDES ALL PRIOR AGREEMENTS;
-----------------------------------------------------------------
AMENDMENT OF PRIOR AGREEMENTS. This Agreement shall be effective from and after
- -----------------------------
the date hereof and shall supersede any and all other agreements by and between
the Founders and among the Founders, the Investors and the Company relating to
the subject matter hereof. Without limiting the foregoing, this Agreement shall
also supersede (i) that certain Shareholders Agreement dated as of June 10, 1994
by and among the Company, the Series A Investors and certain other persons named
therein and (ii) Article VIII (Special Covenants) of the Series A Purchase
Agreement. By executing this Agreement, the parties hereto agree that all such
prior agreements are hereby terminated and shall be of no further force or
effect.
3. RIGHT OF FIRST REFUSAL GRANTED BY FOUNDERS.
------------------------------------------
3.1 Until the closing of the Public Offering, and subject
to Section 3.3 hereof, each time a Founder (the "Offering Stockholder") proposes
to offer for sale or otherwise transfer any Equity Securities of the Company
owned by such Founder (the "Offered Stock"), such Offering Stockholder shall
-------------
first make an offering of such Offered Stock to the Company in accordance with
the following provisions:
(a) The Offering Stockholder shall deliver a notice (the
"Offering Notice") to the Company and each of the Investors and the non-selling
---------------
Founders (the "Other Founders") stating (i) the Offering Stockholder's bona fide
--------------
intention to offer such Offered Stock, (ii) the number of shares of such Offered
Stock to be offered for sale and (iii) the price and terms, if any, upon which
the Offering Stockholder proposes to offer such Offered Stock.
(b) Within 30 days after the Offering Notice is given, the
Company may elect to purchase from the Offering Stockholder, at the price and on
the terms specified in the Offering Notice, any or all of the shares of Offered
Stock offered in the Offering Notice. Such right shall be exercised by written
notice delivered to the Offering Stockholder by the Company prior to the
expiration of the 30-day exercise period.
(c) The closing of the purchase of any shares of Offered
Stock by the Company shall take place at the principal offices of the Company
(or such other location as the parties may agree on) on the fifth business day
after the expiration of the 30-day period following the giving of the Offering
Notice. At such closing, the Company shall
B-4.
<PAGE>
make payment in the appropriate amount by means of a check or by a wire transfer
to the Offering Stockholder against delivery of stock certificates representing
the shares so purchased, duly endorsed in blank by the Person or Persons in
whose name such certificate is registered or accompanied by a duly executed
stock or security assignment separate from the certificate.
(d) In the event the Company does not elect to purchase all
of the shares of Offered Stock offered in the Offering Notice, the Company shall
give written notice to the Investors and the Other Founders (the "Reoffer
-------
Notice") of its decision not to exercise its rights or of the number of shares
- ------
of Offered Stock available for purchase (the "Reoffered Shares") on or before
----------------
the final day of such 30-day period and the right to purchase such Reoffered
Shares shall pass automatically to each of such Investors and Other Founders.
Each Investor and Other Founder shall initially be entitled to purchase its
Percentage Share. In the event that any Reoffered Shares remain after such
allocation and Investors and Other Founders remain who desire to purchase
additional Reoffered Shares in excess of their Percentage Share all of the
remaining Reoffered Shares which such Investors and Other Founders have elected
to purchase shall be allocated to them pro rata based on the number of shares of
Equity Securities held by them (treating the Equity Securities as having been
converted into, exchanged for or exercised for Common Stock), or as otherwise
agreed to among such remaining Investors and Other Founders. Each Investor and
Other Founder will have 20 days from receipt of such notice from the Company to
exercise its repurchase rights under this Section 3 by written notice to the
Offering Stockholder. The closing of any purchase and sale under this subsection
(d) shall be held on the 5th business day following the expiration of the 20-day
period in accordance with the provisions of subsection (c) above.
3.2 In the event that all of the shares being offered are
not purchased at the closings referred to in Section 3.1(c) or (d), the Offering
Stockholder shall for a period of 45 days thereafter have the right to sell or
otherwise dispose of the remaining number of shares of Offered Stock offered in
the Offering Notice upon terms and conditions (including the price per share) no
more favorable to the third party purchaser than those specified in the Offering
Notice; provided, however, that such sale or disposition shall be subject to,
-------- -------
and be made in full compliance with, the co-sale rights set forth in Section 4.
In the event that the Offering Stockholder does not sell or otherwise dispose of
such Offered Stock within the specified 45-day period, the right of first
refusal provided for in this Section 3 shall continue to be applicable to any
subsequent disposition of such shares.
3.3 Notwithstanding the terms and provisions of Section 3.1
hereof, the right of first offer provided for in this Section 3 shall not be
applicable to (i) any transfers of Offered Stock by a Founder to immediate
family members or to trusts or other fiduciaries for the benefit of the Founder
or immediate family members, provided that in each such case such transferees
agree in writing to be bound by the terms of this Agreement as if a Founder or
(ii) the sale by a Founder of Offered Stock in the Public Offering. For
purposes of this Section, "immediate family members" shall mean a Founder's
spouse, children and grandchildren.
B-5.
<PAGE>
4. CO-SALE PROVISIONS.
------------------
4.1 Until the closing of the Public Offering, in the event
that any Founder after the application of Section 3 hereof continues to propose
to sell or otherwise transfer Equity Securities aggregating in excess of twenty-
five percent of the Equity Securities then owned by such Founder to any Person
(individually a "Third Party" and collectively, "Third Parties") in any one
transaction or any series of transactions, directly or indirectly, such sale or
other disposition shall not be permitted unless such Founder shall offer (or
cause the Third Party to offer) the Other Founders and the Investors the right
to elect to include, at the sole option of the Other Founders and the Investors,
in the sale or other disposition to the Third Party such number of shares of
Equity Securities owned by the Other Founders and the Investors as shall be
determined in accordance with subsection (a) of this Section 4.1 (the "Tag-Along
---------
Shares"). At any time within 30 days after the giving of the Reoffer Notice
- ------
described in Section 3.1 hereof, each Other Founder and Investor may make an
election to include the Tag-Along Shares in such a sale or other disposition
(the "Inclusion Election") by giving written notice of its Inclusion Election to
------------------
such Founder and delivering to the Company a stock certificate or certificates
representing the Tag-Along Shares, together with a limited power-of-attorney
authorizing such Founder to sell or otherwise dispose of such Tag-Along Shares
pursuant to the terms of such Third Party's offer.
(a) Each Investor and Other Founder shall have the
right to sell, pursuant to the Third Party's offer, that percentage (the "Tag-
---
Along Percentage") of the number of shares of Offered Stock to be sold to the
- ----------------
Third Party equal to the ratio (expressed as a percentage) of (i) the shares of
Equity Securities (treating the Equity Securities as having been converted into,
exchanged for or exercised for Common Stock) held by the Investor or Other
Founder, as compared with (ii) the aggregate number of shares of Offered Stock
owned by the Founder and the Equity Securities held by all Investors and Other
Founders (treating the Equity Securities as having been converted into,
exchanged for or exercised for Common Stock). In the event that (i) the
Investors and Other Founders in the aggregate elect to sell fewer Tag-Along
Shares than they are entitled to sell in the aggregate and (ii) certain
Investors or Other Founders wish to sell an aggregate amount in excess of each
such Person's Tag-Along Percentage, then the excess available Tag-Along Shares
shall be allocated among such Investors and Other Founders pro rata based upon
the number of shares of Equity Securities (treating the Equity Securities as
having been converted into, exchanged for or exercised for Common Stock) owned
by such Investors and Other Founders, or as otherwise agreed among such
Investors and Other Founders.
(b) The purchase from the Investors and Other Founders
pursuant to this Section 4.1 shall be on the same terms and conditions,
including the price per share and the date of sale or other disposition, as are
received by the Founder and stated in the Offering Notice.
B-6.
<PAGE>
(c) At the consummation of the sale or other disposition of
shares of Equity Securities of the Founder, the Investors and any Other Founders
to the Third Party pursuant to the Third Party's offer, there shall be remitted
to the Investors and Other Founders the total sales price attributable to the
shares of Equity Securities which the Investors and Other Founders sold or
otherwise disposed of pursuant thereto, and there shall be furnished to such
Investors and Other Founders such other evidence of the completion and time of
completion of such sale or other disposition and the terms thereof as may be
reasonably requested by the Investors and Other Founders.
(d) If within 30 days after the Reoffer Notice is given, a
Investor or Other Founder has not accepted the offer to make an Inclusion
Election, such Investor and Other Founder will be deemed to have waived any and
all of its rights with respect to the sale or other disposition of shares of
Equity Securities described in the Offering Notice. The Founder shall have 45
days after such 30-day period in which to sell or otherwise dispose of the
shares of Founders' Stock to the Third Party at a price and on terms not more
favorable to the Founder than were set forth in the Offering Notice.
(e) If, at the end of such 45-day period, the Founder has
not completed the sale of shares of Founders' Stock in accordance with the terms
of the Third Party's offer, all the restrictions on sale contained in this
Agreement with respect to Founders' Stock owned by the Founder shall again be in
effect.
4.2 The rights provided in this Section 4 shall not be
applicable to any transaction if Section 3.3 makes Section 3 inapplicable
thereto.
4.3 The provisions of Section 3 shall take priority over this
Section 4, and nothing in this Section 4 shall be construed to relieve a Founder
of its obligation to deliver an Offering Notice to the Company and each of the
Investors and Other Founders pursuant to the terms of Section 3 in connection
with such a proposed transaction.
5. GOVERNANCE.
----------
5.1 Composition of Board. The Stockholders each hereby agree to
--------------------
take any and all action necessary (including, without limitation, voting their
shares of Voting Stock, executing and delivering written consents of
shareholders, and calling special shareholders' meetings) to cause the Board of
Directors of the Company (the "Board") to be comprised as follows:
-----
(a) The number of Directors on the Board shall be not more
than eight, and such Directors shall consist of:
(i) two representatives designated in writing by
holders of a majority of the Series A Preferred Stock voting as a separate class
and on an as-converted basis; provided that so long as the Cardinal Group Voting
Agreement dated as of June 10,
B-7.
<PAGE>
1994, as amended (the "Cardinal Voting Agreement"), is in effect, Marshall Payne
-------------------------
shall be entitled to designate such individuals, or in the event of Mr. Payne's
death, disability, resignation or replacement pursuant to the terms of the
Cardinal Voting Agreement, then Edward W. Rose III shall be entitled to so
designate; which designees shall initially be Marshall Payne and Raymond Hemmig;
and provided further that if at any time (A) subject to subsections 5.1(a)(i)(B)
and 5.1(a)(ii) below, the number of shares of Common Stock into which the Series
A Preferred Stock is then convertible represents less than 20% but more than 5%
of the outstanding shares of the Company's Common Stock (assuming conversion of
all outstanding shares of Preferred Stock into Common Stock), then the holders
of the Series A Preferred Stock, voting as a separate class (and on an as-
converted basis), shall be entitled to select only one director but the holders
of the Series A Preferred Stock and Series B Preferred Stock, voting together as
a class and not as separate series (and on an as-converted basis), shall be
entitled to elect one director, and (B) the number of shares of Common Stock
into which the Series A Preferred Stock is then convertible represents less than
5% of the outstanding shares of the Company's Common Stock (assuming conversion
of all outstanding shares of Preferred Stock into Common Stock), then the
holders of the Series A Preferred Stock, voting as a separate class, shall not
be entitled to select any directors pursuant to any provisions of this
subsection 5.1(a)(i).
(ii) one representative designated in writing by
holders of a majority of the Series B Preferred Stock voting as a separate class
and on an as-converted basis; provided that so long as Weston Presidio Capital
II, L.P. (together with its Affiliates) holds at least 60,000 shares of Common
Stock issuable upon conversion of the Series B Preferred Stock (adjusted to
reflect any stock splits, dividends, recapitalizations or the like occurring
after the date hereof) it shall be entitled to designate such representative,
which designee shall initially be Michael Lazarus; and provided further that if
at any time the number of shares of Common Stock into which the Series B
Preferred Stock is then convertible represents less than 5% of the outstanding
shares of the Company's Common Stock (assuming conversion of all outstanding
shares of Preferred Stock into Common Stock), then the holders of the Series B
Preferred Stock, voting as a separate class, shall not be entitled to select any
directors pursuant to the provisions of this subsection 5.1(a)(ii) or pursuant
to subsection 5.1(a)(i).
(iii) two representatives designated in writing by
holders of a majority of the Series D Preferred Stock voting as a separate class
and on an as-converted basis; provided that so long as CVCA (together with its
Affiliates) holds at least 67,000 shares of Common Stock issuable upon
conversion of the Series D Preferred Stock (adjusted to reflect any stock
splits, dividends, recapitalizations or the like occurring after the date
hereof) it shall be entitled to designate one such representative, which
designee shall initially be David L. Ferguson and provided that so long as Desai
Capital (together with its Affiliates) holds at least 63,000 shares of Common
Stock issuable upon conversion of the Series D Preferred Stock (adjusted to
reflect any stock splits, dividends, recapitalizations or the like occurring
after the date hereof) it shall be entitled to designate one such
representative, which designee shall initially be Damon H. Ball; provided,
--------
however, that for
- -------
B-8.
<PAGE>
so long as it owns any shares of capital stock of the Company, such designation
shall be made on behalf of Desai Capital by Private Equity Investors III, L.P.
("PEI III") unless and until written notice to the contrary is provided to the
Board of Directors by each of Equity-Linked Investors-II and PEI III, pursuant
to Section 15 hereof; and provided, further that in the event that (i) at any
-------- -------
time PEI III is not entitled to designate at least one member for election to
the board of directors of the Company, or (ii) the United States Department of
Labor through formal or informal rules, regulations or interpretations provide,
or it is otherwise established through governmental or court action that such
representation does not constitute the exercise of management rights of the kind
necessary to enable PEI III to continue to qualify as a "venture capital
operating company" within the meaning of Section 2510.3-101 of the plan asset
regulations promulgated by the United States Department of Labor (a "VCOC"),
then the Company and PEI III shall in good faith negotiate provisions to enable
PEI III to exercise the minimum amount of such management rights in order to
continue to qualify as a VCOC.
(iv) the remaining individuals designated in writing
by the holders of at least a majority of the Common Stock then outstanding
(voting together as a class); provided, however, that one of such individuals
-------- -------
shall be the Chief Executive Officer of the Company.
(b) Any Director who is elected to the Board pursuant to a
designation under paragraph (a) of this Section 5.1, may be removed from the
Board only upon the request of the Person(s) who designated such Director by
vote of at least the number of shares required to elect such Director. In the
event that a Director so elected resigns, is removed from, or otherwise ceases
to serve on, the Board, for whatever reason, the vacancy shall be filled, in
accordance with applicable law, with an individual designated in accordance with
paragraph (a) and the Founders and the Investors hereby agree to call a special
shareholders meeting and to vote their shares of Voting Stock at such meeting,
or to execute a written consent of shareholders, upon the request of such
Person(s).
(c) Until the closing of the Public Offering, the Audit
Committee of the Board and the Compensation Committee of the Board shall be
comprised of a majority of Investor Directors. Until the closing of the Public
Offering, the Board shall not make a broad delegation of its authority to any
committee but may establish committees for specific purposes (such as a pricing
committee with respect to a public offering).
(d) The Company agrees to reimburse the directors elected
pursuant to Sections 5.1(a)(i), (ii) and (iii) for reasonable travel and out-of-
pocket expenses incurred in connection with attending Board and Committee
meetings.
(e) Notwithstanding the provisions of this Section 5, in
the event that the Series D Preferred Stock has been redeemed pursuant to the
Company's Restated Articles of Incorporation but the holders thereof have not
received the full redemption price therefor (including all principal, interest
and other amounts due in respect
B-9.
<PAGE>
of any related promissory notes), the Stockholders hereby agree to vote their
shares to elect the two Series D Investor Directors as directors of the Company
until such time as such redemption price is paid in full, all as described in
the Company's Restated Articles of Incorporation. In addition, notwithstanding
the provisions of this Section 5, from and after the occurrence of an Event of
Default, the Series D Investor Directors, the Series B Investor Director and one
of the Series A Investor Directors, on behalf of the Investors, shall thereafter
be entitled to designate additional individuals to the Board of Directors so
that the Board of Directors would then consist of a majority of persons selected
by the Investors. In the event that the Investors are entitled to designate
members of the Board pursuant to this Section, such Investors may, and at their
request the Founders shall immediately cause the Company to, call a special
shareholders' meeting to be held as soon as possible, but in any event not later
than 15 days after the date of such Investors' request. At such special share
holders' meeting, the Investors shall be entitled, as described above, to
designate such additional individuals to be elected to the Board of Directors,
and the Founders and the Investors hereby agree that in such event they will
vote any and all shares of Voting Stock they are entitled to vote, and take any
other actions (including, without limitation, appointing proxies or executing
written consents or removing, if necessary, one or more individuals elected to
the Board of Directors pursuant to Section 5.1(a) to create vacancies on the
Board of Directors in order to limit the maximum number of directors to eight so
that the Board of Directors would consist of a majority of members designated by
the Investors), as may be necessary to elect as Directors the individuals
designated by the Investors, as described above. The right to elect a majority
of the Board of Directors set forth in this Section (e) shall terminate upon the
earlier of the closing of the Public Offering or the date on which all of the
shares of Preferred Stock have been redeemed by the Company in accordance with
the terms of the Restated Articles of Incorporation and all principal, interest
and other amounts due in respect of any related promissory notes have been paid
in full.
(f) This Section 5.1 shall terminate in its entirety and be
of no further force or effect upon the earlier to occur of: (i) the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with a Public Offering; (ii) the date upon which the Company
first becomes subject to the periodic reporting requirements of Sections 12(g)
or 15(d) of the 1934 Act in respect of its equity securities; or (iii) May 16,
2007 provided that if the Series D Preferred Stock or any notes issued in
connection with the redemption thereof are outstanding as of May 17, 2005, the
May 16, 2007 date shall be extended to May 16, 2012.
5.2 Board and Committee Meetings. The Company shall call, and
----------------------------
use its best efforts to have, regular Board meetings at least once every other
month unless otherwise agreed to in writing by each of the Investor Directors.
The Compensation and Audit Committees shall meet at least annually. Meetings of
the Board and any committee thereof shall not be held on less than five days
written notice to the Investor Directors. All notices of a Board meeting shall
include an agenda setting forth in reasonable detail any and all matters to be
officially acted upon at such meeting, but such agenda shall not limit any
matters that may be officially acted upon at any such meeting.
B-10.
<PAGE>
5.3 Subsidiaries. The Company shall cause the Board of Directors
------------
of any wholly- or majority-owned subsidiary of the Company to include the same
individuals as the Board.
5.4 Cardinal Voting Agreement. The parties to the Cardinal
-------------------------
Voting Agreement hereby authorize and instruct the Voting Person (as defined
therein) to vote the shares of Series A Preferred Stock that are subject to the
terms of the Cardinal Voting Agreement in the manner set forth herein to effect
the agreements set forth in this Section 5.
5.5 Regulatory Compliance Cooperation. In the event that there
---------------------------------
is a Regulatory Problem (as defined in Section 7.2 of the series D Purchase
Agreement) which, consistent with the Company's undertakings and obligations set
forth in such Series D Purchase Agreement, would require a vote of shareholders
of the Company at that time to approve a new non-voting class or series of
capital stock of the Company for which some or all of the Series D Preferred
Stock then owned by CVCA or any of its Affiliates could be exchanged (such
security, it is anticipated, would be non-voting but would otherwise have all
the same rights, privileges and preferences as the Series D Preferred Stock), or
other shareholder action, the parties to this Agreement agree to vote all Voting
Stock and otherwise to use their respective best efforts as shareholders or
directors of the Company (i) to authorize such new class or series of capital
stock, (ii) to approve the exchange of CVCA's Series D Preferred Stock for
shares of such new capital stock, to the extent the Company is required to
effectuate such exchange, and (iii) to approve any ancillary agreements or
amendments provided for under such Section 7.2.
6. REGISTRATION RIGHTS. The Company covenants and agrees as
-------------------
follows:
6.1 Definitions. For purposes of this Section 6:
-----------
(a) The term "register", "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document;
(b) The term "Registrable Securities" means a registration
related to the resale of (1) the Common Stock issuable or issued upon conversion
of the Series A Preferred Stock, (2) the Common Stock issuable or issued upon
conversion of the Series B Preferred Stock, (3) the Common Stock issuable upon
conversion of the Series C Preferred Stock, (4) the Common Stock issuable upon
conversion of the Series D Preferred Stock, (5) the Common Stock issuable or
issued upon exercise of the Warrants or Series D Warrants and (6) any Common
Stock of the Company issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
Series A
B-11.
<PAGE>
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Warrants, Series D Warrants or Common Stock;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 6.13 hereof. In addition, to the extent that any Founder or Common
Holder participates in a registration pursuant to its rights under Section 6.3,
such Founder or Common Holder shall be considered a "Holder" with respect to
Sections 6.5, 6.6, 6.8, 6.11 and 6.12 hereof and the Common Stock held by such
Founder or Common Holder shall be considered "Registrable Securities" for
purposes of such Sections (such shares are sometimes referred to herein as
"Other Shares"; and
- -------------
(e) The term "Form S-3" means such form under the
Securities Act as in effect on the date hereof or any registration form under
the Securities Act subsequently adopted by the Securities and Exchange
Commission ("SEC") which permits inclusion or incorporation of substantial
---
information by reference to other documents filed by the Company with the SEC.
6.2 Request for Registration.
------------------------
(a) If the Company shall receive 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 written request from (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 issued pursuant to the Series D Purchase
Agreement (or any Affiliate thereof), that the Company file a registration
statement under the Securities Act covering the registration of all or a portion
of the Registrable Securities then outstanding (provided that the anticipated
aggregate offering price to the public would exceed $10,000,000), then the
Company shall, within ten (10) days of the receipt thereof, give written notice
of such request to all Holders and shall, subject to the limitations of
subsections 6.2(b) and 6.2(c), use its best efforts to effect as soon as
practicable, and in any event shall use its best efforts to effect within 90
days of the receipt of such request, the registration under the Securities Act
of all Registrable Securities which the Holders request to be registered within
twenty (20) days of the mailing of such notice by the Company in accordance with
Section 15 hereof.
(b) If the Holders initiating the registration request
hereunder ("Initiating Holders") intend to distribute the Registrable Securities
------------------
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request
B-12.
<PAGE>
made pursuant to this Section 6 and the Company shall include such information
in the written notice referred to in subsection 6.2(a). In such event, the
right of any Holder to include his Registrable Securities in such registration
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority of the Initiating Holders and
such Holder to the extent provided herein). All Holders proposing to distribute
their securities through such underwriting shall (together with the Company as
provided in subsection 6.5(e)) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting.
Notwithstanding any other provision of this Section 6, if the underwriter
advises the Initiating Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Initiating
Holders shall so advise all Holders of Registrable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among all Holders thereof, including the Initiating Holders, in
proportion (as nearly as practicable) to the amount of Registrable Securities of
the Company owned by each Holder; provided, however, that the number of shares
of Registrable Securities to be included in such underwriting shall not be
reduced unless all other securities are first entirely excluded from the
underwriting.
(c) The Company is obligated to effect only three (3) such
registrations pursuant to this Section 6.2.
(d) The Company shall not be obligated to effect a
registration pursuant to this Section 6.2 (i) if the Company shall furnish to
the Holders a certificate signed by the President of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
detrimental to the Company and its shareholders for such registration to be
effected at such time, in which event the Company shall have the right to defer
the filing of the registration statement for a period of not more than 90 days
after receipt of the request of the Holder or Holders under this Section 6.2;
provided, however, that the Company shall not utilize this right more than once
in any twelve month period; and (ii) if at the time of any request to register
Registrable Securities pursuant to this Section 6.2 the Company is engaged in,
or has fixed plans to file a registration statement within sixty (60) days of
the time of the request for, a registered public offering, other than a
registration statement on Form S-8 or other comparable form, then the Company
may at its option direct that such request be delayed until the first to occur
of (x) six (6) months from the effective date of such registered offering and
(y) the decision of the Board of Directors to abandon such offering.
6.3 Company Registration. If (but without any obligation to do
--------------------
so) the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the Securities Act in connection with the public
offering of such securities solely for cash (other than a registration relating
solely to the sale of securities to participants in a Company stock plan or a
registration relating solely to an SEC Rule 145 transaction), the Company
B-13.
<PAGE>
shall, at such time, promptly give each Holder, each Founder and each Common
Holder written notice of such registration. Upon the written request of each
such person given within twenty (20) days after mailing of such notice by the
Company in accordance with Section 15, the Company shall, subject to the
provisions of Section 6.9, cause to be registered under the Securities Act all
of the securities that each such Holder, Founder and Common Holder has requested
to be registered.
6.4 Form S-3 Registration. In case the Company shall receive
---------------------
from (a) any Holder or 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 pursuant to the Series D Purchase Agreement (or any
Affiliate thereof), a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will (provided that the anticipated aggregate offering
price to the public would exceed $500,000):
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such registration and
all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within 15 days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 6.4: (i) if
Form S-3 is not available for such offering by the Holders; (ii) if the Company
shall furnish to the Holders a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors of the
Company, it would be detrimental to the Company and its shareholders for such
Form S-3 Registration to be effected at such time, in which event the Company
shall have the right to defer the filing of the Form S-3 registration statement
for a period of not more than 90 days after receipt of the request of the Holder
or Holders under this Section 6.4; provided, however, that the Company shall not
utilize this right more than once in any twelve month period; (iii) if the
Company has, within the twelve (12) month period preceding the date of such
request, already effected two such registrations on Form S-3 for the Holders
pursuant to this Section 6.4; (iv) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance or (v) within six months of the effective date of any other
registration statement relating to an underwritten public offering filed by the
Company, pursuant to which the Holders were given the opportunity to
participate.
B-14.
<PAGE>
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with the
first two registrations requested pursuant to this Section 6.4, including
(without limitation) all registration, filing, qualification, printer's and
accounting fees, the reasonable fees and disbursements of one counsel for the
selling Holder or Holders and counsel for the Company shall be borne by the
Company; provided, however, that the underwriters' discounts or commissions
associated with Registrable Securities shall not be borne by the Company, but
shall be borne by the applicable Holder or Holders of such Registrable
Securities. Registrations effected pursuant to this Section 6.4 shall not be
counted as demands for registration or registrations effected pursuant to
Sections 6.2 or 6.3, respectively.
6.5 Obligations of the Company. Whenever required under this
--------------------------
Section 6 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to 90 days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form and consistent in all material respects with this Section 6, with
the managing underwriter of such offering, and to the extent required by the
underwriter, participate in a road show arranged by the underwriters with
investors, provided that only two officers shall
B-15.
<PAGE>
be required to participate and such road show shall be conducted in such manner
and for such number of days as the underwriters deem necessary for the success
of the offering. Each Holder participating in such underwriting shall also
enter into and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing and, as
promptly as practicable, provide a supplement or post-effective amendment in
accordance with Subparagraph (b) to cure such misstatement or omission.
6.6 Furnish Information. It shall be a condition precedent to
-------------------
the obligations of the Company to take any action pursuant to this Section 6
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required under applicable law to effect the
registration of such Holder's Registrable Securities.
6.7 Expenses of Demand Registration. All expenses other than
-------------------------------
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 6.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, reasonable fees and disbursements of counsel for the
Company, and up to $25,000 of the reasonable fees and disbursements of one
counsel for the selling Holders shall be borne by the Company; provided,
however, that the Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant to Section 6.2 if the registration
request is subsequently withdrawn at the request of the Holders of a majority of
the Registrable Securities to be registered (in which case all participating
Holders shall bear such expenses as are actually incurred by the Company on an
out-of-pocket basis), unless the Holders of a majority of the Registrable
Securities agree to forfeit their right to one demand registration pursuant to
Section 6.2; provided, further however, that if at the time of such withdrawal,
-------- -------
the Holders have learned of a material adverse change in the condition,
business, or prospects of the Company from that known to the Holders at the time
of their request and have withdrawn the request with reasonable promptness
following disclosure by the Company or discovery by the Holders of such material
adverse change, then the Holders shall not be required to pay any of such
expenses and shall retain their rights pursuant to Section 6.2.
6.8 Expenses of Company Registration. The Company shall bear
--------------------------------
and pay all expenses incurred in connection with any registration, filing or
qualification of securities with respect to registrations pursuant to Section
6.3 for each Holder, including (without limitation) all registration, filing,
and qualification fees, printers and accounting fees
B-16.
<PAGE>
and fees and expenses of counsel to the Company relating or apportionable
thereto and up to $25,000 of the reasonable fees and disbursements of one
counsel for the selling Holders selected by them, but excluding underwriting
discounts and commissions relating to such registered securities.
6.9 Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 6.3 to include any securities in such
underwriting unless the selling stockholder accepts the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
the persons entitled to select the underwriters, and then only in such quantity
as the underwriters determine in their sole discretion will not jeopardize the
success of the offering by the Company. If the total amount of securities,
including Registrable Securities, requested to be included in such offering
exceeds the amount of securities sold other than by the Company that the
underwriters determine in their sole discretion is compatible with the success
of the offering, then the Company shall be required to include in the offering
only that number of such securities, including Registrable Securities, which the
underwriters determine in their sole discretion will not jeopardize the success
of the offering, but in no event shall the amount of the securities of selling
Holders included in the offering be reduced below thirty percent (30%) of the
total amount of securities included in such offering unless such offering is the
initial public offering of the Company's securities in which case the selling
Holders may be excluded if the underwriters make the determination described
above and no other shareholder's securities are included. In any circumstance
in which all of the Registrable Securities requested to be included in a
registration on behalf of Holders or other selling stockholders cannot be so
included as a result of the above-described limitation, the number of shares of
Registrable Securities that may be included shall be allocated among the Holders
and other selling stockholders as follows: first all Other Shares shall be
excluded so that all other Registrable Securities requested to be included in
such registration shall be included first (the securities so included to be
apportioned pro rata among all Holders according to the total amount of
securities owned by such Holder or in such other proportions as shall mutually
be agreed to by such Holder or Holders); second, after all other Registrable
Securities have been included, the remaining portion of the allocation shall be
allocated among the holders of the Other Shares (pro rata among such holders).
For purposes of the preceding parentheticals concerning apportionment, for any
selling stockholder which is a Holder of Registrable Securities and which is a
partnership or corporation, the partners, retired partners and stockholders of
such Holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling stockholder", and any pro-rata reduction with
respect to such "selling stockholder" shall be based upon the aggregate amount
of shares owned by all entities and individuals included in such "selling
stockholder," as defined in this sentence.
6.10 Delay of Registration. No Holder, Founder or Common Holder
---------------------
shall have any right to obtain or seek an injunction restraining or otherwise
delaying any such registration as the result of any controversy that might arise
with respect to the
B-17.
<PAGE>
interpretation or implementation of this Section 6, it being understood that
this Section 6.10 shall not in any way limit the right of any such person to
bring an action for damages in respect of any breach hereof.
6.11 Indemnification. In the event any Registrable Securities
---------------
are included in a registration statement under this Section 6:
(a) To the fullest extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as defined in the Act)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (the "1934 Act"), against any losses, claims, damages, or liabilities
--------
(joint or several) to which they may become subject under the Act, or the 1934
Act or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
---------
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the Securities Act, the 1934 Act, any state securities law or any
rule or regulation promulgated under the Securities Act, or the 1934 Act or any
state securities law; and the Company will pay to each such Holder, underwriter
or controlling person, as incurred, any legal or other expenses reasonably
incurred by one law firm retained by them (or such additional law firms retained
by a Holder or Holders if such Holder or Holders reasonably believe there exists
a conflict of interest among them) in connection with investigating or defending
any such loss, claim, damage, liability, or action; provided, however, that the
-------- -------
indemnity agreement contained in this subsection 6.11(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the extent (and
only to the extent) that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
(b) To the fullest extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Securities Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Securities Act, or the 1934 Act
or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent
B-18.
<PAGE>
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Holder expressly for use
in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection 6.11(b), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subsection
- -------- -------
6.11(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; and provided,
--------
further that in no event shall any indemnity under this subsection 6.11(b)
- -------
exceed the net proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under
this Section 6.11 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 6.11, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
-------- -------
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall to the extent
thereof relieve such indemnifying party of any liability to the indemnified
party under this Section 6.11, but the omission so to deliver written notice to
the indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 6.11.
(d) Notwithstanding the foregoing, to the extent the
provisions on indemnification contained in the underwriting agreement entered
into in connection with the underwritten public offering are in conflict with
the foregoing provisions, the provisions in the underwriting agreement shall
control.
(e) The obligations of the Company and Holders under this
Section 6.11 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 6, and otherwise.
6.12 Reports Under Securities Exchange Act of 1934. With a view
---------------------------------------------
to making available to the Holders the benefits of Rule 144 promulgated under
the Securities Act and any other rule or regulation of the SEC that may at any
time permit a Holder to sell
B-19.
<PAGE>
securities of the Company to the public without registration or pursuant to a
registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after the
effective date of the first registration statement filed by the Company for the
offering of its securities to the general public;
(b) use its best efforts, including voluntarily registering
its Common Stock under Section 12 of the 1934 Act, to qualify for registration
on Form S-3 for the sale of their Registrable Securities, such action to be
taken no later than 120 days after the end of the fiscal year in which the first
registration statement filed by the Company for the offering of its securities
to the general public is declared effective and use its best efforts to maintain
its eligibility thereafter to qualify for use of that Form;
(c) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Securities Act and the 1934
Act (at any time after it has become subject to such reporting requirements), or
that it qualifies as a registrant whose securities may be resold pursuant to
Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and documents
so filed by the Company, and (iii) such other information as may be reasonably
requested in availing any Holder of any rule or regulation of the SEC which
permits the selling of any such securities without registration or pursuant to
such form.
6.13 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register securities pursuant to this Section 6 may be assigned (but
only with all related obligations) by a person who is at such time a Holder to a
purchaser, assignee or transferee of the underlying Registrable Securities (or
in the case of the Common Holders and Founders, the underlying securities);
provided that such purchaser, assignee or transferee agrees in writing to be
bound by and subject to the terms and conditions of this Agreement, including
without limitation the provisions of Section 6.18 below, and further provided
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Act.
6.14 Limitations on Subsequent Registration Rights. From and
---------------------------------------------
after the date of this Agreement, the Company shall not, without the prior
written consent of the Holders of at least 66% of the outstanding Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow
B-20.
<PAGE>
such holder or prospective holder (a) to include such securities in any
registration filed under Section 6.2 or 6.3 hereof, unless under the terms of
such agreement, such holder or prospective holder may include such securities in
any such registration only to the extent that the inclusion of his securities
will not reduce the amount of the Registrable Securities of the Holders which is
included or, (b) to make a demand registration which could result in such
registration statement being declared effective prior to the earlier of either
of the dates set forth in subsection 6.2(a) or within one hundred eighty (180)
days of the effective date of any registration effected pursuant to Section 6.2.
6.15 Amendment of Registration Rights. Any provision of this
--------------------------------
Section 6 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least 66% of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities, the Founders, the Common Holders, and the Company.
6.16 Selection of Underwriter. The selection of the underwriter
------------------------
for the Company's initial public offering shall require the approval of the
Board of Directors of the Company and the approval of the Series B Investor
Director, at least one of the Series A Investor Directors and at least one of
the Series D Investor Directors.
6.17 Termination of Registration Rights. No Holder, Common
----------------------------------
Holders or Founder shall be entitled to exercise any right provided for in this
Section 6 at such time as all Registrable Securities held by such Holder (or in
the case of a Common Holder or a Founder, the Common Stock held by such Common
Holder or Founder) can be sold within a given three-month period, without
compliance with the registration requirements of the Securities Act, pursuant to
Rule 144 thereunder (in the case of Holders of Series D Preferred Stock (or
Common Stock issued upon conversion thereof), without regard to Rule 144(k)).
In addition, these registration rights shall terminate, in any event, on the
date that is four (4) years after the date of the closing of the Public
Offering.
6.18 "Market Stand-Off" Agreement.
----------------------------
(a) Each Investor, Founder and Common Holder hereby agrees that
for seven days prior to and up to 180 days following the effective date of the
first registration statement of the Company covering Common Stock filed on Form
S-1 under the Securities Act, it shall not, to the extent reasonably requested
by the Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except Common Stock included in such registration;
provided, however, that all officers and directors of the Company and all other
persons with registration rights (whether or not pursuant to this Agreement)
enter into similar agreements;
B-21.
<PAGE>
and provided, further all Holders are treated similarly with respect to any
-------- -------
release prior to the termination of the 180-day period.
(b) Each Holder hereby agrees that for up to 90 days following
the effective date of any registration statement (other than the first) of the
Company covering Common Stock filed on Form S-1 or Form S-3 under the Securities
Act, it shall not, to the extent reasonably requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Company held by it at any time during such period
except Common Stock included in such registration, except that such agreement
shall not apply (i) to any Holder who owns less than five percent (5%) of the
then outstanding Common Stock, (ii) to any shares distributed by a Holder that
is a corporation or partnership to its shareholders or partners, respectively
and (iii) to any Holder that is not provided the opportunity to include shares
in the secondary offering on a pro rata basis with all Holders according to the
total amount of Registerable Securities then owned by such Holder.
(c) In order to enforce the foregoing covenants, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Investor, Founder and Common Holder (and the shares of securities of every
other person subject to the foregoing restriction) until the end of such period.
6.19 Additional Deliveries. In the case of any registration
---------------------
effected on Form S-3 pursuant to Section 6.4 hereof where securities are offered
on a continuous or delayed basis pursuant to Rule 415 (or any successor rule) of
the Securities Act, the Company will provide not more than three times during
the period in which such registration statement is effective to a financial
intermediary who reasonably advises the Company in writing, after a good faith
review, that it is entitled to establish a due diligence defense under the
Securities Act with respect to the sale of the securities covered by such
registration statement an opinion of counsel to the Company and a comfort letter
of its independent accountants in customary form; but the out-of-pocket costs of
such deliveries shall be borne by the Holder requesting the same if the Company
has already borne the expenses of two registrations on Form S-3.
7. DELIVERY OF FINANCIAL STATEMENTS. Until the closing of the
--------------------------------
Public Offering, the Company shall either deliver to each Investor or make
available to each Investor for review and inspection at the Company's offices:
(a) as soon as practicable, but in any event within ninety
(90) days after the end of each fiscal year of the Company, an income statement
for such fiscal year, a balance sheet of the Company and statement of
stockholder's equity as of the end of such year, and a schedule as to the
sources and applications of funds for such year, such year-end financial reports
to be in reasonable detail, prepared in accordance with
B-22.
<PAGE>
generally accepted accounting principles ("gaap"), and audited and certified by
----
independent public accountants approved by the Board of Directors of the
Company;
(b) as soon as practicable, but in any event within thirty
(30) days of the end of each month, an unaudited income statement (showing
actual, budget and prior month) and schedule as to the sources and application
of funds and balance sheet for and as of the end of such month, in reasonable
detail;
(c) as soon as practicable, but in any event within forty-
five (45) days of the end of each fiscal quarter, an unaudited income statement,
schedule as to the sources and applications of funds and balance sheet for and
as of the end of each such quarter, in reasonable detail;
(d) as soon as practicable, but in any event thirty (30)
days prior to the end of each fiscal year, a budget for the next fiscal year,
prepared on a monthly basis, including income statements, balance sheets and
sources and applications of funds statements for such months and, as soon as
practicable after the adoption thereof, any revisions to such annual budget;
(e) as soon as is practicable after delivery or occurrence,
but in no event later than 10 days following such delivery or occurrence, other
reports, including any notices or reports to stockholders or members of the
financial community, the Company's accountants or business consultants,
governmental agencies and authorities, any reports filed by the Company or its
officers, directors and representatives with any securities exchange or the SEC
and notice of any event which might have a material effect on the Company's
business prospects or financial condition or on the Investor's investments in
the Company.
8. INSPECTION RIGHTS. So long as an Investor (together with any
-----------------
partners or other affiliates thereof) holds any shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Common Stock (including any Common Stock issued upon conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or
Series D Preferred Stock), the Company shall permit such Investor, at such
Investor's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
upon reasonable notice by the Investor; provided, however, that the Company
shall not be obligated to provide access to any information which it reasonably
believes is a trade secret or similar confidential information.
9. RIGHT OF FIRST OFFER. Subject to the terms and conditions
--------------------
specified in this Section 9, the Company hereby grants to each Investor a right
of first offer with respect to future sales by the Company of its Equity
Securities. For purposes of this Section 9, Investor includes any partners and
other Affiliates of an Investor. An Investor
B-23.
<PAGE>
shall be entitled to apportion the right of first offer hereby granted it among
itself and its partners and Affiliates in such proportions as it deems
appropriate.
Each time the Company proposes to offer any Equity Securities, the
Company shall first make an offering of such Equity Securities to each Investor
in accordance with the following provisions:
(a) The Company shall deliver a written notice ("Notice")
------
to the Investors stating (i) its bona fide intention to offer such Equity
Securities, (ii) the number of such Equity Securities to be offered, and (iii)
the price and terms, upon which it proposes to offer such Equity Securities.
(b) Within 30 calendar days after receipt of the Notice, an
Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Equity Securities which
equals the proportion that the number of shares of Common Stock issued and held,
or issuable upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock then held, by such
Investor bears to the total number of shares of Common Stock issued and held, or
issuable upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock then held by all
Investors.
(c) The Company shall, during the 10-day period following
the expiration of the period provided in subsection 9(b) hereof, offer the
remaining unsubscribed portion of such Equity Securities which any Investor has
not elected to purchase under subsection 9(b) hereof to the other Investors.
During the 90-day period following the expiration of such 10-day period, the
Company may offer the remaining unsubscribed portion of such shares which the
Investors have not elected to purchase to any person or persons at a price not
less than, and upon the same terms and conditions as those specified in the
Notice. If the Company does not enter into an agreement for the sale of the
Equity Securities within such period, or if such agreement is not consummated
within 90 days following the expiration of the period provided in this Section
9(c), the right provided hereunder shall be deemed to be revived and such Equity
Securities shall not be offered unless first reoffered to the Investors in
accordance herewith.
(d) The right of first offer in this Section 9 shall not be
applicable (i) to the issuance or sale of shares of Common Stock reserved for
issuance to employees and directors pursuant to stock plans approved by the
Company's Board of Directors, (ii) to or after consummation of the Public
Offering, (iii) to any Common Stock issued upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock or upon exercise of outstanding warrants, including the Warrants
and the Series D Warrants or (iv) to the issuance of shares of Common Stock in
connection with the acquisition of a business by the Company in a transaction or
series of related transactions valued at less than $2 million or in a
transaction
B-24.
<PAGE>
approved by (i) the Series D Investor Directors and (ii) at least one of the
Series A Investor Directors and the Series B Investor.
(e) To the extent that CVCA or Desai Capital purchases
additional Equity Securities from the Company, the Company shall (i) if such
person purchases Equity Securities for consideration of $2,500,000 or more, make
any filing required under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR
Act") in connection with such a purchase and pay any associated filing fees and
reasonable costs of preparation thereof (including any filing fee and reasonable
preparation costs required to be paid by such person), or (ii) offer to sell to
such person non-voting Equity Securities on the same terms as the other
Investors. The Company shall not enter into any more favorable agreements
regarding reimbursement of HSR costs with any Stockholder or prospective
Stockholder without treating CVCA and Desai Capital similarly.
10. KEY-MAN INSURANCE. The Company shall use its best efforts to
-----------------
obtain within 30 days following the date of this Agreement and shall maintain,
with a carrier acceptable to the Investors, in full force and effect, key-man
life insurance policies in the amount of at least $1,000,000 each on the lives
of Stephen Gordon and Thomas Christopher, with proceeds payable to the Company.
11. POSITIVE COVENANTS. The Company agrees as follows:
------------------
(a) The Company will promptly pay and discharge, or cause
to be paid and discharged, when due and payable, all lawful taxes, assessments,
and governmental charges or levies imposed upon the income, profits, property,
or business of the Company or any Subsidiary; provided, however, that any such
tax, assessment, charge, or levy need not be paid if the validity thereof shall
currently be contested in good faith by appropriate proceedings and if the
Company shall have set aside on its books adequate reserves with respect
thereof, and provided further, that the Company will pay all such taxes,
assessments, charges, or levies forthwith upon the commencement of proceedings
to foreclose any lien that may have attached as security therefor. The Company
will promptly pay or cause to be paid when due, or in conformance with customary
trade terms, all other indebtedness incident to the operations of the Company
and any Subsidiary;
(b) The Company will keep its properties and those of its
Subsidiaries in good repair, working order, and condition, reasonable wear and
tear excepted, and from time to time make all necessary and proper repairs,
renewals, replace ments, additions, and improvements thereto; and the Company
and its Subsidiaries will at all times comply with the provisions of all
material leases to which any of them is a party or under which any of them
occupies property so as to prevent any material adverse effect to the business,
assets or property of the Company and its Subsidiaries;
(c) The Company will keep true records and books of account
in which full, true, and correct entries will be made of all dealings or
transactions in
B-25.
<PAGE>
relation to its business and affairs in accordance with generally accepted
accounting principles applied on a consistent basis;
(d) The Company and all its Subsidiaries shall duly observe
and conform to all valid requirements of governmental authorities which are
material to the conduct of their businesses or to their property or assets; and
(e) The Company shall maintain in full force and effect its
corporate existence, rights, and franchises and all material licenses and other
material rights to use processes, licenses, trademarks, trade names, or
copyrights owned or possessed by it or any subsidiary and deemed by the Company
to be necessary to the conduct of its business.
12. GOVERNING LAW. This Agreement shall be governed by and con-
-------------
strued under the laws of the State of California as applied to agreements made
and to be performed in the State of California without regard to the conflict of
laws principles thereof.
13. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14. TITLES AND SUBTITLES. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
15. NOTICES. Any notice, request, instruction or other document to
-------
be given hereunder by any party hereto to another party hereto shall be in
writing, shall be deemed to have been duly given or delivered when delivered
personally or telecopied (receipt confirmed, with a copy sent by certified or
registered mail as set forth herein) or sent by certified or registered mail,
postage prepaid, return receipt requested, or by Federal Express or other
overnight delivery service or by courier, to the address of the party set forth
below such person's signature on this Agreement or to such address as the party
to whom notice is to be given may provide in a written notice to each of the
other parties to this Agreement, a copy of which written notice shall be on file
with the Secretary of the Company.
16. LEGEND.
------
(a) Each certificate representing shares of Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock subject to this Agreement shall be endorsed with the
following legend:
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
TERMS AND CONDITIONS OF A CERTAIN RESTATED INVESTORS
B-26.
<PAGE>
RIGHTS AGREEMENT BY AND AMONG THE CORPORATION AND CERTAIN
HOLDERS OF STOCK OF THE CORPORATION. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF THE CORPORATION."
(b) Each party to this Agreement agrees that the Company
may instruct the transfer agent to impose transfer restrictions on the shares
represented by certificates bearing the legend referred to in Section 17(a)
above to enforce the provisions of this Agreement. The legend shall be removed
upon termination of this Agreement.
17. AMENDMENTS AND WAIVERS. Except as otherwise provided in Section
----------------------
6.15, any term of this Agreement may be amended and the observance of any term
of this Agreement may be waived (either generally or in a particular instance
and either retroactively or prospectively) only with the written consent of the
Company and the holders of at least (i) a majority of the Common Stock issued or
issuable upon conversion of the Series A Preferred Stock, (ii) 60% of the Common
Stock issued or issuable upon conversion of the Series B Preferred Stock, (iii)
60% of the Common Stock issued or issuable upon conversion of the Series C
Preferred Stock, (iv) a majority of the Common Stock issued or issuable upon
conversion of the Series D Preferred Stock, and (v) if such amendment or waiver
would adversely affect the rights of the Founders or Common Holders set forth
herein, at least a majority of the Common Stock held by the Founders or Common
Holders, respectively. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each holder of any Registrable Securities then
outstanding, each future holder of all such Registrable Securities, and the
Company.
18. SEVERABILITY. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms to the fullest extent permitted by law.
19. FURTHER ASSURANCES. Each of the parties shall, without further
------------------
consideration, use reasonable efforts to execute and deliver such additional
documents and take such other action, as the other parties, or any of them may
reasonably request to carry out the intent of this Agreement and the
transactions contemplated hereby.
20. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
----------------------
all rights hereto shall inure to the benefit of the respective successors and
assigns of the parties hereto, including, without limitation, transferees of any
shares of Series A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock, the Series D Preferred Stock or Common Stock issued upon
conversion thereof.
B-27.
<PAGE>
21. ENTIRE AGREEMENT. This Agreement, together with the Company's
----------------
Restated Articles of Incorporation and bylaws, embodies the entire agreement and
understanding of the parties hereto in respect of the actions and transactions
contemplated by this Agreement. There are no restrictions, promises,
inducements, representations, warranties, covenants or undertakings, other than
those expressly set forth or referred to herein, in the Restated Articles of
Incorporation or bylaws.
22. SPECIFIC PERFORMANCE. Each of the Stockholders acknowledges and
--------------------
agrees that in the event of any breach of this Agreement, the non-breaching
party or parties would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that the Stockholders will waive the
defense in any action for specific performance that a remedy at law would be
adequate and that the Stockholders, in addition to any other remedy to which
they may be entitled at law or in equity, shall be entitled to compel specific
performance of this Agreement in any action instituted in any state court of the
State of California or any United States District Court located in California
or, in the event said Courts would not have jurisdiction for such action, in any
court of the United States or any state thereof having jurisdiction for such
action.
B-28.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective duly authorized officers as of the date first
above written.
RESTORATION HARDWARE, INC.
/s/ Thomas Low
--------------------------------------------------
By: Thomas Low
Its: Vice President and Chief Financial Officer
Address: 15 Koch Road, Suite J
Corte Madera, CA 94925
FOUNDERS:
/s/ Stephen Gordon
--------------------------------------------------
Stephen Gordon
Address: 15 Koch Road, Suite J
Corte Madera, CA 94925
/s/ Thomas Christopher
--------------------------------------------------
Thomas Christopher (ALSO SIGNING IN THE CAPACITY
OF AN INVESTOR)
Address: 15 Koch Road, Suite J
Corte Madera, CA 94925
/s/ Thomas A. Christopher
--------------------------------------------------
Thomas A. Christopher as Trustee for the Thomas A.
Christopher 1997 Qualified Grantor Annuity Trust
dtd 5/1/97
/s/ Barbara A. Christopher
--------------------------------------------------
Barbara A. Christopher as Trustee for the Barbara
Christopher 1997 Qualified Grantor Retained
Annuity Trust dtd 5/1/97
28
<PAGE>
SPOUSAL CONSENT
I, the undersigned, being the spouse of Thomas Christopher, hereby
acknowledge that I have read and understand the foregoing Investors Rights
Agreement and I agree to be bound by the terms thereof.
/s/ Barbara A. Christopher
----------------------------------------
<PAGE>
COMMON HOLDERS:
C.J. BURGESS CO., INC. (ALSO SIGNING IN THE
CAPACITY OF AN INVESTOR)
By: /s/ Richard G. Benson Pres
----------------------------------
Address: 309 E. Main St
----------------------------------
Canajoharie N.Y. 13317
----------------------------------
/s/ Vanessa Burgess
-------------------------------------------
Vanessa Burgess (ALSO SIGNING IN THE CAPACITY OF
AN INVESTOR)
Address:___________________________________
___________________________________
/s/ Robert Camp
-------------------------------------------
Robert Camp (ALSO SIGNING IN THE CAPACITY OF AN
INVESTOR)
Address:___________________________________
___________________________________
WARRANTHOLDERS:
/s/ Mark Masinter
-------------------------------------------
Mark Masinter (ALSO SIGNING IN THE CAPACITY OF
AN INVESTOR)
Address: The Harberg Masinter Company
10,000 North Central Expressway
Suite 1060
Dallas, TX 75231
<PAGE>
/s/ Joseph Harberg
-------------------------------------------
Joseph Harberg (ALSO SIGNING IN THE CAPACITY OF
AN INVESTOR)
Address: The Harberg Masinter Company
10,000 North Central Expressway
Suite 1060
Dallas, TX 75231
/s/ Michael Beck
-------------------------------------------
Michael Beck (ALSO SIGNING IN THE CAPACITY OF AN
INVESTOR)
Address: The Harberg Masinter Company
10,000 North Central Expressway
Suite 1060
Dallas, TX 75231
/s/ J. Eric Lawrence
-------------------------------------------
J. Eric Lawrence (ALSO SIGNING IN THE CAPACITY OF
AN INVESTOR)
Address: The Harberg Masinter Company
10,000 North Central Expressway
Suite 1060
Dallas, TX 75231
/s/ K. Scott Johnson
-------------------------------------------
K. Scott Johnson
Address: The Harberg Masinter Company
10,000 North Central Expressway
Suite 1060
Dallas, TX 75231
<PAGE>
INVESTORS:
/s/ Kathleen Wright
----------------------------------
Kathleen Wright
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
/s/ Debbie Crady
----------------------------------
Debbie Crady
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
/s/ Byrd Teague
---------------------------------
Byrd Teague
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
/s/ Amy K. Langston
---------------------------------
Amy Langston
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
/s/ George Howard
---------------------------------
George Howard
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
<PAGE>
_________________________________
Ray Hemmig
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
/s/ Don Neustadt
---------------------------------
Don Neustadt
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
/s/ Roger Todd Rankin
---------------------------------
Roger Todd Rankin
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
/s/ Laura Fagan
---------------------------------
Laura Fagan
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
/s/ Marshall B. Payne
---------------------------------
Marshall B. Payne
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
<PAGE>
SCOUT VENTURES
By: /s/ Marshall B. Payne
----------------------------------------
Marshall B. Payne
Address: 500 Crescent Court, Suite 250
Dallas, TX 75201
/s/ E.W. Rose III
------------------------------------------------
E.W. Rose III
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
/s/ Eric Stroud
------------------------------------------------
Eric Stroud
Address: 500 Crescent Court
Suite 250
Dallas, TX 75201
see above signature
------------------------------------------------
Joe Harberg (ALSO SIGNING IN THE CAPACITY OF A
WARRANTHOLDER)
Address: 2911 Turtle Creek Blvd.
Suite 925
Dallas, TX 75219
see above signature
------------------------------------------------
J. Eric Lawrence (ALSO SIGNING IN THE CAPACITY OF
A WARRANTHOLDER)
Address: 2911 Turtle Creek Blvd.
Suite 925
Dallas, TX 75219
<PAGE>
see above signature
------------------------------------------------
Mark Masinter (ALSO SIGNING IN THE CAPACITY OF A
WARRANTHOLDER)
Address: 2911 Turtle Creek Blvd.
Suite 925
Dallas, TX 75219
BECK INVESTMENTS
By: /s/ Michael R. Beck
--------------------------------------
Michael R. Beck,
its General Partner
Address: 2911 Turtle Creek Blvd.
Suite 925
Dallas, TX 75219
WESTON PRESIDIO CAPITAL II, L.P.,
By: WESTON PRESIDIO CAPITAL
MANAGEMENT II, L.P.,
By: /s/ Michael P. Lazarus
------------------------------------------------
Michael P. Lazarus
General Partner
Address:
343 Sansome Street, Suite 1210
San Francisco, CA 94104-1316
Attn: Michael P. Lazarus
See above signature
----------------------------------------------------
Thomas Christopher (ALSO SIGNING IN THE CAPACITY OF A
FOUNDER)
Address: c/o Restoration Hardware
15 Koch Road, Suite J
Corte Madera, CA 94925
<PAGE>
See above signature
----------------------------------------------------
Robert Camp (ALSO SIGNING IN THE CAPACITY OF A
COMMONHOLDER)
Address:RR #1
Box 202
North Hero, Vermont 05474
RS & CO. IV, L.P.
By: RS & Co. Venture Partners IV, L.P.,
its General Partner
By: /s/ Kathy Behrens
---------------------------------------------
General Partner
Authorized Signatory
Address: 555 California Street
San Francisco, CA 94104
Attention: Molly Barger
BAYVIEW INVESTORS, LTD.
By: Robertson, Stephens & Company Private Equity
Group, L.L.C.,
its General Partner
By: /s/ Kathy Behrens
--------------------------------------------
Authorized Signatory
Address: 555 California Street
San Francisco, CA 94104
Attention: Molly Barger
/s/ Jeff Brotman
---------------------------------------------------
Jeff Brotman
Address: __________________________________________
__________________________________________
__________________________________________
<PAGE>
U.S. VENTURE PARTNERS IV, L.P.
By: Presidio Management Group IV, L.P.,
its General Partner
By: /s/ Dale J. Vogel
--------------------------------------------
Name: Dale J. Vogel
Title: General Partner
Address: U.S. Venture Partners
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Attn: Michael P. Maher
SECOND VENTURES II, L.P.
By: Presidio Management Group IV, L.P.,
its General Partner
By: /s/ Dale J. Vogel
---------------------------------------------
Name: Dale J. Vogel
Title: General Partner
Address: U.S. Venture Partners
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Attn: Michael P. Maher
USVP ENTREPRENEUR PARTNERS II, L.P.
A Delaware Limited Partnership
By: Presidio Management Group IV, L.P.,
its General Partner
By: /s/ Dale J. Vogel
---------------------------------------------
Name: Dale J. Vogel
Title: General Partner
Address: U.S. Venture Partners
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Attn: Michael P. Maher
<PAGE>
2180 ASSOCIATES FUND
By: /s/ Michael P. Maher
-------------------------------------------------
Michael P. Maher, Attorney in Fact
Address: U.S. Venture Partners
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Attn: Michael P. Maher
/s/ Jeff Westmont
----------------------------------------------------
Jeff Westmont
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
/s/ Marcia Aaron
----------------------------------------------------
Marcia Aaron
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
/s/ Mark Goodman
----------------------------------------------------
Mark Goodman
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
/s/ Peter B. Breck
----------------------------------------------------
Peter Breck
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
<PAGE>
PRIVATE EQUITY INVESTORS III, L.P.
By: Rohit M. Desai Associates III, its General Partner
By: /s/ Rohit M. Desai
-------------------------------------------------
Name: Rohit M. Desai
Title: General Partner
EQUITY-LINKED INVESTORS-II
By: Rohit M. Desai Associates II, its General Partner
By: /s/ Rohit M. Desai
-------------------------------------------------
Name: Rohit M. Desai
Title: General Partner
____________________________________________________
John Berg
Address: 600 Montgomery Street
San Francisco, CA 94111
____________________________________________________
Dave Smith
Address: __________________________________________
_____________________________________________
_____________________________________________
<PAGE>
PRIVATE EQUITY INVESTORS III, L.P.
By: Rohit M. Desai Associates III, its General Partner
By:
_________________________________________________
Name: Rohit M. Desai
Title: General Partner
EQUITY-LINKED INVESTORS-II
By: Rohit M. Desai Associates II, its General Partner
By:
_________________________________________________
Name: Rohit M. Desai
Title: General Partner
BAYVIEW INVESTORS, LTD.
By: Robertson, Stephens & Company Private
Equity Group, L.L.C. its General Partner
By: ________________________________________________
Name:
Title: Managing Director
/s/ John Berg
----------------------------------------------------
John Berg
Address: 600 Montgomery Street
San Francisco, CA 94111
/s/ Dave Smith
----------------------------------------------------
Dave Smith
B-39.
<PAGE>
/s/ Jay Eastman
----------------------------------------------------
Jay Eastman
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
/s/ Barb Herrington
----------------------------------------------------
Barb Herrington
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
/s/ Ed Fitzgerald
----------------------------------------------------
Ed Fitzgerald
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
/s/ Thomas Low
----------------------------------------------------
Thomas Low
Address: 15 Koch Road, Suite J
Corte Madera, CA 94925
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
a CALIFORNIA LIMITED PARTNERSHIP
By: Chase Capital Partners, its General Partner
____________________________________________________
By: David L. Ferguson, a General Partner
Address: 380 Madison Avenue, 12th Floor
New York, NY 10017
Attention: Chief Administrative Officer
<PAGE>
____________________________________________________
Jay Eastman
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
____________________________________________________
Barb Herrington
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
____________________________________________________
Ed Fitzgerald
Address: Alex. Brown & Sons Incorporated
101 California Street
San Francisco, CA 94111
____________________________________________________
Thomas Low
Address: 15 Koch Road, Suite J
Corte Madera, CA 94925
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By: Chase Capital Partners, its General Partner
/s/ David L. Ferguson
----------------------------------------------------
By: David L. Ferguson, a General Partner
Address: 380 Madison Avenue, 12th Floor
New York, NY 10017
Attention: Chief Administrative Officer
<PAGE>
/s/ Robert Grayson
----------------------------------------------------
Robert Grayson
SPITFIRE CAPITAL PARTNERS, L.P.
By: MS SPITFIRE LLC,
a Delaware limited liability company
Its: General Partner
By: ________________________________________________
Name: Derek Lemke-von Ammon
Title: Chairman
B-40.
<PAGE>
SPOUSAL CONSENT
I, the undersigned, being the spouse of Robert Grayson, hereby
acknowledge that I have read and understood the foregoing Investors Rights
Agreement and I agree to be bound by the terms thereof.
/s/ Penelope K. Grayson
----------------------------------------------------
<PAGE>
____________________________________________________
Robert Grayson
Address: ___________________________________________
______________________________________________
______________________________________________
SPITFIRE CAPITAL PARTNERS, L.P.
By: MS SPITFIRE LLC,
a Delaware limited liability company
Its: General Partner
By: /s/ Derek Lemke-von Ammon
----------------------------------------------------
Name: Derek Lemke-von Ammon
Title: Chairman
Address: ___________________________________________
______________________________________________
______________________________________________
NATIO VIE DEVELOPMENT II
By: /s/ D. Bellanger
-------------------------------------------------
D. Bellanger - Fund Manager
NATIO NOUVEAUX MARCHE EUROPE
By: /s/ D. Bellanger
-------------------------------------------------
D. Bellanger - Fund Manager
B-41.
<PAGE>
/s/ Franklin Harberg, M.D.
----------------------------------------------------
Franklin Harberg, M.D.
Address: ___________________________________________
______________________________________________
______________________________________________
/s/ Franklin Harberg, Jr.
----------------------------------------------------
Franklin Harberg, Jr.
Address:
/s/ Aaron Kreisler
----------------------------------------------------
Aaron Kreisler
Address: ___________________________________________
______________________________________________
______________________________________________
/s/ Franklin Harberg, Jr. Partner
----------------------------------------------------
HLH McAllen Ventures
Address: ___________________________________________
______________________________________________
______________________________________________
<PAGE>
SERIES D WARRANTHOLDER:
MONTGOMERY SECURITIES
By: /s/ Derek Lemke-von Ammon
-------------------------------------------------
Managing Director
<PAGE>
Exhibit 10.6
STOCK PURCHASE AGREEMENT
Dated as of March 20, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I Definitions............................................................................ 1
1.01 Defined Terms......................................................................... 1
1.02 Construction.......................................................................... 5
1.03 Other Definitional Provisions......................................................... 5
ARTICLE II Purchase of Shares; Consideration..................................................... 5
2.01 Closing............................................................................... 5
2.02 Purchase of Shares.................................................................... 5
2.03 Closing Payment....................................................................... 5
2.04 Post Closing Adjustment............................................................... 6
2.05 Cash Earnout.......................................................................... 7
2.06 Stock Earnout......................................................................... 8
2.07 Offset................................................................................ 10
ARTICLE III Representations and Warranties of the Seller......................................... 11
3.01 Corporate Organization................................................................ 11
3.02 Capitalization........................................................................ 11
3.03 Subsidiaries.......................................................................... 11
3.04 Financial Statements.................................................................. 11
3.05 No Violation.......................................................................... 12
3.06 Consents and Approvals................................................................ 12
3.07 Compliance with Legal Requirements.................................................... 12
3.08 Environmental Matters................................................................. 13
3.09 Absence of Certain Changes............................................................ 14
3.10 Availability of Assets and Title...................................................... 15
3.11 Permits............................................................................... 15
3.12 Litigation............................................................................ 15
3.13 Taxes................................................................................. 16
3.14 Employee Benefit Plans................................................................ 16
3.15 Contracts............................................................................. 19
3.16 Employees and Affiliated Agreements................................................... 20
3.17 Proprietary Rights.................................................................... 22
3.18 Insurance............................................................................. 22
3.19 Real Property......................................................................... 22
3.20 Personal Property..................................................................... 23
3.21 Personal Property Leases.............................................................. 23
3.22 Production Capacity................................................................... 23
3.23 Execution, Delivery and Enforceability of Agreement................................... 23
3.24 Ownership of Stock.................................................................... 23
3.25 Disclosure............................................................................ 23
</TABLE>
i.
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE IV Representations and Warranties of Restoration......................................... 24
4.01 Corporate Organization................................................................ 24
4.02 Authorization......................................................................... 24
4.03 No Violation.......................................................................... 24
4.04 Consents and Approvals................................................................ 24
ARTICLE V Conditions to Obligations of Restoration to Consummate the Transactions
Contemplated Hereby................................................................... 25
5.01 Representations and Warranties True................................................... 25
5.02 Performance........................................................................... 25
5.03 Authorization......................................................................... 25
5.04 No Change in Business................................................................. 25
5.05 Opinion of Counsel for the Seller..................................................... 25
5.06 No Restraint or Litigation............................................................ 25
5.07 Necessary Governmental Approvals...................................................... 26
5.08 Necessary Consents.................................................................... 26
5.09 Liens................................................................................. 26
5.10 Other Documents....................................................................... 26
5.11 Repayment of Affiliate Indebtedness and Termination of Affiliate Agreements........... 26
5.12 Key Man Insurance Policy.............................................................. 26
5.13 Other Closing Date Deliveries......................................................... 26
5.14 Transfer of Loans..................................................................... 27
5.15 Title Insurance and NonDisturbance Agreement.......................................... 27
5.16 Sanwa Bank Documents.................................................................. 27
5.17 Proceedings, Instruments, etc......................................................... 27
ARTICLE VI Conditions to Obligations of the Seller to Consummate the Transactions Contemplated
Hereby................................................................................ 27
6.01 Representations and Warranties True................................................... 28
6.02 Performance........................................................................... 28
6.03 Authorization......................................................................... 28
6.04 Necessary Governmental Approvals...................................................... 28
6.05 Certificates.......................................................................... 28
6.06 Proceedings, Instruments, etc......................................................... 28
ARTICLE VII Covenants Regarding Employees and Covenant Not to Interfere, Compete or
Solicit Business...................................................................... 28
7.01 Covenant Regarding Employees.......................................................... 28
7.02 Covenant Not to Compete............................................................... 29
7.03 Equitable Relief...................................................................... 29
</TABLE>
ii.
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VIII Indemnification..................................................................... 29
8.01 Indemnification by the Seller......................................................... 29
8.02 Notice of Claims...................................................................... 30
8.03 Third Party Claims.................................................................... 30
ARTICLE IX Miscellaneous Provisions.............................................................. 30
9.01 Brokers............................................................................... 30
9.02 Confidentiality....................................................................... 31
9.03 Payment of Expenses................................................................... 31
9.04 Waiver of Compliance.................................................................. 31
9.05 Notices............................................................................... 32
9.06 Certain Limitations................................................................... 32
9.07 Survival of Representations, Warranties, Indemnities and Other Agreements............. 32
9.08 Binding Nature; Assignment............................................................ 33
9.09 Governing Law; Construction........................................................... 33
9.10 Counterparts.......................................................................... 33
9.11 Entire Agreement; Amendments and Waivers.............................................. 33
9.12 Severability.......................................................................... 33
9.13 Headings.............................................................................. 33
9.14 Remedies.............................................................................. 33
9.15 Arbitration........................................................................... 34
9.16 Further Documents and Assurances...................................................... 36
</TABLE>
iii.
<PAGE>
Schedules
- ---------
Disclosure Schedule
Schedule 3.06 Consents and Approvals
Schedule 3.08 Environmental Matters
Schedule 3.10 Availability of Assets and Title
Schedule 3.11 Permits
Schedule 3.14 Employee Benefit Plans
Schedule 3.15 Contracts
Schedule 3.16 Employees and Affiliated Agreements
Schedule 3.17 Proprietary Rights
Schedule 3.18 Insurance
Schedule 3.19 Real Estate
Schedule 3.20 Personal Property
Schedule 3.21 Personal Property Leases
Exhibits
- --------
Exhibit A Investment Representation Letter
Exhibit B Opinion of Seller's Counsel
Exhibit C Form of Consent
Exhibit D Lease Agreement
Exhibit E Supply Agreement
Exhibit F Employment Agreement
iv.
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, is made and entered into as of this
20th day of March, 1998, by and among Restoration Hardware, Inc. ("Restoration")
and Michael Vermillion ("Seller").
WITNESSETH:
WHEREAS, Seller is the beneficial and record owner of 100% of the
outstanding capital stock (the "Shares") of The Michaels Concepts in Wood, Inc.,
a California corporation (the "Company");
WHEREAS, Restoration desires to acquire from Seller, and Seller
desires to transfer to Restoration, all of the Shares, on the terms and
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
1.01 DEFINED TERMS. As used in this Agreement, the following terms
shall have the following meanings:
"Affiliate" of a Person shall mean any other Person that, directly or
indirectly, Controls or is Controlled by that Person, or is under common Control
with that Person or any such other Person.
"Agreement" shall mean this Stock Purchase Agreement as the same may
be amended, supplemented or otherwise modified from time to time.
"Balance Sheet Date" shall mean December 31, 1997.
"Benefit Plans" shall have the meaning ascribed thereto in Section
3.14 hereof.
"Best Efforts" shall mean the taking by a party of such action as
would be in accordance with reasonable commercial practices as applied to the
particular matter in question to achieve the result as expeditiously as
practicable.
"Business Day" shall mean any day excluding Saturday, Sunday and any
day which shall be in San Francisco, California a legal holiday or a day on
which banking institutions are authorized by law to close.
1.
<PAGE>
"Closing" shall have the meaning ascribed thereto in Section 2.01.
"Closing Balance Sheet" shall have the meaning set forth in Section
2.04(a).
"Closing Date" shall have the meaning ascribed thereto in Section
2.01.
"COBRA" shall have the meaning set forth in Section 3.14(d).
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Contracts" shall have the meaning ascribed thereto in Section 3.15
hereof.
"Control" (including, with correlative meaning, the terms "controlled
by" or "under common control with"), as used with respect to any Person, means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person or the ownership of
voting securities of a Person representing more than 20% of the voting power of
such Person.
"Disclosure Schedule" shall mean the disclosure schedule delivered by
Seller to Restoration concurrently with the execution of this Agreement.
"EBITDA" shall mean, for any fiscal year, the Company's net income for
such fiscal year before interest, depreciation, amortization and provision for
all federal and state income taxes, all as determined in accordance with GAAP
and as reflected on the Company's audited financial statements for such fiscal
year as prepared by the Company's independent auditors. For purposes of
calculating EBITDA, the sales, cost of goods sold and operating expenses will be
those generated solely by the Company exclusive of Restoration's operations
(i.e., on a non-consolidated basis), except to the extent that Restoration has
incurred expenses on the Company's behalf (but in no event more than $50,000 in
any fiscal year without the consent of Seller) in which case such expenses will
be reflected in the Company's financial statements prepared in accordance with
GAAP. In the event that Seller advises Restoration in writing within 7 days
after Seller's receipt of such audited financial statements that Seller has any
exceptions to such audited financial statements which would result in a material
adjustment to EBITDA as calculated therein, the dispute mechanism set forth in
subsection 2.04(b) shall apply with respect to such disputed items.
"Environmental Laws" shall mean any federal, state or local laws,
ordinances, codes, regulations, rules, policies or orders that are intended to
assure the protection of the environment, or that classify, regulate, call for
the remediation of, require reporting with respect to, or list or define air,
water, groundwater, solid waste, hazardous or toxic substances, materials,
wastes, pollutants or contaminants, or which are intended to assure the safety
of employees, workers or other persons, including the public.
"Environmental Liabilities" shall mean any cost, debt, expense,
obligation, liability or other responsibility arising as a result of, from or
under any Environmental Law.
2.
<PAGE>
"ERISA" shall have the meaning ascribed thereto in Section 3.14
hereof.
"Expense" shall have the meaning ascribed to it in Section 8.01
hereof.
"Facilities" shall mean all buildings and improvements on the Property
of the Company.
"Financial Status" shall mean the condition (financial or otherwise),
business, assets, properties or operations of the Person in question.
"Financial Statements" shall have the meanings ascribed thereto in
Section 3.04 hereof.
"GAAP" shall mean generally accepted United States accounting
principles.
"Governmental Authority" shall mean any federal, state, local or other
governmental or administrative body, instrumentality, department or agency or
any court, tribunal, administrative hearing, arbitration panel, commission or
other similar dispute resolving panel or body.
"Hazardous Materials" shall mean any toxic or hazardous substance,
material or waste or any pollutant or contaminant, or infectious or radioactive
substance or material, including without limitation, those substances, materials
and wastes defined in or regulated under any Environmental Laws.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the Internal Revenue Service.
"Leased Property" shall have the meaning ascribed thereto in Section
3.19 hereof.
"Leases" shall have the meaning ascribed thereto in Section 3.21
hereof.
"Legal Requirements" shall mean all applicable international, foreign,
federal, state and local laws, judgments, decrees, orders, statutes, ordinances,
rules, regulations or permits.
"Lien" shall mean any mortgage, pledge, security interest,
encumbrance, lien, hypothecation, assignment for security or charge of any kind.
"Loss" shall have the meaning ascribed to it in Section 8.01 hereof.
3.
<PAGE>
"Net Worth" shall mean the Company's total assets calculated in
accordance with GAAP minus the Company's total liabilities calculated in
accordance with GAAP, as reflected on the Company's Closing Balance Sheet.
"Ordinary Course of Business" shall mean an action taken by a Person
if: (a) such action is consistent with the past practices of such Person and is
taken in the ordinary course of the normal ongoing operations of such Person;
and (b) such action is not required to be authorized by the board of directors
of such Person (or by any Person or group of Persons exercising similar
authority), is not required to be specifically authorized by the parent company
(if any) of such Person, and does not require any other special corporate
authorization (other than the customary delegation of authority to officers and
other employees).
"Permits" of a Person shall mean all rights, franchises, permits,
authorities, licenses, certificates of approval or authorizations, including,
without limitation, licenses and other authorizations issuable by a Governmental
Authority, which pursuant to applicable Legal Requirements are necessary to
permit such Person lawfully to conduct and operate its business as currently
conducted and to own and use its assets.
"Permitted Lien" shall mean with respect to any Lien on the assets and
properties of the Company any (i) Liens for Taxes not yet delinquent for which
adequate reserves, as are required by GAAP, have been established on the
Financial Statements and (ii) minor interests, none of which is substantial in
amount, materially detracts from the value of such assets or property or
materially impairs the use thereof in the operation of the business of the
Company.
"Person" shall mean an individual, partnership, corporation, joint
venture, trust, unincorporated organization or association or other legal
entity.
"Property" shall mean all real property leased or owned by the Company
either currently or in the past.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Subsidiary" of a Person, shall mean any corporation, limited
liability company, partnership or other entity of which securities or other
interests are owned, directly or indirectly, by such Person.
"Taxes" means (i) any net income, alternative or add-on minimum tax,
gross income, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, environmental or windfall profit tax, custom,
duty or other tax governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or any penalty, addition to tax or
additional amount imposed by any Governmental Authority responsible for the
imposition of any such tax (domestic or foreign), (ii) any liability for the
payment of any
4.
<PAGE>
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any express or implied obligation to indemnify any other
person.
"Tax Return" means any return, report, information return, or other
document (including any related or supporting information and, where applicable,
profit and loss accounts and balance sheets) with respect to Taxes (including
any returns related to Benefit Plans maintained by a Person).
1.02 CONSTRUCTION. This Agreement is the result of arm's-length
negotiations between, and has been reviewed by, each party hereto and its
counsel. Each party agrees that any ambiguity of this Agreement shall not be
interpreted against the party drafting the particular clause which is in
question.
1.03 OTHER DEFINITIONAL PROVISIONS. The meanings given to terms
herein shall be equally applicable to both the singular and plural forms of such
terms. Any references to Articles, Sections, Exhibits or Schedules contained
herein shall, unless otherwise so specified, refer to the Article, Section,
Exhibit or Schedule of the same number contained in this Agreement. A masculine
pronoun whenever used herein shall be construed to include the feminine or
neuter where appropriate.
ARTICLE II
PURCHASE OF SHARES; CONSIDERATION
2.01 CLOSING. A closing (the "Closing") will be held at the offices
of Brobeck, Phleger & Harrison LLP, in San Francisco, California on March 20,
1998 (unless the parties hereto otherwise agree in writing) at which the
documents referred to in Articles V and VI hereof will be exchanged by the
parties, and the consideration to which the parties are entitled pursuant to
this Article II hereof shall be paid. The date on which the Closing actually
takes place is referred to herein as the "Closing Date."
2.02 PURCHASE OF SHARES. Subject to the terms and conditions of this
Agreement, at the Closing, Seller will sell and transfer to Restoration, and
Restoration will purchase from Seller, the Shares.
2.03 CLOSING PAYMENT.
(a) Upon the terms and subject to the conditions of this
Agreement, in consideration for the transfer of the Shares, Restoration
shall deliver to Seller at the Closing cash in the amount of U.S.
$5,000,000. Of such $5,000,000 (i) $1,100,000 shall be withheld by
Restoration in a segregated account to be disbursed as set forth in
subsection 2.03(c) below and (ii) the sum of $848,469.86 plus any amounts
paid to Seller (other than Seller's ordinary salary) by the Company since
5.
<PAGE>
January 31, 1998, shall be paid to the Company in payment of Seller's
shareholder note payable due the Company.
(b) In addition, based on Seller's reasonable expectation that
the Net Worth is greater than $1,450,000, the Company shall deliver to
Seller immediately prior to the Closing cash in an amount equal to $350,000
less applicable witholdings and taxes of $5,075. Such amount shall be
netted from the $848,469.86 shareholder note payable due for a balance of
$503,544.86.
(c) The $1,100,000 withheld by Restoration pursuant to
subsection 2.03(a) shall be disbursed by Restoration as follows: (i) if
Seller shall have provided Restoration within 45 days of the Closing a
written release in form reasonably satisfactory to Restoration by the
United States Small Business Administration (the "SBA") releasing the
Company from any obligations owing by Seller to the SBA and UCC-3
termination statements in form suitable for filing terminating all security
interests held by the SBA in property of the Company, then Restoration
shall deliver the $1,100,000 to Seller promptly upon receipt of such
release and termination statements or (ii) if Seller has not provided
Restoration within 45 days of the Closing with the documents referenced in
subsection (i) above, then Restoration shall pay such $1,100,000 to the SBA
as soon as SBA will allow to relieve such outstanding indebtedness. If the
$1,100,000 is insufficient to pay all obligations owing to SBA, Seller
shall promptly remit any deficiency to Restoration. If the $1,100,000 is
greater than required to discharge all obligations to SBA then Restoration
shall promptly remit to Seller any excess.
2.04 POST CLOSING ADJUSTMENT.
(a) Promptly after the Closing Date, Seller shall cause to be
prepared and delivered to Restoration statements of operations, changes in
shareholder's equity and cash flow and a balance sheet of the Company as of
and for the fiscal year ended January 31, 1998 (the "Year-End Financial
Statements") and a balance sheet of the Company as of March 20, 1998 (the
"Closing Balance Sheet"), in each case in accordance with GAAP applied on a
basis consistent with the Financial Statements for the Company referred to
in Section 3.04. The Year-End Financial Statements shall be audited and
the Closing Balance Sheet shall be reviewed by Deloitte & Touche LLP
("Deloitte"), independent accountants for Restoration, to confirm that such
Year-End Financial Statements and the Closing Balance Sheet have been
prepared in accordance with GAAP and fairly present the financial position
of the Company as of such dates and its results of operations and cash
flows for such periods. Restoration shall deliver copies of the audited
Year-End Financial Statements and the reviewed Closing Balance Sheet to
Seller and Seller's independent accountants, Bartig Basler & Ray
("Bartig"), not later than 45 days after the Closing Date. Seller shall
cooperate and cause its accountants to cooperate with Restoration and its
auditors in connection with such audit and review.
6.
<PAGE>
(b) Within 7 days after its receipt of the audited Year-End
Financial Statements and the Closing Balance Sheet, Seller shall advise
Restoration whether Seller has any exceptions to such audited Year-End
Financial Statements, the Closing Balance Sheet or the conduct of the
audit. Unless Seller shall deliver to Restoration within such 7-day period
a letter of Seller specifying in reasonable detail any such exceptions, the
Net Worth shall be conclusive and binding on Seller and Restoration and
shall provide the basis for the adjustment specified in subsection (c)
below. If within such 7-day period Seller shall deliver to Restoration a
letter of Seller setting forth any such exceptions which, in the aggregate,
would result in a material adjustment in the Closing Balance Sheet, Seller
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and Restoration shall promptly endeavor to resolve the matters set forth in
such letter; and if Seller and Restoration shall fail to reach an agreement
with respect to such matters on or before the 14th day after receipt by
Restoration of such Seller letter, then Seller and Restoration shall engage
a third firm of independent public accountants of recognized national
standing who shall promptly make an independent determination of such
matters as to which disagreement remains and shall deliver its written
opinion thereon to Seller and Restoration. The opinion of such third firm
shall be conclusive and binding on Seller and Restoration and shall provide
the basis for the adjustment specified in subsection (c) below with respect
to any remaining disagreement between Seller and Restoration.
(c) If the Net Worth shall be less than $1,450,000, Seller shall
pay, within 5 days after the date on which the Closing Balance Sheet shall
become conclusive and binding in accordance with subsection (b) above, to
Restoration an amount equal to the difference between $1,450,000 and such
Net Worth. If the Net Worth shall be greater than $1,450,000, there shall
be no further action or payment by either party.
(d) One half of the fees and disbursements of Deloitte incurred
in connection with the audit described in Section 2.04(a) shall be paid by
Restoration. The remaining half of the Deloitte fees and disbursements to
a maximum amount of $30,000 shall be paid by Seller. The fees incurred by
Bartig as they relate to helping the Company maintain and close its books
at February 1, 1997, December 31, 1997, January 31, 1998 and as of the
Closing Date shall be borne by the Company up to maximum of $30,000. All
additional costs in excess of the aforementioned $30,000 related to
maintaining and closing the Company's books at February 1, 1997, December
31, 1997, January 31, 1997 and as of the Closing Date and all costs
relating to Bartig's review of the audited Year-End Financial Statements
and the Closing Balance Sheet shall be borne by Seller. The fees and
disbursements of such third firm, if any, shall be equally shared by Seller
and Restoration.
2.05 CASH EARNOUT. Restoration shall pay to Seller, subject to the
provisions of this Section 2.05 and Section 2.07, additional cash amounts equal
to 35% of the Company's EBITDA for the period beginning with the Closing Date
and ending on January 30, 1999, 25% of the Company's EBITDA for the fiscal year
ending January 29, 2000 and 25% of the Company's EBITDA for the fiscal year
ending January 27, 2001 (each,
7.
<PAGE>
an "Earnout Payment"). Each Earnout Payment will be payable to Seller within 60
days following the Company's fiscal year-end for the applicable Earnout Payment.
2.06 STOCK EARNOUT.
(a) Subject to the provisions of Section 2.07, Restoration shall
also cause the Company to issue to Seller, upon Seller's execution of the
Investor Representation Letter in the form attached hereto as Exhibit A for
---------
each such issuance, shares of the common stock of the Company (the "Common
Stock") in an amount equal to (i) 3.3% of the outstanding shares of the
Common Stock if EBITDA for the period commencing on the Closing Date and
ending on January 30, 1999 equals or exceeds $2.605 million, (ii) an
additional 3.3% of the outstanding shares of the Common Stock if EBITDA for
the fiscal year ending January 29, 2000 equals or exceeds $3.6 million and
(iii) an additional 3.4% of the outstanding shares of the Common Stock if
EBITDA for the fiscal year ending January 27, 2001 equals or exceeds $4.0
million. In no event shall Seller receive in excess of 10% of the
Company's total outstanding shares of Common Stock in the aggregate. Each
issuance shall occur within 60 days following the Company's fiscal year-end
for the applicable issuance. If the Company at any time issues additional
shares of Common Stock or effects a subdivision or combination of its
shares, the number of shares issued to Seller shall be adjusted so that
Seller maintains his percentage ownership in the total outstanding shares
of the Company's Common Stock.
(b) Seller shall not dispose of any shares of such Common Stock,
whether by sale, exchange, assignment, transfer, gift, devise, bequest,
mortgage, pledge, encumbrance or otherwise, or contract to do or permit any
of the foregoing, whether voluntarily or involuntarily, by bankruptcy,
operation of law or otherwise, except in accordance with the terms and
conditions of this Agreement, and Seller shall not take or omit to take any
action which will impair the absolute and unrestricted right, power,
authority and capacity of such Seller to sell such shares of Common Stock
to Restoration in accordance with the terms and conditions hereof. Any
purported transfer of such shares of Common Stock by Seller that violates
any provision of this Agreement shall be wholly void and ineffectual and
such shares of Common Stock shall continue to be subject to this Agreement.
(c) The shares of Common Stock may not be pledged, mortgaged or
otherwise encumbered and shall at all time be free of any Liens.
(d) (i) Subject to the provisions of Section 2.07, Seller will
have the right, commencing on April 15, 2003 and ending 60 days thereafter,
to require the Company to purchase all, but not less than all, of his
shares of the Common Stock, at a per share price equal to 5 times the
Company's EBITDA for the fiscal year ending January 25, 2003 divided by the
number of shares of Common Stock outstanding as of such fiscal year-end
(calculated on a fully diluted basis) (the "2003 Value") times 95%. If
Seller does not exercise his right by providing written notice to the
Company within such 60 day period, the Company shall have the right
8.
<PAGE>
commencing on the day after such 60 day period terminates to purchase all,
but not less than all, of Seller's shares at a price per share equal to
105% of the 2003 Value.
(ii) Subject to the provisions of Section 2.07, Seller will
have the right, commencing on April 15, 2004 and ending 60 days thereafter,
to require the Company to purchase all, but not less than all, of his
shares of the Common Stock, at a per share price equal to 5 times the
Company's EBITDA for the fiscal year ending January 31, 2004 divided by the
number of shares of Common Stock outstanding as of such fiscal year-end
(calculated on a fully diluted basis) (the "2004 Value") times 95%. If
Seller does not exercise his right by providing written notice to the
Company within such 60 day period, the Company shall have the right
commencing on the day after such 60 day period terminates to purchase all,
but not less than all, of Seller's shares at a price per share equal to
105% of the 2004 Value.
(iii) Subject to the provisions of Section 2.07, Seller will
have the right, commencing on April 15, 2005 and ending 60 days thereafter,
to require the Company to purchase all, but not less than all, of his
shares of the Common Stock, at a per share price equal to 5 times the
Company's EBITDA for the fiscal year ending January 29, 2005 divided by the
number of shares of Common Stock outstanding as of such fiscal year-end
(calculated on a fully diluted basis) (the "2005 Value") times 95%. If
Seller does not exercise his right by providing written notice to the
Company within such 60 day period, the Company shall have the right
commencing on the day after such 60 day period terminates to purchase all,
but not less than all, of Seller's shares at a price per share equal to
105% of the 2005 Value.
(e) Notwithstanding anything to the contrary herein, the Company
shall have the right, but not the obligation, to purchase any such shares
of the Common Stock held by Seller, at a per share price equal to the
quotient obtained by dividing the Company's EBITDA for the fiscal year
ending immediately prior to such occurrence by the number of shares of
Common Stock outstanding as of such fiscal year-end (calculated on a fully
diluted basis), upon the occurrence of any of the following events:
(i) Any levy upon such shares of Common Stock, the
commencement of federal or state bankruptcy, reorganization or
insolvency proceedings by or against the Seller, or the appointment in
any bankruptcy, reorganization or insolvency proceeding of a trustee,
receiver, conservator or other judicial representative of the Seller
unless such levy or proceeding has been withdrawn or dismissed within
20 days of its commencement; or
(ii) Any voluntary, involuntary or attempted sale,
assignment, conveyance, transfer, pledge, hypothecation, encumbrance
or other disposition of such shares of Common Stock in violation of
this Agreement.
9.
<PAGE>
2.07 OFFSET. Restoration may offset against any amounts due under
the cash and stock earnouts set forth in Sections 2.05 and 2.06 any liabilities
or amounts of any kind whatsoever incurred by Restoration or owed to Restoration
by Seller pursuant to the terms of this Agreement (including the provisions of
Article VIII hereof) or the lease agreement of even date herewith between Seller
and the Company (the "Lease Agreement"), attached hereto as Exhibit D, or as a
---------
result of a breach by the Company of the supply agreement of even date herewith
between the Company, Seller and Restoration (the "Supply Agreement"), attached
hereto as Exhibit E. Notwithstanding the foregoing, if Seller initiates
---------
arbitration pursuant to Section 9.15 hereof contesting the liability claimed in
connection with such offset, Restoration shall deposit any amounts otherwise due
to Seller against which Restoration seeks offset into a third party escrow until
a final judgment of the arbitrators shall have been rendered as to such matter
in accordance with Section 9.15.
10.
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
Except as expressly set forth in the Disclosure Schedule, the Seller
represents and warrants to Restoration as follows:
3.01 CORPORATE ORGANIZATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has full power and authority to carry on its business
as it is now being conducted and to own the properties and assets it now owns,
and is duly qualified or licensed to do business as a foreign corporation in
good standing in every jurisdiction in which its ownership of property or the
conduct of its business requires such qualification or licensing. No amendment
or other document relating to the Articles of Incorporation of the Company has
been filed in the Office of the Secretary of State of California since November
1, 1979 The copies of the Bylaws and corporate minutes of the Company delivered
to Restoration on or before the date hereof are true, correct and complete
copies of the Bylaws and corporate minutes of the Company.
3.02 CAPITALIZATION. The entire authorized capital stock of the
Company consists of 1,000 shares of Common Stock, no par value and no shares of
preferred stock (the "Preferred Stock"). As of the date hereof, 1,000 shares of
such Common Stock are issued and outstanding and are held of record and
beneficially by Seller and no shares of Preferred Stock are issued and
outstanding. All of the outstanding shares of Common Stock have been validly
issued, fully paid and are nonassessable, and none were issued in violation of
the preemptive or similar rights (whether statutory or contractual) of any
Person. None of such shares were issued, offered or sold by the Company in
violation of any applicable federal or state securities laws or the rules and
regulations thereunder. The Company has no outstanding options, warrants,
debentures or other securities convertible into or exchangeable or exercisable
for shares of capital stock of the Company, and there are no outstanding
contracts, commitments or arrangements by which the Company is or may become
bound to issue, repurchase, retire or otherwise acquire (contingent or
otherwise) any shares of capital stock of the Company or any security
convertible into or exchangeable for any of its capital stock. Neither the
Company nor the Seller is a party to any voting trust or other agreement,
contract or obligation (whether written or oral) with respect to the voting of
the capital stock of the Company and there are no such voting trusts or other
agreements, contracts or obligations (whether written or oral) with respect to
the voting of the capital stock of the Company.
3.03 SUBSIDIARIES. The Company has no Subsidiaries.
3.04 FINANCIAL STATEMENTS. Seller has furnished to Restoration
complete and accurate copies of (i) reviewed financial statements of the Company
as of and for the years ended December 31, 1995 and December 31, 1996, including
a reviewed balance sheet of the Company as of the end of such years and reviewed
statements of operations, changes in shareholders equity and statement of cash
flows of the Company for such years, together
11.
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with the opinions thereon of Bartig and (ii) unaudited financial statements of
the Company as of and for the year ended December 31, 1997 (the financial
statements referred to in this Section 3.04 being collectively referred to as
the "Financial Statements"). The Financial Statements have been prepared in
accordance with GAAP applied on a consistent basis during the respective
periods. The Financial Statements present fairly the financial position of
Seller as of such dates and the results of its operations and cash flows for
such periods. The Company's fiscal year shall be changed to a fiscal year ending
the last Saturday in January.
3.05 NO VIOLATION. The execution and delivery of this Agreement, the
Lease Agreement, the Supply Agreement and the employment agreement of even date
herewith between Seller and the Company (the "Employment Agreement") attached
hereto as Exhibit F (this Agreement, the Lease Agreement, the Supply Agreement
---------
and the Employment Agreement, collectively, are referred to herein as the
"Transaction Documents") and the consummation of the transactions contemplated
hereby and thereby by Seller and the Company will not (a) violate any provision
of the Company's Articles of Incorporation, Bylaws or other charter documents,
(b) violate, constitute a default under or permit the termination or
acceleration of the maturity of any indebtedness for borrowed money of Seller or
the Company except with respect to a $998,000 loan to SBA, (c) violate,
constitute a default under, permit the termination of, trigger a right of first
refusal under or cause the loss or impairment of any rights or options under or
any payments being made with respect to any agreement to which Seller is a party
or to any Permit, Lease or Contract, (d) result in the creation or imposition of
any Lien upon any of the assets or properties of Seller or the Company or (e)
violate any Legal Requirement to which Seller or the Company is subject.
3.06 CONSENTS AND APPROVALS. Except as set forth on Schedule 3.06 of
-------------
the Disclosure Schedule, the execution, delivery and performance of the
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby by the Seller do not require the consent, approval, license
or authorization of, notice to, or declaration, filing or registration with, any
third party or Governmental Authority.
3.07 COMPLIANCE WITH LEGAL REQUIREMENTS.
(a) The Company has conducted its business in material
compliance with all Legal Requirements. The assets and properties of the
Company and their uses conform in all material respects to all applicable
Legal Requirements currently required to be complied with in the business
and operations of the Company.
(b) Neither Seller nor the Company has received any citations,
complaints, consent orders, compliance schedules or other similar
enforcement orders which currently remain outstanding and unresolved or
received any other notice from any Governmental Authority or Person
regarding the violation of, or failure to comply with, any Legal
Requirements relating to the operations or any assets or properties of the
Company or Seller, or the obligation on the part of the Company or Seller
to undertake or bear the cost of any remedial action.
12.
<PAGE>
3.08 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 3.08 of
-------------
the Disclosure Schedule,
(a) no methylene chloride or asbestos is contained in or has
been used at or released from the Facilities;
(b) all Hazardous Materials and wastes have been disposed of in
accordance with all Environmental Laws;
(c) neither the Company nor Seller has received any notice of
any noncompliance of the Facilities or the Company's past or present
operations with Environmental Laws;
(d) no notices, administrative actions or suits are pending or
threatened relating to a violation of any Environmental Laws;
(e) the Company is not a potentially responsible party under the
federal Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA), or state analog statute, arising out of events occurring
prior to the Closing Date;
(f) there have not been in the past, and there are not now, any
Hazardous Materials on, under or migrating to or from the Facilities or
Property;
(g) there have not been in the past, and are not now, any
underground tanks or underground improvements at, on or under the Property
including without limitation, treatment or storage tanks, sumps, or water,
gas or oil wells;
(h) there are no polychlorinated biphenyls (PCBs) deposited,
stored, disposed of or located on the Property, the Facilities or any
equipment on the Property at levels in excess of 50 parts per million;
(i) there is no formaldehyde or asbestos on the Property or in
the Facilities, nor any insulating material containing urea formaldehyde or
asbestos in the Facilities;
(j) the Facilities and the Company's uses and activities therein
have at all times complied with all Environmental Laws; and
(k) the Company has all the Permits required to be issued under
all Legal Requirements regarding Environmental Laws and is in full
compliance with the terms and conditions of those Permits.
13.
<PAGE>
3.09 ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date, the
Company has conducted its business only in the Ordinary Course of Business, has
paid promptly its trade payables and other accrued expenses and has not:
(a) incurred any increase in indebtedness for borrowed money
over the level thereof reflected in the Financial Statements or granted any
security interest in any of its assets or other property to secure any
obligation for borrowed money;
(b) issued or sold any capital stock;
(c) received any notices of a default or breach of any Permit,
Contract or Lease;
(d) waived, compromised or permitted to lapse any claims or
rights of substantial value, or sold, transferred or otherwise disposed of
any assets or other properties, except in the Ordinary Course of Business;
(e) adopted or amended in any respect any Benefit Plan or bonus,
profit sharing, deferred compensation, incentive, stock option or stock
purchase, paid time off for sickness or other plan, program or arrangement
for the benefit of employees, consultants or directors, or granted any
general increase in the compensation of employees (including any such
increase pursuant to any bonus, profit sharing or other compensation or
incentive plan, program or commitment) or any increase in the compensation
payable or to become payable to any officer or director;
(f) made any capital expenditures in excess of $100,000 or made
or entered into any commitments in excess of $5,000 or entered into any
Contract in excess of $10,000;
(g) declared, paid or set aside for payment any dividend or
other distribution in respect of its capital stock, or directly or
indirectly redeemed, purchased or otherwise acquired any shares of its
capital stock;
(h) paid, loaned or advanced any amount to, or sold, transferred
or leased any properties or assets to, or entered into any other agreement
or arrangement with any of its executive officers, directors or other
Affiliates, except for payment of compensation to officers;
(i) suffered any damage, destruction, loss or claim to or
against any property or asset with an aggregate value in excess of $10,000,
whether or not covered by insurance;
(j) initiated or maintained any proceedings with respect to its
sale, merger, consolidation, liquidation or reorganization other than
pursuant to the terms of this Agreement;
14.
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(k) terminated, amended or modified any Permit, Contract or
Lease; or
(l) agreed, whether in writing or otherwise, to take any action
described in this Section 3.09.
3.10 AVAILABILITY OF ASSETS AND TITLE.
(a) Except as described in Schedule 3.10 in the Disclosure
-------------
Schedule, which disclosure constitutes all assets and properties currently
used by the Company and owned by the Seller not being transferred to
Restoration at the Closing, the assets and properties owned or leased by
the Company constitute all of the assets and properties used in its
business, such assets constitute all of the assets necessary to continue
the operations of the Company as currently being conducted and such assets
are, in all material respects, in reasonably good and serviceable condition
(normal wear and tear excepted).
(b) The Company has good and valid title to all of the
properties and assets owned by it, including the properties and assets
reflected in the Financial Statements (other than those disposed of since
the Balance Sheet Date in the Ordinary Course of Business), and the Company
has good and valid leasehold interests in all other properties and assets
held under lease by it, in each case free and clear of all Liens other than
Permitted Liens and liens described in Schedule 3.21.
-------------
3.11 PERMITS. The Company owns, holds or possesses all Permits. The
Company is in compliance with all of its respective obligations with respect to
such Permits, and no event has occurred which permits, or upon the giving of
notice or lapse of time or otherwise would permit, revocation or termination of
any such Permit. All Permits are listed on Schedule 3.11 of the Disclosure
-------------
Schedule. Except as set forth in Schedule 3.11 of the Disclosure Schedule, each
-------------
of the Permits is valid and is in full force and effect and there are no
existing proceedings, complaints or investigations pending, or to the knowledge
of the Seller, threatened before or by any Governmental Authority relating to
any of such Permits or to the right or ability of the Company to maintain,
acquire or otherwise hold such Permits.
3.12 LITIGATION.
(a) There are no actions at law, suits in equity or claims
pending or, to the knowledge of the Seller, threatened against, the Company
or Seller, their respective officers, directors, partners, employees or
shareholders or their respective businesses or properties or their
respective Benefit Plans and, to the knowledge of the Seller, there is no
reasonable basis for any action, suit or claim which would reasonably be
expected to result in a material adverse change in the Financial Status of
the Company;
15.
<PAGE>
(b) there are no governmental proceedings or investigations (in
which any subpoena, request for information or other notice, paper or
demand has been served upon the Company or the Seller or any of its
officers, directors or employees) pending against the Company or the
Seller;
(c) there is no action, suit or proceeding pending or, to the
knowledge of the Seller, threatened which questions the legality or
propriety of the transactions contemplated by the Transaction Documents;
(d) neither the Company nor the Seller is a party to or bound
by, and the properties and assets of the Company and Seller are not subject
to, any judgments, writs, decrees, injunctions or orders of any
Governmental Authority; and
(e) neither the Company nor the Seller is engaged in any present
dispute with any of its present or former officers, directors, employees,
partners, joint venturers or shareholders, as the case may be, or any
representative thereof.
3.13 TAXES. The Company and any consolidated, combined, unitary or
aggregate group for Tax purposes of which the Company is or has been a member
have timely filed all Tax Returns required to be filed by them and have paid all
Taxes shown thereon to be due. The Company has provided adequate accruals in
accordance with GAAP in its Financial Statements for any Taxes that have not
been paid, whether or not shown as being due on any Tax Returns. There is (i)
no material claim for Taxes that is a lien against the property of the Company
or is being asserted against the Company other than liens for Taxes not yet due
and payable, (ii) no audit of any Tax Return of the Company or Seller being
conducted by a Governmental Authority, (iii) no extension of the statute of
limitations on the assessment of any Taxes granted by the Company currently in
effect and (iv) no agreement, contract or arrangement to which the Company is a
party that may result in the payment of any amount that would not be deductible
by reason of Sections 280G (other than agreements or arrangements for which
shareholder approval meeting the requirements of Section 280G(b)(5)(B) will be
obtained prior to the Closing) or 404 of the Code. The Company has not been and
will not be required to include any material adjustment in Taxable income for
any Tax period (or portion thereof) pursuant to Section 481 or 263A of the Code
or any comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Closing.
Neither Seller nor the Company is a party to any Tax sharing or Tax allocation
agreement nor does the Company or Seller owe any amount under any such
agreement.
3.14 EMPLOYEE BENEFIT PLANS.
(a) Schedule 3.14 lists, with respect to the Company, and any
-------------
trade or business (whether or not incorporated) which is treated as a
single employer with the Company (an "ERISA Affiliate") within the meaning
of Section 414(b), (c), (m) or (o) of the Code (i) all material employee
benefit plans (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), (ii) each loan to a non-officer
employee in excess of $10,000, loans to officers and
16.
<PAGE>
directors and any stock option, stock purchase, phantom stock, stock
appreciation right, supplemental retirement, severance, sabbatical,
medical, dental, vision care, disability, employee relocation, cafeteria
benefit (Code Section 125), dependent care (Code Section 129), life
insurance or accident insurance plans, programs or arrangements, (iii) all
bonus, pension, profit sharing, savings, deferred compensation or incentive
plans, programs or arrangements, (iv) other fringe or employee benefit
plans, programs or arrangements that apply to senior management of the
Company and that do not generally apply to all employees and (v) any
current or former employment or executive compensation or severance
agreements, written or otherwise, as to which unsatisfied obligations of
the Company of greater than $10,000 remain for the benefit of, or relating
to, any present or former employee, consultant or director of the Company
(together, the "Benefit Plans").
(b) Seller has furnished to Restoration a copy of each of the
Benefit Plans and related plan documents (including trust documents,
insurance policies or contracts, employee booklets, summary plan
descriptions and other authorizing documents, and any material employee
communications relating thereto) and has, with respect to each Benefit Plan
which is subject to ERISA reporting requirements, provided copies of the
Form 5500 reports filed for the last three plan years. Any Benefit Plan
intended to be qualified under Section 401(a) of the Code has either
obtained from the Internal Revenue Service a favorable determination letter
as to its qualified status under the Code, including all amendments to the
Code effected by the Tax Reform Act of 1986 and subsequent legislation, or
has applied to the Internal Revenue Service for such a determination letter
prior to the expiration of the requisite period under applicable Treasury
Regulations or IRS pronouncements in which to apply for such determination
letter and to make any amendments necessary to obtain a favorable
determination. Seller has also furnished Restoration with the most recent
IRS determination letter issued with respect to each such Benefit Plan, and
nothing has occurred since the issuance of each such letter which could
reasonably be expected to cause the loss of the Tax-qualified status of any
Benefit Plan subject to Code Section 401(a). Seller has also furnished
Restoration with all registration statements and prospectuses prepared in
connection with each Benefit Plan.
(c) (i) None of the Benefit Plans promises or provides retiree
medical or other retiree welfare benefits to any person; (ii) there has
been no "prohibited transaction," as such term is defined in Section 406 of
ERISA and Section 4975 of the Code, with respect to any Benefit Plan, which
could reasonably be expected to have, in the aggregate, a material adverse
effect on the Company's Financial Status; (iii) each Benefit Plan has been
administered in accordance with its terms and in compliance with the
requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code), except as would not have, in the aggregate,
a material adverse effect on the Company's Financial Status, and the
Company or ERISA Affiliate have performed all obligations required to be
performed by them under, are not in any material respect in default under
or in violation of, and have no knowledge of any material default or
violation by any other party to, any of the Benefit Plans; (iv) neither the
Company nor any subsidiary or ERISA Affiliate is
17.
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subject to any liability or penalty under Sections 4976 through 4980 of the
Code or Title I of ERISA with respect to any of the Benefit Plans; (v) all
material contributions required to be made by the Company or any subsidiary
or ERISA Affiliate to any Benefit Plan have been made on or before their
due dates and a reasonable amount has been accrued for contributions to
each Benefit Plan for the current plan years; (vi) with respect to each
Benefit Plan, no "reportable event" within the meaning of Section 4043 of
ERISA (excluding any such event for which the 30-day notice requirement has
been waived under the regulations to Section 4043 of ERISA) nor any event
described in Section 4062, 4063 or 4041 of ERISA has occurred; (vii) no
Benefit Plan is covered by, and neither the Company nor any subsidiary or
ERISA Affiliate has incurred or expects to incur any liability under Title
IV of ERISA or Section 412 of the Code; and (viii) each Benefit Plan can be
amended, terminated or otherwise discontinued after the Closing in
accordance with its terms, without liability to Restoration (other than
ordinary administrative expenses typically incurred in a termination
event). With respect to each Benefit Plan subject to ERISA as either an
employee pension plan within the meaning of Section 3(2) of ERISA or an
employee welfare benefit plan within the meaning of Section 3(1) of ERISA,
the Company has prepared in good faith and timely filed all requisite
governmental reports (which were true and correct as of the date filed) and
has properly and timely filed and distributed or posted all notices and
reports to employees required to be filed, distributed or posted with
respect to each such Benefit Plan. No suit, administrative proceeding,
action or other litigation has been brought, or to the best knowledge of
Seller is threatened, against or with respect to any such Benefit Plan,
including any audit or inquiry by the IRS or United States Department of
Labor. No payment or benefit which will or may be made by the Company to
any employee will be characterized as an "excess parachute payment" within
the meaning of Section 280G(b)(1) of the Code.
(d) With respect to each Benefit Plan, the Company has complied
with (i) the applicable health care continuation and notice provisions of
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and
the regulations (including proposed regulations) thereunder, (ii) the
applicable requirements of the Family Medical and Leave Act of 1993 and the
regulations thereunder, except to the extent that such failure to comply
would not, in the aggregate, have a material adverse effect on the
Company's Financial Status and (iii) the applicable requirements of the
Health Insurance Portability and Accountability Act of 1996 and the
regulations (including proposed regulations) thereunder, except to the
extent that such failure to comply would not, in the aggregate, have a
material adverse effect on the Company's Financial Status.
(e) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or other
service provider of the Company, any Subsidiary of the Company or any other
ERISA Affiliate to severance benefits or any other payment, except as
expressly provided in this Agreement, or (ii) accelerate the time of
payment or vesting, or increase the amount of compensation due any such
employee or service provider.
18.
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(f) There has been no amendment to, written interpretation or
announcement (whether or not written) by the Company, any Subsidiary of the
Company or other ERISA Affiliate relating to, or change in participation or
coverage under, any Benefit Plan which would materially increase the
expense of maintaining such Benefit Plan above the level of expense
incurred with respect to that Benefit Plan for the most recent fiscal year
included in the Company's Financial Statements.
(g) Pension Plans. The Company does not currently maintain,
-------------
sponsor, participate in or contribute to nor has it ever maintained,
established, sponsored, participated in or contributed to any pension plan
(within the meaning of Section 3(2) of ERISA) which is subject to Part 3 of
Subtitle B of Title I of ERISA, Title IV of ERISA or Section 4.12 of the
Code.
(h) Multiemployer Plans. Neither the Company nor any ERISA
-------------------
Affiliate is a party to, or has made any contribution to or otherwise
incurred any obligation under, any "multiemployer plan" as defined in
Section 3(37) of ERISA.
3.15 CONTRACTS.
(a) Except as set forth in Schedule 3.15 of the Disclosure
-------------
Schedule, neither Seller nor the Company is a party to or bound by:
(i) any note, bond, debenture or other evidence of
indebtedness, or any contract, agreement, commitment or understanding
under which the Company or Seller has borrowed any money or issued any
note, bond, debenture or other evidence of indebtedness, or any
mortgage, pledge, security agreement, deed of trust, financing
statement or other document granting any Lien or any guaranty or
endorsement (other than endorsements for collection in the Ordinary
Course of Business) of, or other contingent obligations in respect of,
indebtedness for borrowed money or other liabilities or obligations of
others;
(ii) any contract, agreement, commitment or arrangement
relating to any joint venture, partnership or sharing of profits or
losses with any Person or permitting any Person to utilize any
technology, know-how or proprietary information of the Company;
(iii) any contract, agreement, commitment, arrangement or
understanding for the future purchase or sale by the Company of any
products, materials, equipment, services or supplies, which (w)
involves the payment or receipt by the Company of more than $25,000,
(x) continues for a period of more than six months, (y) by its terms
requires the Company to purchase or supply the entire output of a
Person or (z) provides for any exclusive relationship between the
Company and any Person;
19.
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(iv) any contract, agreement, commitment, arrangement or
understanding for the sale or other disposition by the Company of any
of its assets or properties other than in the Ordinary Course of
Business, or for the merger or consolidation of the Company with any
other Person;
(v) any contract, agreement, commitment, arrangement or
understanding containing covenants purporting to limit the freedom of
the Company to compete in any line of business or in any geographic
area or to require the Company to maintain any information as
confidential; or
(vi) any contract, agreement, commitment, arrangement or
understanding not elsewhere specifically disclosed pursuant to this
Agreement involving the payment or receipt by the Company of more than
$25,000 per year or $100,000 over the term thereof.
(b) Copies of all agreements or instruments identified in
Schedule 3.15 of the Disclosure Schedule (herein collectively called
-------------
"Contracts") have been made available to Restoration. Except as set forth
in Schedule 3.15 of the Disclosure Schedule under the title "Contract
-------------
Defects," (i) each of such Contracts constitutes a legal, valid and binding
obligation of the Company and is in full force and effect, (ii) the Company
has fulfilled and performed in all material respects its obligations under
each of the Contracts required to be performed prior to the date hereof,
and is not in breach or default under, nor is there any basis for
termination of, any of the Contracts, (iii) no other party to any of the
Contracts has materially breached or defaulted thereunder, and no event has
occurred which, with the passage of time or the giving of notice or both,
would constitute such a default or breach by the Company and (iv) neither
Seller nor the Company is currently renegotiating any of the Contracts or
paying liquidated damages in lieu of performance thereunder.
3.16 EMPLOYEES AND AFFILIATED AGREEMENTS.
(a) Except as set forth in Schedule 3.16(a) of the Disclosure
----------------
Schedule, the Company is not a party to or bound by any (i) employee
collective bargaining agreement, employment agreement, consulting, advisory
or service agreement, deferred compensation agreement, confidentiality
agreement or covenant not to compete; (ii) contract or agreement with any
officer, director or employee (other than employment agreements disclosed
in response to clause (i)); or (iii) Benefit Plan or bonus, profit sharing,
deferred compensation, incentive, stock option or stock purchase, or paid
time off for sickness plan, program or arrangement with respect to their
employees. Except as set forth in Schedule 3.16(a) of the Disclosure
----------------
Schedule, the Company is not a party to or bound by any severance plan or
program or other severance arrangement for its employees. The consummation
of the transactions contemplated by this Agreement will not result in any
severance liability to any employee of the Company.
20.
<PAGE>
(b) Set forth in Schedule 3.16(b) of the Disclosure Schedule are
----------------
(i) the name of each of the officers and directors and other key employees
(i.e. those employees who earn in excess of $25,000) of the Company and
(ii) the base annual salary level as of the date hereof and projections for
the current fiscal year of other incentive compensation (including bonuses)
for each person whose name is set forth under such title in the Disclosure
Schedule. Schedule 3.16(b) of the Disclosure Schedule lists as of the date
----------------
hereof the names of all other employees of the Company, the annual rates of
compensation and the job titles for all such employees.
(c) Except as set forth in Schedule 3.16(c) of the Disclosure
----------------
Schedule, (i) neither Seller (or any Affiliate of Seller) nor the Company
has a direct or indirect interest in the business of competitors, suppliers
or customers of the Company and for which the Company will continue to make
payments or be obligated in any respect beyond the Closing, (ii) neither
Seller nor any Affiliate of Seller owns or has any interest in any assets
or properties currently used by the Company in the conduct of its business
and (iii) neither Seller nor the Company has used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful expenses
related to political activity, made any direct or indirect unlawful
payments to government officials or others from corporate funds or
established or maintained any unlawful or unrecorded funds, violated any of
the provisions of The Foreign Corrupt Practices Act of 1977, or any rules
or regulations thereunder, received any illegal discounts or rebates or
been the subject of any investigation by the Securities and Exchange
Commission or any other Governmental Authority.
(d) Except as set forth in Schedule 3.16(d) of the Disclosure
----------------
Schedule, neither Seller nor the Company has engaged in any unfair labor
practice, unlawful employment practice or unlawful discriminatory practice
in the conduct of its business. Except as set forth in Schedule 3.16(d) of
----------------
the Disclosure Schedule, Seller and the Company have complied in all
material respects with all applicable Legal Requirements relating to
prices, wages, hours and collective bargaining and have complied in all
material respects with all applicable Legal Requirements relating to the
payment and withholding of taxes and have withheld all amounts required by
law or agreement to be withheld from the wages or salaries of employees and
are not liable for any arrears of wages or any taxes or penalties for
failure to comply with any of the foregoing. Except as set forth in
Schedule 3.16(d) of the Disclosure Schedule, the relations of the Company
----------------
with its employees are satisfactory and the Company is not a party to or,
to the knowledge of the Seller, threatened with any dispute or controversy
with a union or with respect to unionization or collective bargaining.
Schedule 3.16(d) of the Disclosure Schedule sets forth all union organizing
----------------
or election activities involving any nonunion employees of the Company
which are in progress or threatened as of the date hereof.
(e) Except as set forth in Schedule 3.16(e) of the Disclosure
----------------
Schedule, neither Seller nor the Company has made any agreement with or
promise to any employee, officer or consultant regarding continued
employment by the Company or Restoration after the Closing Date.
21.
<PAGE>
3.17 PROPRIETARY RIGHTS. The Company holds all patents, patent
applications, trademarks, service marks, trade names, corporate names,
copyrights, trade secrets or other proprietary rights, if any, necessary to the
conduct of its business as now conducted. The Company has taken all action
reasonably necessary to protect its proprietary rights. Neither Seller nor the
Company has received notice of any infringement, misappropriation or conflict
from any third party with respect to such proprietary rights which are listed;
neither Seller nor the Company has infringed, misappropriated or otherwise taken
any actions which conflict with any proprietary rights of any third parties; no
claim by any third party contesting the validity of any proprietary rights
listed under such caption is currently outstanding against Seller or the
Company, or to the knowledge of the Seller, is threatened. Seller is not aware
of the infringing use of any of such trademarks, trade names or other
proprietary rights or the infringement of any of such copyrights and patents by
any other Person.
3.18 INSURANCE. The Company has with respect to its properties and
business insurance of such a nature, with such terms and in such amounts, as
would reasonably be maintained with respect to similar properties and a similar
business. Schedule 3.18 of the Disclosure Schedule identifies (indicating
-------------
policy owners, carriers and effective dates) all policies of insurance,
including insurance providing benefits for employees, owned, held or maintained
by or for the benefit of the Company or under which any of such companies is a
named insured on the date hereof. All such policies are in full force and
effect and no notice of cancellation or termination has been received with
respect to such insurance.
3.19 REAL PROPERTY.
(a) The Company does not own any real property other than
fixtures. Seller owns that certain real property described in Schedule
--------
3.19 free and clear of any Liens, except as set forth on Schedule 3.19.
---- -------------
(b) Schedule 3.19 of the Disclosure Schedule also identifies
-------------
each lease, sublease, material easement, grant or similar instrument
(showing the annual rental, expiration date, renewal and purchase options,
if any, and the location of the real property covered by such lease or
other agreement) under which the Company has the rights to use, hold or
operate any real property owned by a third party (collectively, the "Real
Property Leases") (the property covered by the agreements described in this
Section being referred to herein as the "Leased Property").
(c) Except as disclosed in Schedule 3.19 of the Disclosure
-------------
Schedule, the Real Property Leases (i) are each in full force and effect
and are each legal, valid and binding obligations of the Company and (ii)
will continue in effect after the Closing without the consent, approval or
act of, or the making of any filing with, any other party. The Company is
not in default in any material respect nor has it received any notice of
default thereunder which has not been cured. To the knowledge of the
Seller, no other party to any such Real Property Lease is in material
default thereunder. The Company has valid (except with respect to the
interest of
22.
<PAGE>
lessors in leasehold improvements) leasehold interests in the Leased
Property, free and clear of all Liens.
(d) There are no security deposits held by Seller or the Company
under any of the Real Property Leases and there are no arrearages in rent
or additional rent under any of such Real Property Leases.
3.20 PERSONAL PROPERTY. Schedule 3.20 of the Disclosure Schedule
-------------
contains a detailed list of all machinery, equipment, vehicles, furniture and
other personal property owned and in current use by the Company having an
original purchase price per item in excess of $5,000 and not expensed by the
Company at the time of purchase or fully depreciated before December 31, 1997.
3.21 PERSONAL PROPERTY LEASES. Schedule 3.21 of the Disclosure
-------------
Schedule identifies each lease or other agreement or right under which the
Company is lessee of, or holds or operates, any machinery, equipment, vehicle or
other tangible personal property owned by a third party and having lease or rent
payment in excess of $10,000 per year (indicating in each case the annual
rental, the expiration date thereof and the type of property covered)
(collectively, the "Personal Property Leases", and together with the Real
Property Leases, the "Leases"). Each of the Personal Property Leases is in full
force and effect and will continue in effect after the Closing without the
consent, approval or act of, or the making of any filing with, any other party.
3.22 PRODUCTION CAPACITY. The Company has sufficient capacity to
provide Restoration the volume of furniture set forth in the Supply Agreement
and the Company has no commitments or agreements which would prevent or impair
its ability to perform its obligations under the Supply Agreement.
3.23 EXECUTION, DELIVERY AND ENFORCEABILITY OF AGREEMENT. Seller has
all requisite power and authority to enter into the Transaction Documents and to
perform his obligations hereunder and thereunder. Seller has taken all actions
necessary to be taken by him to authorize the execution and delivery of the
Transaction Documents and the transactions contemplated hereby and thereby.
Each of the Transaction Documents has been executed and delivered by Seller and
constitutes the legal, valid and binding obligation of Seller, enforceable
against him in accordance with its terms.
3.24 OWNERSHIP OF STOCK. Seller owns of record and beneficially the
Shares with full right and authority to deliver such Shares hereunder, and upon
delivery of such Shares hereunder in exchange for the consideration set forth
herein, Restoration will receive good title thereto, free and clear of all Liens
and not subject to any agreements, contracts or obligations among any Persons
with respect to the voting or transfer of such Shares other than those arising
under agreements to which Restoration is a party.
3.25 DISCLOSURE. No representation or warranty of Seller contained
in any of the Transaction Documents and no statement of Seller contained in the
Disclosure Schedule or any certificate delivered in connection with the Closing
contains or will contain
23.
<PAGE>
any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements made herein or therein, with
respect to the respective subject matters of such representations, warranties or
statements, in light of the circumstances under which they were made, not
misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
RESTORATION
Restoration hereby represents and warrants to the Seller as follows:
4.01 CORPORATE ORGANIZATION. Restoration is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation, and is duly qualified or licensed to do business as a foreign
corporation in good standing in every jurisdiction in which its ownership of
property or the conduct of its business requires such qualification or
licensing, except where the failure to be so qualified or licensed would not
have a material adverse effect on the Financial Status of Restoration, or on its
ability to execute and deliver this Agreement and to consummate the transactions
contemplated hereby.
4.02 AUTHORIZATION. Restoration has all requisite power and
authority (corporate and other) to enter into this Agreement and to perform its
obligations under this Agreement. Restoration has taken all corporate action
required to be taken by law and its Articles of Incorporation and Bylaws to
authorize and approve the execution and delivery of this Agreement, the
performance of its obligations hereunder and the consummation of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Restoration, and is the valid and binding obligation of
Restoration, enforceable against it in accordance with its terms.
4.03 NO VIOLATION. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby by Restoration will not
(a) violate any provision of Restoration's Articles of Incorporation or Bylaws,
(b) violate, or constitute a default under, or permit the termination or
acceleration of the maturity of, any indebtedness for borrowed money of
Restoration, (c) violate, or constitute a default under, or permit the
termination of, any material agreement, understanding or instrument to which
Restoration is a party or by which it or its properties is bound, (d) result in
the creation of any Lien upon any of the assets or properties of Restoration or
(e) violate any Legal Requirements to which Restoration is subject.
4.04 CONSENTS AND APPROVALS. Except for possible filings under the
HSR Act, no consent, approval, license or authorization of, notice to, or
declaration, filing or registration with, any third party or Governmental
Authority is required to be made or obtained by Restoration in connection with
the execution, delivery and performance of this Agreement by Restoration or the
consummation by it of the transactions contemplated hereby.
24.
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ARTICLE V
CONDITIONS TO OBLIGATIONS OF RESTORATION
TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY
The obligations of Restoration to consummate the purchase of the
Shares under this Agreement shall, unless waived in writing by Restoration, be
subject to the satisfaction on or before the Closing Date of each of the
following conditions, and the Seller shall use his Best Efforts to cause each
such condition to be so satisfied:
5.01 REPRESENTATIONS AND WARRANTIES TRUE. Each of the
representations and warranties of the Seller contained herein shall be true and
correct in all respects as of the date made and at and as of the Closing Date as
though such representations and warranties were made at and as of the Closing
Date.
5.02 PERFORMANCE. The Seller shall have performed and complied in
all respects with each of the covenants, agreements and obligations required by
this Agreement to be performed or complied with by him on or prior to the
Closing Date.
5.03 AUTHORIZATION. All actions necessary to authorize the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated by this Agreement shall have been duly and validly
taken; and the Seller shall have full power and right to transfer the Shares all
in accordance with the terms and conditions set forth in this Agreement.
5.04 NO CHANGE IN BUSINESS. Between the Balance Sheet Date and the
Closing Date, there shall have been (a) no material adverse change in the
Financial Status of the Company; and (b) no lawsuits, claims or proceedings
filed against or affecting the Company or the Seller which may result in a
material adverse change in the Financial Status of the Company.
5.05 OPINION OF COUNSEL FOR THE SELLER. Restoration shall have
received from Thompson, Meade & Brodovsky LLP, as Seller's counsel for the
transaction, an opinion, dated the Closing Date, in form and substance
reasonably satisfactory to Restoration and its counsel, to the effect set forth
in Exhibit B hereto.
---------
5.06 NO RESTRAINT OR LITIGATION. No order, decree or ruling of any
Governmental Authority shall have been entered, and no action, suit or
proceeding before any Governmental Authority shall have been instituted (or
threatened if Restoration reasonably believes that such threat will result in
institution of an action, suit or proceeding) by any Governmental Authority, to
restrain, prohibit, challenge or invalidate any of the transactions contemplated
by this Agreement or the right of the Company to carry out its business after
the Closing Date.
25.
<PAGE>
5.07 NECESSARY GOVERNMENTAL APPROVALS. The waiting periods under the
HSR Act shall have expired or been terminated, and the parties shall have
received all approvals and actions from Governmental Authorities necessary to
consummate the transactions contemplated hereby which are either required to be
obtained prior to the Closing by applicable law or regulation or are specified
to be obtained in the Disclosure Schedule.
5.08 NECESSARY CONSENTS. The parties shall have received all
necessary consents, in substantially the form attached hereto as Exhibit C or
---------
otherwise as reasonably satisfactory to Restoration, to the transactions
contemplated hereby by all third parties to the Leases and other Contracts.
5.09 LIENS. Restoration shall have received reports, satisfactory to
Restoration, from the Secretary of State of California and the Secretary of
State of any other jurisdiction in which any assets of the Company are located,
indicating that there are no Liens of record as of a date no more than five days
before the Closing Date with respect to any asset of the Company, other than
Permitted Liens, and liens relating to a $998,000 loan to Seller by the SBA,
liens relating to Hardwoods Inc. and liens relating to Sanwa Bank, California.
Restoration shall have received UCC Termination Statements from any secured
creditors releasing all Liens other than Permitted Liens and those approved and
accepted in writing by Restoration on the assets and properties at the Closing.
5.10 OTHER DOCUMENTS. This Agreement, the Lease Agreement, the
Supply Agreement, the Employment Agreement and all other instruments and
documents required to be executed and delivered hereunder to Restoration by the
Seller on or prior to the Closing Date shall have been executed and delivered by
Seller.
5.11 REPAYMENT OF AFFILIATE INDEBTEDNESS AND TERMINATION OF AFFILIATE
AGREEMENTS. All indebtedness due to the Company from Seller, any Affiliate of
Seller or the Company and all related parties shall be paid to the Company as of
Closing, including the shareholder note payable described in Section 2.03(a).
5.12 KEY MAN INSURANCE POLICY. The Company shall have obtained key
man insurance on the life of Seller in the amount of $1 million, with proceeds
payable to Restoration, or Seller shall have assigned to Restoration the Allied
Group Insurance policy number IN 023453 and Aetna Life Insurance Company policy
number R2 G35-198 until such time as the Company shall have obtained such key
man insurance policy.
5.13 OTHER CLOSING DATE DELIVERIES. In addition to the other
deliveries referenced in this Article V, on the Closing Date, the Seller shall
deliver to Restoration:
(a) Stock Certificates. Stock certificates representing in the
------------------
aggregate all (100%) of the outstanding shares of capital stock of the
Company, together with duly executed and witnessed stock powers (in blank)
attached thereto;
26.
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(b) Certificates. Such certificates of the Seller to evidence
------------
compliance with the conditions specified in Sections 5.01, 5.02, 5.03, 5.04
and 5.11;
(c) Resignations. Resignations of the Board of Directors and
------------
Officers of the Company, effective as of the Closing; and
(d) Books. The books, records, customer lists, files, reports,
-----
surveys, studies, projections, budgets and strategic plans of the Company.
5.14 TRANSFER OF LOANS. Seller and Sanwa Bank California shall have
executed and delivered assignments transferring the Sanwa Bank California
consumer loan for the Hummer vehicle from the Company to Seller.
5.15 TITLE INSURANCE AND NONDISTURBANCE AGREEMENT. At the Closing,
Restoration shall have received preliminary title reports relating to the real
property to be leased by Restoration in connection with this Agreement, which
reports shall set forth as the only exceptions to Seller's ownership thereof a
Deed of Trust in favor of Sanwa Bank of California and a Deed of Trust in favor
of Marvin L. Oates. Sanwa Bank of California and Marvin L. Oates shall have
provided Restoration NonDisturbance Agreements in form reasonably satisfactory
to Restoration with respect to Restoration's lease of such real property.
5.16 SANWA BANK DOCUMENTS. Sanwa Bank of California shall have
provided to Restoration a written release of the Company's guaranty on Seller's
personal loans, a written release of three pieces of the Company's equipment
currently being used as collateral for Seller's personal loans, and an executed
consent letter relating to the transactions contemplated hereby.
5.17 PROCEEDINGS, INSTRUMENTS, ETC. All proceedings and actions
taken on or prior to the Closing Date in connection with the transactions
contemplated by this Agreement and all instruments incident thereto shall be in
form and substance reasonably satisfactory to Restoration and its counsel
(provided that such documents shall not expand the representations, warranties
or obligations of the Seller hereunder), and Restoration and its counsel shall
have received copies of all documents that Restoration and its counsel may
reasonably request in connection with such proceedings, actions and
transactions.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE SELLER
TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY
The obligations of the Seller to consummate the sale of the Shares
under this Agreement shall, unless waived in writing by the Seller, be subject
to the satisfaction on or before the Closing Date of each of the following
conditions, and Restoration shall use its Best Efforts to cause each such
condition to be so satisfied:
27.
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6.01 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Restoration contained herein shall be true and correct in all
respects as of the date made and at and as of the Closing Date as though such
representations and warranties were made at and as of the Closing Date.
6.02 PERFORMANCE. Restoration shall have performed and complied in
all respects with all covenants, agreements and obligations required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date.
6.03 AUTHORIZATION. All actions necessary to authorize the
execution, delivery and performance of this Agreement by Restoration and the
consummation of the transactions contemplated by this Agreement by Restoration
shall have been duly and validly taken.
6.04 NECESSARY GOVERNMENTAL APPROVALS. The waiting periods under the
HSR Act shall have expired or been terminated, and the parties shall have
received all approvals of Governmental Authorities and actions necessary to
consummate the transactions contemplated hereby which are either required to be
obtained prior to the Closing by applicable law or regulation or are specified
to be obtained in the Disclosure Schedule.
6.05 CERTIFICATES. Restoration shall have delivered to the Seller a
certificate to evidence compliance with the conditions set forth in Sections
6.01, 6.02 and 6.03 hereof.
6.06 PROCEEDINGS, INSTRUMENTS, ETC. All proceedings and actions
taken on or prior to the Closing Date in connection with the transactions
contemplated by this Agreement and all instruments incident thereto shall be in
form and substance reasonably satisfactory to the Seller and his counsel
(provided that such documents shall not expand the representations, warranties
or obligations of Restoration hereunder), and the Seller and his counsel shall
have received copies of all documents that the Seller and his counsel may
reasonably request in connection with such proceedings, actions and
transactions.
ARTICLE VII
COVENANTS REGARDING EMPLOYEES AND COVENANT NOT TO INTERFERE,
COMPETE OR SOLICIT BUSINESS.
7.01 COVENANT REGARDING EMPLOYEES. Seller hereby agrees that
commencing on the date hereof and continuing for a period of five years from the
Closing Date, he shall not induce or encourage, directly or indirectly, any
current employee or consultant of the Company to decline an employment or
consulting arrangement with Restoration or the Company, and Seller hereby agrees
that for a period of five years from the Closing Date, he shall not induce or
encourage, directly or indirectly, any current employee or consultant if such
Person is hired by Restoration or the Company, to leave Restoration's or the
Company's employ, whether to accept a position with him or an entity related to
him or otherwise.
28.
<PAGE>
7.02 COVENANT NOT TO COMPETE. In furtherance of the sale of the
Shares to Restoration and more effectively to protect the business and good will
of the Company, upon the consummation of the transactions contemplated hereby,
the Seller agrees that, for a period commencing on the Closing Date and ending
on the later of (i) the fifth annual anniversary of the Closing Date or (ii) two
years after the exercise of the rights by Seller or Restoration referred to in
Section 2.06(d) hereof, Seller and his Affiliates will not: (i) directly or
indirectly (whether as an employer, employee, partner, stockholder, director,
representative or otherwise) anywhere within the United States, Canada or Mexico
(it being understood and agreed by the parties hereto that the prohibited
activities are not limited to any particular region within such area because
such activities may be engaged in effectively in competition with the Company
from any location therein) organize, invest in, sponsor or promote, participate
or become interested, affiliated or connected with or provide management,
employment or consulting services to any Person which is engaging or intending
to engage in activities of the type conducted by the Company or Restoration.
7.03 EQUITABLE RELIEF. Without limiting the right of Restoration to
pursue all other legal and equitable rights available to it for violation of
this Article VI by the Seller, it is agreed that other remedies cannot fully
compensate Restoration for such a violation and that Restoration shall be
entitled to injunctive relief to prevent the violation or the continuing
violation thereof. It is the intent and understanding of each party hereto that
if, in any action before any Governmental Authority legally empowered to enforce
this Article VI, any term, restriction, covenant or promise in this Article VI
is found to be unreasonable and for that reason unenforceable, then such term,
restriction, covenant or promise shall be deemed modified to the extent
necessary to make it enforceable by such court or agency.
ARTICLE VIII
INDEMNIFICATION
8.01 INDEMNIFICATION BY THE SELLER. The Seller hereby agrees to
indemnify and hold harmless Restoration and the Company and their respective
Affiliates, agents, officers, employees, successors and assigns from and against
any and all liabilities, obligations, losses, costs, damages or diminution of
value ("Loss") and reasonable attorneys' and accountants' fees and expenses,
court costs and all other reasonable out-of-pocket expenses ("Expense") incurred
by any of Restoration or the Company or their respective Affiliates, agents,
officers, employees, successors and assigns in connection with or arising from
or attributable to (i) any breach by Seller of any of his representations,
warranties, covenants or agreements contained in this Agreement, the Lease
Agreement or in any agreement or instrument contemplated hereby or thereby; (ii)
any failure of the Seller to perform any of his obligations in this Agreement,
the Lease Agreement or in any agreement or instrument contemplated hereby or
thereby; (iii) any Taxes for any period prior to the Closing or arising as a
result of the closing of the transactions contemplated hereby; (iv) those
matters set forth in Schedules 3.06 and 3.08 of the Disclosure Schedule; and (v)
the operations of the business of the Company or the ownership, use or operation
of the assets of
29.
<PAGE>
the Company prior to the Closing Date, whether invoiced or not invoiced,
liquidated or unliquidated, known or unknown.
8.02 NOTICE OF CLAIMS. If an indemnified person believes that it has
suffered or incurred any Loss or Expense pursuant to Sections 8.01 hereof, it
shall so notify the indemnifying person promptly in writing (i) describing such
Loss or Expense, (ii) the amount thereof, if known, (iii) any complaints,
subpoenas or other documents served against the indemnified person in connection
with such Loss or Expense and (iv) the method of computation of such Loss or
Expense. Promptly after receipt by an indemnified party of notice of the
commencement of any action by any third party, such indemnified party shall, if
a claim in respect thereof is to be made against the indemnifying party under
Section 8.01, notify each party against whom indemnification is to be sought in
writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Article VIII).
8.03 THIRD PARTY CLAIMS. The persons indemnified under this Article
VIII shall have the right, at the expense of the indemnifying party, to conduct
and control, through counsel of their choosing, any third party claim, action or
suit, and the persons indemnified may compromise or settle the same, provided
that any of the indemnified persons shall give the indemnifying party advance
notice of any proposed compromise or settlement. The indemnifying party shall
promptly pay to such indemnified persons the amount of any Loss resulting from
its liability to the third party claimant and all related Expense. The
indemnified persons shall permit the indemnifying party to participate in the
defense of any such action or suit through counsel chosen by it, provided that
the fees and expenses of such counsel shall also be borne by the indemnifying
party.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.01 BROKERS.
(a) Each party represents and warrants to the other that it has
dealt with no brokers with respect to the transactions contemplated hereby.
No party has done any acts, had any negotiations or conversations, or made
any agreements or promises which will in any way create or give rise to any
obligation or liability for the payment of any fee, charge, commission or
other compensation to any party with respect to the transactions
contemplated hereby other than as provided above.
(b) The Sellers and Restoration agree to forever indemnify,
defend and save harmless each other of, from and against any and all claims
or suits for compensation, commission or otherwise which may be asserted or
made by any broker, person or entity as a result of any dealing by the
indemnifying party or its representatives with such other broker, person or
entity, including, without limitation, all costs, losses, liabilities,
damages and expenses (including, without limitation,
30.
<PAGE>
attorneys' fees and disbursements) related thereto. This Section 9.01
shall survive the Closing or any sooner expiration or termination of this
Agreement.
9.02 CONFIDENTIALITY.
(a) Subject to the provisions contained in this Section 9.02,
all information furnished as confidential to a party by any other party
hereunder shall be treated confidentially. Each of the parties hereby
agrees for the benefit of each other that, except as required by law, they
will not release, cause or permit to be released any press notices,
publicity (oral or written) or advertising promotion or otherwise announce,
disclose or cause or permit to be announced or disclosed, in any manner
whatsoever, the fact that negotiations have taken place, or the terms and
conditions or substance of the transactions contemplated herein, without
first obtaining the express written consent of the other party.
Notwithstanding anything to the contrary set forth in this Section 9.02, a
party shall be permitted to provide confidentially all materials and
information furnished by another party to its attorneys, legal counsel and
professional advisers.
(b) Each party shall (i) use Best Efforts to keep confidential
all such information furnished to it hereunder and (ii) return to the
disclosing party, or at the option of the disclosing party, destroy, all
documents and other written materials furnished by the disclosing party
containing such information. The obligation to keep such information
confidential shall survive the termination of this Agreement for three
years.
(c) The confidentiality agreement in this Section 9.02 shall not
preclude the Seller or Restoration from discussing the substance of the
transaction with their attorneys, accountants, professional consultants,
counsel and other representatives. Further, the confidentiality agreement
in this Section 9.02 shall not apply to any information which (w) a party
can demonstrate was already in its possession prior to the disclosure
thereof by another party; (x) is known to the public; (y) becomes known to
the public through no fault of the other party; or (z) is disclosed to the
other party by a third party without any duty or obligation of
confidentiality.
9.03 PAYMENT OF EXPENSES. Each of the parties hereto will pay its
own expenses, including without limitation legal, finders, brokerage, investment
banking and accounting fees.
9.04 WAIVER OF COMPLIANCE. Any failure of Seller, on the one hand,
or Restoration, on the other, to comply with any obligation, covenant, agreement
or condition contained herein may be expressly waived in writing by Restoration
on the one hand or Seller on the other, but such waiver or failure to insist
upon strict compliance shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
31.
<PAGE>
9.05 NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered by hand or express mail delivery:
(a) If to Seller to:
Michael Vermillion
The Michaels Concepts in Woods, Inc.
5849 88th Street
Sacramento, CA 95828
And a copy to:
Michael Anderson
Thompson, Meade & Brodovsky LLP
400 Capital Mall, 26th Floor
Sacramento, CA 95814
(b) If to Restoration to:
15 Koch Road, Suite J
Corte Madera, CA 94925
Attn: Tom Low
And a copy to:
Therese Mrozek
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303-0913
or, in each case, to such other Person or address as may be specified in writing
in accordance with this Section 9.05 to the other parties.
9.06 CERTAIN LIMITATIONS. All representations and warranties
contained herein respecting the enforceability of any agreement shall be deemed
to be made subject to any applicable bankruptcy, insolvency, reorganization or
other laws relating to or affecting creditors' rights generally and to general
principles of equity.
9.07 SURVIVAL OF REPRESENTATIONS, WARRANTIES, INDEMNITIES AND OTHER
AGREEMENTS. All representations and warranties, indemnities and other
agreements made by each party in this Agreement, in any Schedule hereto or in
any list, certificate, document or written statement furnished or delivered by
any such party pursuant hereto shall expire on the third anniversary of the
Closing Date and all liabilities of the parties hereto with respect to such
representations, warranties, indemnities and other agreements (except as with
respect to
32.
<PAGE>
the agreements set forth in Article VII hereof and except as expressly otherwise
provided) shall thereupon be extinguished, except for any claim or action
against any party relating thereto brought prior to the expiration of such
three-year period or in the event of the fraud, intentional misrepresentation or
active concealment of such party and except that the representations and
indemnities set forth in Sections 3.08, 3.13 and 3.14 shall terminate upon
termination of the applicable statute of limitations under the applicable Legal
Requirements.
9.08 BINDING NATURE; ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns. Nothing contained herein,
express or implied, is intended to confer on any Person other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities.
9.09 GOVERNING LAW; CONSTRUCTION. This Agreement, and the legal
relations among the parties hereto arising from this Agreement, shall be
governed by and construed in accordance with the laws of the State of
California. The fact that one representation and warranty in this Agreement or
the Disclosure Schedule may be duplicative of or may overlap, in whole or in
part, or may be more general or specific than another representation and
warranty in this Agreement or the Disclosure Schedule shall not negate, diminish
or modify either representation and warranty, as each shall be construed and
interpreted independently.
9.10 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
9.11 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement and
the other Transaction Documents (including the Exhibits and Schedules hereto,
the Disclosure Schedule and the other instruments referred to herein) embody the
entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. This Agreement supersedes all prior agreements
and understandings among the parties with respect to such subject matter,
including any term sheets prepared in anticipation of this Agreement. No
amendment, modification or waiver of this Agreement shall be binding unless
executed in writing by the party or parties to be bound thereby.
9.12 SEVERABILITY. If any terms or provisions of this Agreement or
any application thereof shall be invalid or unenforceable, the remainder of this
Agreement and any other application thereof shall not be affected thereby.
9.13 HEADINGS. The headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.14 REMEDIES. A party hereto may pursue any right or remedy
available to it at law or in equity for any claim relating to the transactions
contemplated hereunder, and the use of any one right or other remedy by any
party hereto shall not preclude or constitute
33.
<PAGE>
a waiver of its rights to use any or all other remedies. In any proceeding by
the Company or Restoration to assert or prosecute any claim under, or to
otherwise enforce, this Agreement, the Seller agrees that he shall not assert as
a defense or bar to recovery by the Company or Restoration, and hereby waives
any right to so assert such defense or bar such recovery, that: (a) prior to
the Closing, the Company shall have had knowledge of the circumstances giving
rise to the claim being pursued by it or Restoration; (b) prior to the Closing,
the Company engaged in conduct or took action that caused or brought about the
circumstances giving rise to such claim, or otherwise contributed thereto; (c)
the Company or Restoration is estopped from asserting or recovering upon such
claim by reason of the Company having joined in any of the representations,
warranties and covenants made by the Seller in this Agreement; or (d) the Seller
has a right of contribution from the Company to the extent that there is any
recovery against them.
9.15 ARBITRATION. BY EXECUTING THIS AGREEMENT, THE PARTIES ARE
AGREEING TO HAVE ANY MATTER THAT IS THE SUBJECT OF ARBITRATION PURSUANT TO THIS
SECTION 9.15 DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND
ARE GIVING UP ANY RIGHTS THEY MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A
COURT OR JURY TRIAL. BY EXECUTING THIS AGREEMENT, THE PARTIES ARE GIVING UP
JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY
INCLUDED IN THE ARBITRATION PROVISION OR ARE OTHERWISE PROVIDED BY CODE OF CIVIL
PROCEDURE SECTION 1280 ET SEQ; IF ANY OF THE PARTIES REFUSES TO SUBMIT TO
ARBITRATION IT MAY BE COMPELLED TO ARBITRATE UNDER THE CALIFORNIA CODE OF CIVIL
PROCEDURE. A PARTY'S AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. BY
EXECUTING THIS AGREEMENT, EACH OF THE PARTIES ACKNOWLEDGES THAT IT HAS READ AND
UNDERSTOOD THE FOREGOING AND HAS AGREED TO SUBMIT DISPUTES ARISING OUT OF
MATTERS INCLUDED IN THIS SECTION 9.15 TO NEUTRAL ARBITRATION. Any controversy
or claim arising out of or relating to this Agreement or the breach hereof shall
be settled by binding arbitration, before a retired judge affiliated with
JAMS/Endispute. The place of arbitration shall be the offices of JAMS/Endispute
in San Francisco, California. A party seeking arbitration shall promptly send
its Demand for Arbitration, including a general description of the nature of the
claim and the nature and amount of damages and/or other relief sought, to the
other party and to JAMS/Endispute. The parties shall cooperate in seeking to
agree on the arbitrator; if they are unable to agree within 10 days of notice of
arbitration, JAMS/Endispute shall promptly select an arbitrator.
Within 10 days after the appointment of the arbitrator, any party may
serve demands for documents on another party to the extent permitted by
California Code of Civil Procedure ("CCP") Section 2031, and the other party
shall respond as provided in Section 2031. Within 20 days of the production of
documents, the parties shall exchange a list of: (i) any fact witnesses they
intend to call at the arbitration hearing and (ii) any other persons who may
have material information about the dispute. The witness list also shall
include a brief description of each identified person's knowledge. Within 80
days after the appointment of the arbitrator, any party may notice depositions,
however the total time for
34.
<PAGE>
all of each party's depositions of fact witnesses shall not exceed 15 eight-hour
days, including breaks, and said depositions shall be completed within 90 days
of the notice of deposition. Any other depositions or discovery shall be as
provided by CCP Title 9 Chapter 3.
The parties shall each exchange lists of up to 3 expert witnesses,
along with a statement of the witnesses' backgrounds and opinions, 45 days prior
to the commencement of the arbitration hearing. Between the 30th and 15th day
preceding the arbitration hearing, each party shall have the right to depose the
other party's experts, however, the total time for all of each party's
depositions of expert witnesses shall not exceed 2 eight-hour days, including
breaks. At least 5 business days prior to any expert's scheduled deposition,
the party designating the expert shall provide the other party with copies of
any reports or other documents the expert intends to offer at the arbitration
hearing and all documents on which the expert has relied in forming his or her
opinions.
The arbitration hearing shall be commenced within 240 days of the
notice of arbitration and conducted as expeditiously as possible in the manner
provided by CCP Title 9 Chapter 3. Parties may submit a post-hearing brief to
the arbitrator within 15 days after the conclusion of the arbitration hearing;
replies may be submitted within 10 days thereafter. Within 45 days after the
conclusion of the arbitration hearing, the arbitrator shall render an award and
issue a written statement of reasons for the award. The arbitration award shall
dispose of all of the issues that are the subject of the arbitration. Except as
otherwise limited by the Agreement, the arbitrator shall be empowered to award
compensatory or actual damages or enter an equitable award or remedy as
established by the preponderance of the evidence, but shall NOT have the
authority (i) to award punitive damages, or (ii) to reform, modify or materially
change this Agreement. Judgment upon the award may be entered in any court of
competent jurisdiction.
Costs of the arbitration initially shall be borne one-half each by
Seller and Restoration. However, in the discretion of the arbitrator, the
prevailing party(ies) in the arbitration may be entitled to recover costs and
reasonable attorneys' fees. The arbitrator's award shall determine the
prevailing party(ies), if any, in accordance with CCP Section 1032. Within 15
days after receipt of the award, the prevailing party(ies) shall submit to the
arbitrator a bill of costs and itemization of claimed attorneys' fees. Opposing
parties shall have 15 days to respond. Costs and attorneys' fees shall be
determined as provided by CCP Section 1033.5. Within 45 days after the award,
the arbitrator shall complete the award by adding costs and attorneys' fees as
appropriate. For purposes of petitions to confirm, correct or vacate the award
pursuant to CCP Title 9 Chapter 4, the time of service of any award to which
costs or attorneys' fees have been added as provided above shall be deemed to be
the date of service of a signed copy of the award, including costs and/or
attorneys' fees, on the petitioner. The following periods set forth in the CCP
shall be shortened as follows: Section 1288 -- from four years to 180 days to
file and serve a petition to confirm an award; and from 100 days to 30 days to
file and serve a petition to vacate or correct an award; Section 1288.2 -- from
100 days to 30 days to file and serve a response to a petition to vacate or
correct an award. The provisions of CCP Section 998 (relating to offers of
35.
<PAGE>
compromise) and of Civil Code Section 3287 (relating to prejudgment interest)
shall be applicable to any arbitration proceeding commenced hereunder.
9.16 FURTHER DOCUMENTS AND ASSURANCES.
(a) The Seller agrees to execute, acknowledge and deliver or
cause to be delivered, both before and after the Closing, such other deeds,
documents, affidavits and certificates as may be reasonably necessary and
required from time to time to confirm this Agreement and the performance of the
obligations of such Persons under the terms hereof, in such form and substance
as shall be reasonably satisfactory to Restoration.
(b) Restoration agrees to execute, acknowledge and deliver or
cause to be delivered, both before and after the Closing, such other deeds,
documents, affidavits and certificates as may be reasonably necessary and
required from time to time to confirm this Agreement and the performance of the
obligations of Restoration under the terms hereof, in such form and substance as
shall be reasonably satisfactory to the Seller.
(c) Restoration and Seller shall use best efforts to release
Seller as guarantor under those certain loans to Sanwa Bank California set forth
in Schedule 3.15 of the Disclosure Schedule assumed by Restoration in connection
-------------
with this Agreement and shall hold Seller harmless for liabilities relating to
such assumed loans and Seller's guarantee thereof.
(d) The Company and Seller shall use their respective best
efforts to obtain the key man life insurance referred to in Section 5.12.
------------
36.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and made and entered into as of the date first set forth above.
RESTORATION HARDWARE, INC.
By /s/ Thomas E. Low
-----------------------------
Name: Thomas E. Low
Title: SVP CFO
SELLER
/s/ Michael Vermillion
-------------------------------
Michael Vermillion
<PAGE>
Exhibit 10.7
*= CERTAIN INFORMATION IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
SUPPLY AGREEMENT
----------------
This Agreement is entered as of March 20, 1998, by and between The
Michaels Concepts in Wood, Inc. ("Seller"), a California corporation,
Restoration Hardware, Inc. ("Buyer"), a California corporation and Michael
Vermillion, an individual.
WHEREAS, Seller is engaged in the manufacture of certain furniture
products; and
WHEREAS, Buyer wishes to purchase a minimum volume of such products
from Seller and Seller is willing to supply Buyer with such minimum volume;
NOW, THEREFORE, in consideration of the premises and the mutual
promises and covenants set forth below, Seller and Buyer mutually agree as
follows:
ARTICLE I
---------
DEFINITIONS
-----------
1.1 "Agreement" shall mean this Supply Agreement, as amended from
---------
time to time.
1.2 "Delivery Date" shall mean a date for which delivery of Product
-------------
is properly requested in a purchase order.
1.3 "Product" shall mean each product supplied hereunder by Seller
-------
which is listed in and meets the specifications set forth in Exhibit I, attached
hereto and made a part hereof, as such Exhibit I is amended by the parties from
time to time.
1.4 "Term" shall have the meaning set forth in Section 5.1 hereof.
----
ARTICLE II
----------
SALE AND PURCHASE OF PRODUCTS
-----------------------------
2.1 Sale and Purchase. Seller agrees to sell to Buyer and Buyer
-----------------
agrees to purchase from Seller a minimum volume ("Base Volume") of Product for
each of the fiscal years ending January 30, 1999 (fiscal 1998), January 29, 2000
(fiscal 1999) and January 27, 2001 (fiscal 2000) under the terms and conditions
of certain purchase orders to be delivered by Buyer to Seller from time to time
in substantially the form attached hereto as Exhibit II. The Base
<PAGE>
Volume for fiscal years 1998, 1999 and 2000 will be *= CERTAIN INFORMATION ON
THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
It is understood that Seller may not in connection with supply hereunder
contract with respect to manufacture of Product with any third parties.
ARTICLE III
-----------
PRICE AND PAYMENTS
------------------
3.1 Price. Buyer shall pay to Seller for Product purchased hereunder
-----
an amount equal to *= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
WITH RESPECT TO THE OMITTED PORTIONS.
3.2 Method of Payment. All payments due hereunder to Seller shall be
-----------------
paid to Seller in United States dollars not later than thirty (30) days
following the date of the applicable invoice.
3.3 Examination of Books. Buyer shall have the right, at its own
--------------------
expense, for any period during which Product is purchased by Buyer hereunder and
for one (1) year thereafter, to have an independent public accountant,
reasonably acceptable to Seller, examine the relevant financial books and
records of account of Seller at normal business hours, upon reasonable demand,
to determine or verify the appropriate price of Product purchased hereunder. If
errors of five percent (5%) or more in Buyer's favor are discovered as a result
of such examination, Seller shall reimburse Buyer for the expense of such
examination and pay the deficiency with interest immediately. The opinion of
such independent public accountant shall be binding on the parties hereto with
respect to the cost of Product hereunder.
ARTICLE IV
----------
TERMINATION
-----------
4.1 Term. This Agreement shall continue in effect until January 27,
----
2001.
4.2 Termination by Mutual Agreement. This Agreement may be
-------------------------------
terminated upon mutual written agreement between the parties.
4.3 Termination for Default. If either party materially defaults in
-----------------------
the performance of any material agreement, condition or covenant of this
Agreement and such default or noncompliance shall not have been remedied within
thirty (30) days after receipt by the defaulting party of a notice thereof from
the other party, the party not in default may terminate this Agreement.
ARTICLE V
---------
MISCELLANEOUS
-------------
<PAGE>
5.1 Entire Agreement. This Agreement contains the entire agreement
----------------
of the parties regarding the subject matter hereof and supersedes all prior
agreements, understandings and negotiations regarding the same. This Agreement
may not be changed, modified, amended or supplemented except by a written
instrument signed by both parties. Furthermore, it is the intention of the
parties that this Agreement be controlling over additional or different terms of
any order, confirmation, invoice or similar document, even if accepted in
writing by both parties, and that waivers and amendments shall be effective only
if made by non-pre-printed agreements clearly understood by both parties to be
an amendment or waiver.
5.2 Assignability. This Agreement may not be assigned by either
-------------
party without the prior consent of the other party; provided, however that Buyer
may assign this Agreement to any entity which acquires substantially all of its
assets or business.
5.3 Severability. If any provision of this Agreement shall be held
------------
illegal or unenforceable, that provision shall be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain in full
force and effect and enforceable.
5.4 Further Assurances. Each party hereto agrees to execute,
------------------
acknowledge and deliver such further instruments, and to do all such other acts,
as may be necessary or appropriate in order to carry out the purposes and intent
of this Agreement.
5.5 Use of Party's Name. No right, express or implied, is granted by
-------------------
this Agreement to either party to use in any manner the name of the other or any
other trade name or trademark of the other in connection with the performance of
this Agreement.
5.6 Notice and Reports. All notices, consents or approvals required
------------------
by this Agreement shall be in writing and shall be deemed to have been given or
made for all purposes (i) upon personal delivery, (ii) one (1) day after being
sent, when sent by professional overnight courier service, (iii) five (5) days
after posting when sent by registered or certified mail or (iv) on the date of
transmission when sent by telegraph, telegram, telex or other form of "hard
copy" transmission, to either party hereto at the address set forth below or at
such other address as either party may designate by notice pursuant to this
Section 6.6.
If to Seller
or Michael Vermillion: Michael Vermillion
The Michaels Concepts in Wood, Inc.
5849 88th Street
Sacramento, CA 95822
If to Buyer: Thomas E. Low
c/o Restoration Hardware, Inc.
15 Koch Road, Suite J
Corte Madera, CA 94925
3.
<PAGE>
And a copy to:
Therese A. Mrozek
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
5.7 Relationships of the Parties. Both parties are independent
----------------------------
contractors under this Agreement. Nothing contained in this Agreement is
intended nor is to be construed so as to constitute Seller and Buyer as
partners, agents or joint venturers with respect to this Agreement. Neither
party hereto shall have any express or implied right or authority to assume or
create any obligations on behalf of or in the name of the other party or to bind
the other party to any contract, agreement or undertaking with any third party.
5.8 Waiver. The waiver by either party of a breach of any provisions
------
contained herein shall be in writing and shall in no way be construed as a
waiver of any succeeding breach of such provision or the waiver of the provision
itself.
5.9 Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of California without regard
to the conflicts of laws provisions thereof. BY EXECUTING THIS AGREEMENT, THE
PARTIES ARE AGREEING TO BE BOUND BY SECTION 9.15 (THE ARBITRATION PROVISION) OF
THAT CERTAIN STOCK PURCHASE AGREEMENT OF EVEN DATE HEREWITH BETWEEN BUYER AND
MICHAEL VERMILLION. THEREFORE, THE PARTIES ARE AGREEING TO HAVE ANY MATTER THAT
IS THE SUBJECT OF ARBITRATION PURSUANT TO THIS SECTION 5.9 DECIDED BY NEUTRAL
ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND ARE GIVING UP ANY RIGHTS THEY
MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY
EXECUTING THIS AGREEMENT, THE PARTIES ARE GIVING UP JUDICIAL RIGHTS TO DISCOVERY
AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE ARBITRATION
PROVISION OR ARE OTHERWISE PROVIDED BY CODE OF CIVIL PROCEDURE SECTION 1280 ET
SEQ.; IF ANY OF THE PARTIES REFUSES TO SUBMIT TO ARBITRATION IT MAY BE COMPELLED
TO ARBITRATE UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE. A PARTY'S AGREEMENT
TO THIS ARBITRATION IS VOLUNTARY. BY EXECUTING THIS AGREEMENT, EACH OF THE
PARTIES ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD THE FOREGOING AND HAS
AGREED TO SUBMIT DISPUTES ARISING OUT OF MATTERS INCLUDED IN THIS SECTION 5.9 TO
MUTUAL ARBITRATION. Service of process in any such action may be effected in
the manner provided in Section 5.6 for delivery of notices.
5.10 Captions. Paragraph captions are inserted for convenience only
--------
and in no way are to be construed to define, limit or affect the construction or
interpretation hereof.
4.
<PAGE>
5.11 Force Majeure. A party shall not be liable for nonperformance
-------------
or delay in performance (other than of obligations regarding payment of money or
confidentiality) caused by any event reasonably beyond the control of such party
including, but not limited to, wars, hostilities, revolutions, riots, civil
commotion, national emergency, strikes, lockouts, unavailability of supplies,
epidemics, fire, flood, earthquake, force of nature, explosion, embargo or any
other Act of God, or any law, proclamation, regulation, ordinance or other act
or order of any court, government or governmental agency.
5.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be effective as of the date first written above.
THE MICHAELS CONCEPTS IN WOOD, INC.
By: /s/ Michael Vermillion
----------------------------------------
Title: PRES
--------------------------------------
RESTORATION HARDWARE, INC.
By: /s/ Thomas Low
----------------------------------------
Title: CFO
--------------------------------------
SIGNATURE PAGE TO SUPPLY AGREEMENT
<PAGE>
Exhibit 10.8
LEASE AGREEMENT
WHEREAS, Stephen and Christine Gordon, hereafter designated as Lessor,
and Restoration Hardware, Inc., hereinafter designated as Lessee, are desirous
of entering into a lease agreement respecting the premises hereinafter
described.
NOW, THEREFORE, for and in consideration of the foregoing, and of the
mutual covenants and conditions hereinafter contained.
IT IS AGREED AS FOLLOWS:
1. Lessor leases to Lessee and Lessee leases from Lessor those
certain premises known and described as follows:
The portion of the building located at 417 Second Street, Eureka,
California designated as Unit 101.
2. The term of the within lease is five (5) years commencing June 1,
1994, and ending May 31, 1999. In addition, Lessee shall have the option to
extend the Lease for an additional five (5) year term in accordance with the
provisions of paragraph 4(c).
3. Lessee agrees to use said demised premises for the purpose of
operating a retail hardware and home furnishings store.
4. Lessee agrees to pay rent as follows:
(a) A monthly rental of $1,700.00 commencing June 1, 1994, and
continuing on the first day of each succeeding month during the term;
1.
<PAGE>
(b) The monthly rent provided in subparagraph (a) above shall be
subject to adjustment at the commencement of the second year of the term and
each year thereafter ("Adjustment Date") as follows:
The base for computing the adjustment is the Consumer Price Index (all
items) for the United States, published by the Department of Labor, Bureau of
Labor Statistics ("Index"), nearest the date of the commencement of the term
("Beginning Index"). If the Index published nearest the Adjustment Date
("Extension Index") has increased over the Beginning Index, the monthly rent for
the following year shall be set by multiplying the monthly rent set forth in
subparagraph (a) above by a fraction, the numerator of which is the Extension
Index and the denominator of which is the Beginning Index. In no case shall the
monthly rent be less than the rent set forth in subparagraph (a).
If the Index is changed so that the base year differs from that used
as of the month immediately preceding the month in which the term commences, the
Index shall be converted in accordance with the Conversion Factor published by
the United States Department of Labor, Bureau of Labor Statistics. If the Index
is discontinued or revised during the term, such other government index or
computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the index had not been
discontinued or revised.
Provided, however, that there shall be a minimum annual increase of
three percent (3%) and a maximum of eight percent (8%) during each year of the
term.
2.
<PAGE>
(c) Lessee is hereby granted the right and option to renew the
within lease for an additional period of five (5) years upon the same terms and
conditions as herein set forth. Should Lessee elect to so renew, it shall notify
Lessor in writing of its intention to do at least 180 days prior to the date of
expiration of the within Lease. Rent shall be adjusted at the commencement of,
and throughout the extended term, in accordance with the provisions hereinabove
set forth.
5. Lessee agrees to maintain the interior of the premises in good
and sanitary order, condition and repair. Lessee shall permit Lessor or its
agents to enter into and upon said premises at all reasonable times for the
purpose of inspecting the same.
6. Lessee shall pay for all water, gas, heat, light, telephone,
power, garbage disposal, gardening service and window washing.
7. Lessor agrees to assume responsibility for the maintenance and
repair of all structural portions of the premises including, without limitation,
the foundation, side walls, roof, structural plumbing and structural
electricity. Any other repairs, remodelling or altering with the exception of
those specifically mentioned in the within agreement shall be considered the
obligation of the Lessee. Lessee agrees to replace all broken glass with glass
of the same size and quality of the glass broken. No structural alterations will
be made by Lessee without first obtaining the written consent of Lessor.
8. Lessee agrees to pay when due any taxes which may be levied
against equipment, furniture and fixtures installed by and belonging to Lessee.
3.
<PAGE>
9. Lessee agrees to pay when due any real property taxes and
assessments which may be levied against the premises. Lessor shall deliver the
tax bill to Lessee upon receipt, and Lessee shall provide Lessor with a receipt
for payment or other evidence of payment satisfactory to Lessor, prior to the
due date of such taxes. Taxes due for any partial year shall be prorated.
10. Lessee shall be solely responsible for all damages, claims and
liabilities for personal injuries or property damages occurring on or arising
out of Lessee's use of the demised premises. Lessee agrees to hold harmless,
indemnify and defend Lessor against any and all such claims, liabilities and
demands.
(a) Lessee shall maintain in full force and effect, during the
term or any extension thereof, a policy or policies of comprehensive general
liability insurance with limits of at least $1,000,000.00 per occurrence. Lessor
shall be named as additional assured, and Lessee shall provide Lessor with a
certificate of insurance evidencing the coverage and providing that the coverage
may not be cancelled or amended, as to Lessor, without first providing 20 days
written notice.
(b) Lessor shall maintain fire insurance on the premises, but
Lessee shall be solely responsible for maintaining insurance coverage with
respect to its personal property placed upon the premises. Lessee shall pay when
due the premium due with respect to any and all fire insurance policies
maintained upon the premises by the Lessor, Lessor shall deliver the premium
notice to Lessee, upon receipt, and Lessee shall promptly pay the same no later
than date upon which payment is due.
4.
<PAGE>
11. If the demised premises, during the term of this agreement, or
any renewal thereof, shall be destroyed by fire or other casualty, Lessor shall
be under no obligation to rebuild the same, and if Lessor shall elect to not
rebuild, then this lease shall at once become null and void and the obligations
of Lessee to pay rental hereunder shall cease. Provided, however, if the Lessor
shall elect to rebuild said premises, it may do so by restoring the same to like
condition as of the date of this agreement, and during the term of said
rebuilding the rent reserved hereunder shall cease, but upon the conclusion of
such rebuilding, the rent at once begins again. If the demised premises are
destroyed within the last 12 months of the lease term, the Lessee shall have the
right to terminate the lease.
12. If the premises shall be damaged by fire or other cause so as to
be capable of being repaired within a period of 60 days, then Lessor shall cause
the premises to be repaired and during the time said repairs are being made,
Lessor shall remit to Lessee a fair portion of the rent according to the nature
of the damage sustained and according to the extent that Lessee is deprived of
the use of said premises.
13. Should Lessee fail or omit to perform any of the covenants or
conditions herein, or should Lessee abandon the premises, Lessor may either
elect to terminate this lease, or may elect to re-rent the demised premises at
any time as the agent of the tenants, or otherwise, for whatever rental Lessor
shall be able to obtain. Should Lessor elect to re-rent the premises for the
benefit of Lessee, Lessor shall mail notice in writing to Lessee, addressed to
Lessee at 417 Second Street, Eureka,
5.
<PAGE>
California, notifying said Lessee of such intention; all proceeds received as
rent, in the event of such re-renting, shall be applied first to the payment of
such expenses as Lessor may have incurring in re-renting and re-entering, and
then to the payment of the rent due hereunder, and in case of a deficiency,
Lessee shall be liable therefor.
14. At the expiration of the within lease or any extension thereof,
Lessee shall remove all lettering and signs of a permanent nature placed on the
outside walls of the demised premises.
15. Lessee shall not assign this lease without the written consent of
Lessor first having been obtained.
16. The Lessee shall not sublet portions of the premises to any
separate enterprises operating separately from the Lessee.
17. In the event of any dispute between Lessor and Lessee relative to
the provisions of this lease, they shall each select an arbitrator, who in turn
shall select a third arbitrator. The arbitrators so selected shall determine the
controversy, by majority vote, and their decision thereon shall be final and
binding upon both Lessor and Lessee, who shall bear the cost of such arbitration
equally between them.
18. Failure on the part of Lessor to take any action against Lessee
by reason of any particular breach of any or all of the terms, covenants and
conditions of this lease on the part of Lessee, shall not be deemed in any way
to be a waiver of any other or subsequent breach on the part of Lessee of any or
all of the covenants and conditions of this lease.
6.
<PAGE>
19. Upon the removal from said premises upon expiration this Lease,
or any extended period thereof, and for a period of 30 days thereafter Lessee
shall have the right to remove any and all trade fixtures placed on said demised
premises by the said Lessee. Should Lessee fail to remove such trade fixtures
prior to the expiration of the said Lease or extension thereof, Lessee shall pay
to Lessor the minimum monthly rental herein provided for such period of time as
said fixtures remain on the premises.
20. In the event of any litigation or arbitration between the parties
regarding this Lease, the prevailing party shall be entitled to recover all
costs incurred, including reasonable attorney fees.
21. All the covenants, conditions, agreements and undertakings
herein contained shall extend to and be binding upon the heirs, executors,
administrators, representatives, successors and assigns of the respective
parties hereto.
The parties hereto have set their hands as of this 4th day of May,
1994.
LESSOR:
/s/ Stephen Gordon
---------------------------------
Stephen Gordon
/s/ Christine Gordon
---------------------------------
Christine Gordon
LESSEE:
Restoration Hardware, Inc.
/s/ Stephen Gordon
---------------------------------
Stephen Gordon, President
7.
<PAGE>
Exhibit 10.9
COMMERCIAL LEASE AND DEPOSIT RECEIPT
DATED: October 18, 1994
RECEIVED
FROM Restoration Hardware, Inc. a California Corporation
----------------------------------------------------------------------------
______________________________________________hereinafter referred to as LESSEE,
THE SUM OF $18,600.00 ( Eighteen Thousand Six Hundred Dollars and no/100
------------------------------------------------
(DOLLARS) evidenced by , as a deposit which, upon acceptance of this lease,
shall belong to Lessor and shall be applied as follows:
<TABLE>
<CAPTION>
RECEIVED PAYABLE PRIOR TO
OCCUPANCY
<S> <C> <C>
Rent for the period from December 15, 1994 to January 31, 1995 $ 11,100.00 $ 0
Security deposit ..... (SEE TERM & CONDITION #20 SECURITY)......... $ 7,500.00 $ 0
TOTAL AMOUNT....................................................... $ 18,600.00 $ 0
</TABLE>
In the event that this lease is not accepted by the Lessor within three (3)
business days, the total amount of $18,600.00 received shall be refunded.
----------
Lessee hereby offers to lease from Lessor the premises situated in the
City of Corte Madera
County of Marin State of California, described as: 15 Koch Service Road,
Suite "J"
Upon the following TERMS and CONDITIONS:
1. TERM: The term hereof shall commence on December 15, 1994 and expire on
-----------------
November 30, 1999
- -----------------
2. RENT: The total rent shall be $465,200.00 payable as follows:
<TABLE>
<S> <C> <C>
December 15, 1994 through November 30, 1995: $7,400.00 per month * Restoration Hardware's
December 1, 1995 through November 30, 1996: $7,600.00 per month rent will be adjusted
December 1, 1996 through November 30, 1997: $7,800.00 per month pro-rata if there should
December 1, 1997 through November 30, 1998: $8,025.00 per month be a delay in the previous
December 1, 1998 through November 30, 1999: $8,250.00 per month tenant's departure from the
building beyond December 15
1994.
</TABLE>
Rental payments not received prior to the tenth of each month shall bear a late
charge of (10%) ten percent.
All rents shall be paid to Lessor or his authorized agent, at the following
address:
Wynwood Agency of California, Inc.
P.O. Box 1379
Sacramento, California 95812
(Lessee will receive payment book.)
or at such other places as may be designated by Lessor from time
to time
3. USE: The premises are to be used only for the operation of administrative
offices/distribution warehouse, and for no other purpose, without prior written
consent of Lessor.
4. USES PROHIBITED: Lessee shall not use any portion of the premises for
purposes other than those specified hereinabove, and no use shall be made or
permitted to be made upon the premises, nor acts done, which will increase the
existing rate of insurance upon the property, or cause cancellation of insurance
policies covering said property. Lessee shall not permit or create any toxic
waste on the premises. Lessee shall not conduct or permit any sale by auction on
the premises.
5. SUBLETTING AND ASSIGNMENT: Lessee shall not sublet any portion of the
premises. Lessee shall not assign this lease without prior written consent of
the Lessor, which shall not be unreasonably withheld. Assignment without consent
or subletting shall be void and, at the option of the Lessor, may terminate this
lease. Right of assignment is for entire space. Assignee does not have the right
of assignment.
6. ORDINANCES AND STATUTES US: Lessee shall comply with all statutes, ordinances
and requirements of all municipal, state and federal authorities now in force,
or which may hereafter be in force, pertaining to the premises, occasioned by or
affecting the use thereof by Lessee. The commencement or pendency of any state
or federal court abatement proceeding affecting the use of the premises shall at
the option of the Lessor, be deemed a breach hereof.
DATED: 10-20-94 DATED: 10/23/94
---------------------------- -------------------------
SIGN [SIGNATURE ILLEGIBLE] SIGN [SIGNATURE ILLEGIBLE] Lessor
------------------------------Lessor ---------------------------
LEASE FORMS 9408 PAGE ONE OF FOUR
<PAGE>
7. MAINTENANCE, REPAIRS, ALTERATIONS: Lessee acknowledges that the premises are
in good order and repair, unless otherwise indicated herein. Lessee shall at his
own expense and at all times, maintain the premises in good and safe condition,
including plate glass, electrical wiring, plumbing and heating installations and
any other system or equipment upon the premises and shall surrender the same, at
termination hereof, in as good condition as received, normal wear and tear
excepted. Lessee shall be responsible for all repairs required, excepting the
roof and exterior structural wall surfaces (except glass which shall be the
Lessee's responsibility) which shall be maintained by Lessor.
8. ENTRY AND INSPECTION: Lessee shall permit Lessor or Lessor's agent to enter
upon the premises at reasonable times and upon reasonable notice, for the
purpose of inspecting the same, and will permit Lessor at any time within sixty
(60) days prior to the expiration of this lease, to place upon the premises any
usual "To Let" or "For Lease" signs, and permit persons desiring to lease the
same to inspect the premises thereafter.
9. INDEMNIFICATION OF LESSOR: Lessor shall not be liable for any damage or
injury to Lessee, or any other person, or to any property, occurring on the
demised premises or any part thereof, and Lessee agrees to hold Lessor harmless
from any claims for damages, no matter how caused.
10. POSSESSION: If Lessor is unable to deliver possession of the premises at the
commencement hereof, Lessor shall not be liable for any damage caused thereby,
nor shall this lease be void or voidable, but Lessee shall not be liable for any
rent until possession is delivered. Lessee may terminate this lease if
possession is not delivered within three (3) days of the commencement of the
term hereof.
11. INSURANCE: Lessee, at his expense, shall maintain plate glass, public
liability and property damage insurance insuring Lessee and Lessor with minimum
coverage as follows: $1,000,000 Combined Single Limit of Bodily Injury and
Property Damage Liability.
Lessee shall provide Lessor with a Certificate of Insurance showing Lessor
as additional insured. The Certificate shall provide for a ten-day written
notice to Lessor in the event of cancellation or material change of coverage.
To the maximum extent permitted by insurance policies which may be owned by
Lessor or Lessee, Lessee and Lessor, for the benefit of each other, waive any
and all rights of subrogation which might otherwise exist.
12. UTILITIES: Lessee agrees that he shall be responsible for the payment of all
utilities, gas, electricity, heat and other services delivered to the premises.
13. SIGNS: Lessor reserves the exclusive right to the roof, side and rear walls
of the Premises. Lessee shall not construct any projecting sign or awning.
To assure uniformity of appearance, Lessor shall exercise control over
size, type, color and location of all signs visible from exterior and subject to
appropriate governmental approval.
All signs will require Lessors written consent.
14. ABANDONMENT OF PREMISES: Lessee shall not vacate or abandon the premises at
any time during the term hereof, and if Lessee shall abandon or vacate the
premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee left upon the premises shall be deemed to be
abandoned, at the option of Lessor.
15. CONDEMNATION: If any part of the premises shall be taken or condemned for
public use, and a part thereof remains which is susceptible of occupation
hereunder, this lease shall, as to the part taken, terminate as of the date the
condemnor acquires possession, and thereafter Lessee shall be required to pay
such proportion of the rent for the remaining term as the value of the premises
remaining bears to the total value of the premises at the date of condemnation;
provided however, that Lessor may at his option, terminate this lease as of the
date the condemnor acquires possession. In the event that the demised premises
are condemned in whole, or that such portion is condemned that the remainder is
not susceptible for use hereunder, this lease shall terminate upon the date upon
which the condemnor acquires possession. All sums which may be payable on
account of any condemnation shall belong to the Lessor, and Lessee shall not be
entitled to any part thereof, provided however, that Lessee shall be entitled to
retain any amount awarded to him for his trade fixtures or moving expenses.
16. TRADE FIXTURES: Any and all improvements made to the premises during the
term hereof shall belong to the Lessor, except trade fixtures of the Lessee.
Lessee may, upon termination hereof, remove all his trade fixtures, but shall
repair or pay for all repairs necessary for damages to the premises occasioned
by removal.
17. DESTRUCTION OF PREMISES: In the event of a partial destruction of the
premises during the term hereof, from any cause, Lessor shall forthwith repair
the same, provided that such repairs can be made within sixty (60) days under
existing governmental laws and regulations, but such partial destruction shall
not terminate this lease, except that Lessee shall be entitled to a
proportionate reduction of rent while such repairs are being made, based upon
the extent to which the making of such repairs shall interfere with the business
of Lessee on the premises. If such repairs cannot be made within said sixty (60)
days, Lessor, at his option, may make the same within a reasonable time, this
lease continuing in effect with the rent proportionately abated as aforesaid,
and in the event that Lessor shall not elect to make such repairs which cannot
be made within sixty (60) days, this lease may be terminated at the option of
either party.
In the event that the building in which the demised premises may be
situated is destroyed to an extent of not less than one-third of the replacement
costs thereof. Lessor may elect to terminate this lease whether the demised
premises be injured or not. A total destruction of the building in which the
premises may be situated shall terminate this lease.
In the event of any dispute between Lessor and Lessee with respect to the
provisions hereof, the matter shall be settled by arbitration in such a manner
as the parties may agree upon, or if they cannot agree, in accordance with the
rules of the American Arbitration Association.
DATED 10-20-94 DATE 10/21/94
---------------------------- --------------------------
SIGN [SIGNATURE ILLEGIBLE] SIGN [SIGNATURE ILLEGIBLE]
-----------------------------Lessor ---------------------------Lessor
<PAGE>
18. INSOLVENCY: In the event that a receiver shall be appointed to take over the
business of the Lessee, or in the event that the Lessee shall make a general
assignment for the benefit of creditors, or Lessee shall take or suffer any
action under any insolvency or bankruptcy act, the same shall constitute breach
of this lease by Lessee.
19. REMEDIES OF OWNER ON DEFAULT: In the event of any breach of this lease by
Lessee, Lessor, besides other rights and remedies he may have, shall have the
immediate right of re-entry and may remove all persons and property from the
premises. Such property may be moved and stored in a public warehouse or
elsewhere at the cost of, and for the account of Lessee. Should Lessor elect to
re-enter, or should he take possession pursuant to legal proceedings or any
notice provided by law, he may either terminate this lease or may from time to
time, without terminating his lease, relet said premises, or any part thereof,
for such term or terms (which may be for a term extending beyond the term of
this lease) and at such rental or rentals and upon such other terms and
conditions as Lessor, in his sole discretion, may deem advisable with the right
to alter or repair the premises upon such reletting. In such event, Lessee shall
be immediately liable to pay to Lessor in addition to any other amounts due
hereunder: (a) the cost and expense of such reletting and such alterations or
repairs, and any amount by which the rent reserved herein for the period of such
reletting, but not beyond the term hereof, exceeds the amount agreed to be paid
as rent for such period; or: (b) at the option of the Lessor, rents received by
Lessor from such reletting shall be applied first to the repayment of
Indebtedness other than rent due hereunder, second to costs and expenses of
reletting and alterations or repairs, and third to the payment of rent due and
unpaid hereunder, and the residue, if any, shall be held by Lessor and applied
in payment of future rent as the same may become due and payable. Lessee shall
be credited only with rent actually received by Lessor. Lessee shall, in such
event, pay any deficiency between the amount due from Lessee to Lessor and the
amount credited.
No such re-entry or taking possession by Lessor shall be construed as an
election to terminate this lease unless written notice of such intention is
given, or unless termination be decreed by a court of competent jurisdiction.
Notwithstanding any such reletting without termination, Lessor may at any time
thereafter elect to terminate this lease on account of such previous breach.
Should Lessor at any time terminate this lease for any breach, in addition to
any other remedy he may have, he may recover from Lessee all damages he may
incur by reason of such breach, including the cost of recovering the premises,
and including the worth at the time of such termination, or at the time of an
award if suit be instituted to enforce this provision, of the amount by which
the unpaid rent for the balance of the term exceeds the amount of the rental
loss for the balance of the term which the lessee proves could be reasonably
avoided.
20. SECURITY: The security deposit set forth above, if any, shall secure the
performance of the Lessee's obligations hereunder. Lessor may, but shall be
obligated to, apply all or portions of said deposit on account of Lessee's
obligations hereunder. Any balance remaining upon termination shall be returned
to Lessee. Lessee shall have the right to apply the Security Deposit in payment
of the last month's rent.
21. ATTORNEYS FEES: In case suit should be brought for recovery of the premises,
or for any sum due hereunder, or because of any act which may arise out of the
possession of the premises, by either party, the prevailing party shall be
entitled to all costs incurred in connection with such action, including a
reasonable attorney's fee.
22. WAIVER: No failure of Lessor to enforce any term hereof shall be deemed to
be a waiver.
23. NOTICES: Any notice which either party may or is required to give, shall be
given by mailing the same, postage prepaid, certified mail, return receipt
requested, to Lessee at the premises, or Lessor at the address shown below, or
at such other places as may be designated in writing by the parties from time to
time.
24. HOLDING OVER: Any holding over after the expiration of this lease, with the
consent of Lessor, shall be construed as a month-to-month tenancy at a rental of
$9,487.50 (last months rent plus fifteen percent) per month, otherwise in
accordance with the terms hereof, as applicable.
25. TIME. Time of the essence of this lease.
26. HEIRS, ASSIGNS, SUCCESSORS: This lease is binding upon and inures to the
benefit of the heirs, assigns and successors in interest to the parties.
27. TAX INCREASE: In the event there is any increase during any year of the term
of this lease in the City, County or State real estate taxes over and above the
amount of such taxes assessed for the tax year during which the term of this
lease commences, whether because of increased rate or valuation, Lessee shall
pay to Lessor upon presentation of paid tax bills an amount equal to 13% of the
increase in taxes upon the land and building in which the leased premises are
situated. In the event that such taxes are assessed for a tax year extending
beyond the term of the lease, the obligation of Lessee shall be proportionate to
the portion of the lease term included in such year, (initial tax year shall be
1995-1996).
28. PARKING: No permanent spaces are allocated nor overnight parking permitted.
29. STORAGE: No exterior storage of equipment, supplies, garbage or vehicles
permitted.
30. WASTE-QUITE CONDUCT: Lessee shall not permit any wastage of premises nor any
nuisance or other acts which disturbs the normal enjoyment of other tenants.
31. JURY TRIAL WAIVER: LESSOR and LESSEE hereby waive their respective right to
trial by jury of any cause of action, claim, counter-claim or cross-complaint in
any action, proceeding and/or hearing brought by either LESSOR against LESSEE or
LESSEE against LESSOR on any matter whatsoever arising out of, or in any way
connected with, this Lease, the relationship of LESSOR and LESSEE, LESSEE'S use
or occupancy of the Premises, or any claim of injury or damage, or the
enforcement of any remedy under any law, statute, or regulation, emergency or
otherwise, now or hereafter in effect.
32. LESSEE WILL NOT hang, mount or attach anything on the roof, ceiling, beams
or rafters of the premises unless authorized in writing by lessor.
X
SEE ADDENDUM EXHIBIT "A" ATTACHED FOR ADDITIONAL TERMS AND CONDITIONS:-----YES
- -----NO
TERM AND CONDITION NUMBER---------THROUGH NUMBER-------------EXHIBIT "A"
ATTACHED DATED----------
10-20-94 10-20-94
DATED------------------------ DATED------------------------
[SIGNATURE ILLEGIBLE] Lessor [SIGNATURE ILLEGIBLE] Lessor
SIGN------------------------- SIGN-------------------------
LEASE FORM 9408 PAGE THREE OF FOUR
<PAGE>
ENTIRE AGREEMENT: The foregoing constitutes the entire agreement between the
parties and may be modified only by a writing signed by both parties. The
following Exhibits, if any, have been made a part of this lease before the
parties' execution
hereof Plot Plan Dated October 14, 1994 and Hazardous Materials Disclosure
.........................................................................
...............................................................................
The undersigned Lessee hereby acknowledges receipt of a copy hereof
10/20/94
DATED................................. DATED..................................
[SIGNATURE ILLEGIBLE]
SIGN NAME......................Lessee SIGN NAME........................Lessee
[SIGNATURE ILLEGIBLE]
PRINT NAME.....................Lessee PRINT NAME....... ...............Lessee
..............................Address ................................Address
..................................... .......................................
................................Phone ..................................Phone
ACCEPTANCE
The undersigned Lessor accepts the foregoing offer and agrees to lease the
herein described premises on the terms and conditions herein specified. The
Lessor agrees to pay to Grubb & Ellis Company , the Agent in this transaction
.......................
upon acceptance herein the sum of $ per agreement
(...................................................DOLLARS) for services
rendered.
The undersigned Lessor hereby acknowledges receipt of a copy hereof
10/20/94
DATED................................. DATED.................................
[SIGNATURE ILLEGIBLE]
SIGN NAME........................Agent SIGN NAME.......................Lessor
Diane Kershner H. Koch and Sons
PRINT NAME.......................Agent PRINT NAME......................Lessor
M. J. Koch - Owner/Manager
899 Northgate Drive, Suite 210 2280 Rockville Rd.
.............................. Address ...............................Address
San Rafael, California 94903 Suisun CA. 94585
..................................... ......................................
(415) 499-1800 707 864 1359
................................Phone .................................Phone
LEASE FORM 9408 PAGE FOUR OF FOUR
<PAGE>
ADDENDUM
EXHIBIT "A"
Dated October 18, 1994
----------------
REFERENCE: "COMMERCIAL LEASE AND DEPOSIT RECEIPT" DATED:
LESSEE: Restoration Hardware, Inc.
LESSOR: M. J. Koch
ADDITIONAL TERMS AND CONDITIONS AS FOLLOWS:
32. OPTION: Provided Lessee is not in default of this Lease, Lessee
shall have one (1) option to extend this Lease for one (1) three
(3) year term from December 1, 1999 to November 30, 2002 upon
written notice to Lessor from Lessee, given ninety (90) days
prior to the termination date herein, with all the conditions
remaining the same except for the rent, which shall be as follows
per month:
OPTION PERIOD:
December 1, 1999 through November 30, 2000: $8,500.00 per month
December 1, 2002 through November 30, 2001: $8,750.00 per month
December 1, 2001 through November 30, 2002: $9,000.00 per month
33. FLOOD INSURANCE: Lessee is aware that the Building has flooded in
the past. Lessor has put in a pump station and the City of Corte
Madera has also installed a pump stations plus a barrier has been
put around the property and no flooding has occurred since, but,
it possibly could. Lessee should feel free to discuss this with
the City of Corte Madera. The Building is listed in a flood zone
and Federal Flood Insurance may be available.
34. The premises is separately metered for water usage. Lessor
currently pays all water bills but reserves the right to have
Lessee pay water bills at some future time.
35. Lessee accepts the premises in its "as-is" condition. Premises
shall be delivered clean. Any structural tenant improvements to
premises must be approved by Lessor. All tenant improvements
shall be completed by licensed contractor and in accordance with
all applicable codes.
36. Occupancy date of December 15, 1994 is subject to the current
tenant vacating the premises. Written notice will be provided to
Lessee as to the exact availability date.
37. Lessor and Lessee acknowledges that the broker in this
transaction, Grubb & Ellis Company, represents both parties and
Lessee and Lessor consent thereto.
DATED: 10-20-94 DATED: 10/20/84
--------------------------- ----------------------------
SIGN /s/ M J Koch LESSOR SIGN [SIGNATURE ILLEGIBLE] LESSOR
--------------------------- ----------------------------
LEASE FORM 9408
<PAGE>
[PLOT PLAN APPEARS HERE]
DATED:__________________________ DATED: 10-20-94
------------------------------
SIGN____________________________ Lessee SIGN [SIGNATURE ILLEGIBLE] Lessor
<PAGE>
Grubb & Ellis Company
Commercial Real Estate Services
State of California
SALE/LEASE AMERICANS WITH DISABILITIES ACT
AND HAZARDOUS MATERIALS DISCLOSURE
Address: 15 Koch Road, Suite J, Corte Madera, California
------------------------------------------------------------------------
The United States Congress has enacted the Americans With Disabilities Act.
Among other things, this act is intended to make many business establishments
equally accessible to persons with a variety of disabilities; modifications to
real property may be required. State and local laws also may mandate changes.
The real estate brokers in this transaction are not qualified to advise you as
to what, if any, changes may be required now, or in the future. Owners and
tenants should consult their attorneys and qualified design professionals of
their choices for information regarding these matters. Real estate brokers
cannot determine which attorneys or design professionals have the appropriate
expertise in this area.
Various construction materials may contain items that have been or may be in the
future be determined to be hazardous (toxic) or undesirable and may need to be
specifically treated/handled or removed. For example, some transformers and
other electrical components contain PCB's, and asbestos has been used in the
components such as fire-proofing, heating and cooling systems, air duct
insulation, spray-on and tile acoustical materials, linoleum, floor tiles,
roofing, dry wall and plaster. Due to prior or current uses of the Property or
in the area, the Property may have hazardous or undesirable metals, minerals,
chemicals, hydrocarbons, or biological or radioactive items (including electric
and magnetic fields) in soils, water, building components, above or below-ground
containers or elsewhere in areas that may or may not be accessible or
noticeable. Such items may leak or otherwise be released. Real estate agents
have no expertise in the detection or correction of hazardous or undesirable
items. Expert inspections are necessary. Current or future laws may require
clean up by past, present and/or future owners and/or operators. It is the
responsibility of the Seller/Lessor and Buyer/Tenant to retain qualified experts
to detect and correct such matters and to consult with legal counsel of their
choice to determine what provisions, if any, they may wish to include in
transaction documents regarding the Property.
To the best of Seller/Lessor's knowledge, Seller/Lessor has attached to this
Disclosure copies of all existing surveys and reports known to Seller/Lessor
regarding asbestos and other hazardous materials and undesirable substances
related to the Property. Sellers/Lessors are required under California Health
and Safety Code Section 25915 et seq. to disclose reports and surveys regarding
asbestos to certain persons, including their employees, contractors, co-owners,
purchasers and tenants. Buyers/Tenants have similar disclosure obligations.
Sellers/Lessors and Buyers/Tenants have additional hazardous materials
disclosure responsibilities to each other under California Health and Safety
Code Section 25359.7 and other California laws. Consult your attorney regarding
this matter. Grubb & Ellis Company is not qualified to assist you in this matter
or provide you with other legal or tax advice.
SELLER/LESSOR BUYER/TENANT
By: [SIGNATURE ILLEGIBLE] By: Thomas A. Christopher
----------------------------- ------------------------------
Title:_________________________ Title: Chief Operating Officer
---------------------------
Date: 10-20-94 Date: 10/20/94
-------------------------- ----------------------------
<PAGE>
ADDENDUM TO LEASE
DATED 10-18-94
BETWEEN:
Restoration Hardware, Inc., LESSEE
M. J. Koch, H. Koch & Sons LESSOR
FOR THE PREMISES AT:
15 KOCH SERVICE ROAD,
SUITE "J"
CORTE MADERA, CA.
LESSOR AND LESSEE AGREE THAT THE COMMENCEMENT DATE FOR THE ABOVE MENTIONED
PROPERTY HAS BEEN CHANGED FROM DECEMBER 18, 1994 TO JANUARY 1, 1995.
The money paid by Restoration Hardware for 1/2 of the rent, ($3,700.00) for
December 15, 1994 to December 31, 1994 PER THE LEASE will apply to the term for
February 1, 1995 to February 14, 1995.
Restoration Hardware will pay the balance of the February rent ($3,700.00) on
February 15, 1995.
All other terms and conditions of the lease dated 10-18-94 to remain the same.
The lease will expire on 11-30-99.
This agreement is not valid unless both Lessee & Lessor sign & date below.
SIGNED AND AGREED TO:
/s/ M. J. Koch 11-21-94 /s/ Thomas Christopher 11-17-94
- ------------------------------- -----------------------------------
LESSOR DATE LESSEE DATE
M. J. Koch Thomas Christopher
H. Koch & Sons Restoration Hardware, Inc.,
<PAGE>
EXHIBIT 10.10
POINT EXECUTIVE CENTER
OFFICE LEASE
<TABLE>
<CAPTION>
<S> <C>
LANDLORD: PARADISE POINT PARTNERS
-----------------------------------------------------------
TENANT: RESTORATION HARDWARE
-----------------------------------------------------------
A CALIFORNIA CORPORATION
-----------------------------------------------------------
FLOOR: 1ST BLDG. D SUITE: 700
----------------- ---------------------------
MONTHLY RENT: $9,423.90
-----------------------------------------------------------
ANNUAL RENT: $113,086.80
-----------------------------------------------------------
EXPENSE PERCENTAGES: 7.78
-----------------------------------------------------------
TAX PERCENTAGE: 7.78
-----------------------------------------------------------
BASE EXPENSE YEAR: 1997
-----------------------------------------------------------
BASE TAX YEAR: 96-97
-----------------------------------------------------------
TERM: 5 YEARS
-----------------------------------------------------------
TERMINATION DATE: SEE ITEM 3
-----------------------------------------------------------
DATED AS OF: FEBRUARY 21, 1997
-----------------------------------------------------------
CORTE MADERA, CALIFORNIA
-----------------------------------------------------------
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Page
<C> <S> <C>
1. Premises................................................................................. 1
2. Use of Premises.......................................................................... 1
3. Term..................................................................................... 1
4. Possession............................................................................... 1
5. Minimum Rent............................................................................. 2
6. Rental Adjustment........................................................................ 2
7. Taxes Payable............................................................................ 4
8. Security Deposit......................................................................... 5
9. Compliance with Law...................................................................... 5
10. Parking Facilities....................................................................... 5
11. Maintenance and Repair................................................................... 6
12. Services and Utilities................................................................... 7
13. Alterations and Additions................................................................ 7
14. Liens.................................................................................... 8
15. Fire and Casualty Insurance.............................................................. 8
16. Damage and Destruction................................................................... 8
17. Public Liability Insurance............................................................... 9
18. Subrogation.............................................................................. 9
19. Eminent Domain........................................................................... 9
20. Assignment, Subletting and Encumbering................................................... 10
21. Indemnification of Landlord.............................................................. 11
22. Entry By Landlord........................................................................ 11
23. Default.................................................................................. 11
24. Remedies................................................................................. 12
25. Late Charges............................................................................. 12
26. Landlord's Right to Cure Default......................................................... 13
27. Default by Landlord...................................................................... 13
28. Landlord's Option To Relocate Tenant..................................................... 13
29. Sale of Premise.......................................................................... 13
30. Estoppel Certificate..................................................................... 13
31. Nonmerger................................................................................ 14
32. Subordination............................................................................ 14
33. Notices.................................................................................. 14
34. General Provisions....................................................................... 15
EXHIBIT A - Plan Outlining Premises...................................................... 17
EXHIBIT B - Work Agreement............................................................... 18
EXHIBIT C - Rules And Regulations........................................................ 22
EXHIBIT D - Sale/Lease Americans With Disability Act and Hazardous Materials Disclosure.. 27
</TABLE>
<PAGE>
OFFICE LEASE
THIS LEASE, dated February 21, 1997 is between PARADISE POINT PARTNERS
("Landlord") and RESTORATION HARDWARE ("Tenant").
PREMISES
1. (a) Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, those certain premises (the "Premises") outlined in red on
Exhibit A, which is attached hereto and incorporated herein. The
Premises are identified as Suite 700 and consist of approximately
5,094 net rentable square feet on the 1ST floor of D building of the
Paradise Point Executive Center (the "Center"), located at 5725
Paradise Drive, Corte Madera, California. The term "Center" shall mean
the underlying land and other real property and appurtenance thereto
commonly known as Paradise Point Executive Center, and includes, but
is not limited to, four two-level buildings, two tennis courts, a
recreation building and parking areas.
(b) The net rentable area of the Premises has been and shall continue to
be determined in accordance with the standards applied to full floor
users as of the date of this Lease by the Building Owners and Managers
Association International. Landlord shall construct or install in the
Premises the improvements specified by the provisions of Exhibit B.
(c) This Lease is subject to and conditioned upon all of the terms,
covenants and conditions set forth herein, and Tenant covenants as a
material part of the consideration for this Lease and as a condition
hereof to keep and perform each and all of said terms, covenants and
conditions.
USE OF PREMISES
2. The Premises shall be used and occupied only for GENERAL OFFICES and for no
other purposes without the prior written consent of Landlord. Any
unauthorized use shall be a breach of this Lease. Tenant, its employees,
agents, customers and invitees are hereby granted the nonexclusive use of the
common corridors and hallways, stairwells, elevators, rest rooms and other
generally understood public or common areas of the Center; provided, however,
that Landlord reserves the right to regulate or restrict the use of any such
public or common areas, whether or not specifically set forth above. Tenant
shall not use the Premises or allow the Premises to be used so as to create
waste or constitute a nuisance, or disturb other tenants located in the
Center.
TERM
3. The term of this Lease shall be 60 months, commencing on the date the
Premises are substantially complete, 1997 and ending on the fifth anniversary
thereof unless sooner terminated as provided herein. The Premises shall be
deemed "Substantially Complete" when: (i) construction and installation of
any tenant improvements to be built by Landlord has been completed; (ii)
Building services are ready to be furnished to the Premises; and (iii) Tenant
has received from Landlord evidence satisfactory to Tenant that a Certificate
of Occupancy or other necessary governmental approval has been issued for the
Premises.
POSSESSION
4. If the Landlord, for any reason whatsoever outside the control of Landlord,
cannot deliver possession of the Premises to Tenant at the commencement of
the term hereof (with the improvements to be constructed or installed
pursuant to Exhibit B Substantially Completed), this Lease shall not be void
or voidable, nor shall Landlord be liable to Tenant for any loss or damage
resulting therefrom, but in that event all rent shall be abated until the
Premises are Substantially Completed and delivered to Tenant. In the event
that Landlord shall permit Tenant to occupy the Premises prior to the
commencement date of the term, such occupancy shall be
1
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subject to all provisions of this Lease, except the obligation to pay rent.
MINIMUM RENT
5. Tenant shall pay to Landlord as rent for the use and occupancy of the
Premises, at the times and in the manner hereinafter provided, the following
sums of money:
(a) Minimum Rent. Tenant shall pay to Landlord, without deduction or offset
and without notice or demand, minimum rent in the amount of Nine Thousand
Four Hundred Twenty-three and 90/100 ($9,423.90) per month, payable in
advance on the commencement of the term hereof and on or before the first
day of each and every successive calendar month during the term hereof.
If the term commences or ends on other than the first day of a calendar
month, the payment of minimum rent shall be appropriately prorated. The
first month's rent shall be paid upon execution hereof.
(b) On the first anniversary of this lease and on each anniversary date
thereof, the minimum rent payable by Tenant under this Paragraph 5 shall
be increased to 103% of the prior month's rent.
RENTAL ADJUSTMENT
6. (a) Increases in Operating Expenses: Tenant shall pay to Landlord as
additional rent during the term of this Lease seven point seven eight
percent (7.78%) of the amount by which the annual Operating Expenses of
the Center exceed the Operating Expenses incurred by Landlord during the
calendar year 1997 (the "Base Year"). As used herein, the term "Operating
Expenses" shall include all direct costs of operation, maintenance and
management of the Center as determined by generally accepted accounting
practices. By way of illustration but not limitation, Operating Expenses
shall include the cost or charges for the following items: heat, light,
water, power and steam, environmental surcharges imposed by any
governmental entity, waste disposal, janitorial services, window
cleaning, air conditioning, materials and supplies, equipment and tools,
service agreements on equipment, insurance, licenses, permits and
inspections, wages and salaries, employee benefits and payroll taxes,
accounting and legal expenses, management fees, landscaping and exterior
maintenance, depreciation on personal property including, without
limitation, window draperies provided by Landlord and carpeting in public
corridors and common areas, the cost of contesting the validity or
applicability of any governmental enactments which may affect operating
expenses, and the reasonably amortized costs of capital improvements
required as a
2
<PAGE>
result of government orders, rules and regulations. For the
purposes of this Lease, Operating Expenses shall not include legal fees,
brokerage commissions, advertising costs and other related expenses
incurred in connection with the leasing of the Building, repairs,
alterations, additions, improvements or replacements made to rectify or
correct any defect in the design, materials or workmanship of the
Building or Common Areas or to comply with any requirements of any
governmental authority in effect as of the date of this Lease, damage and
repairs attributable to condemnation, fire or other casualty, damage and
repairs covered under any warranty or insurance policy carried by
Landlord in connection with the Building or Property, damage and repairs
necessitated by the negligence or willful misconduct of Landlord or
Landlord's employees, contractors or agents, Landlord's general overhead
expenses not related to the Building depreciation, the cost of any
service provided to Tenant or other occupants of the Building for which
Landlord is entitled to be reimbursed, taxes covered under subparagraph
(b) below, interest expense, leasing commissions, depreciation on the
Center itself, or the cost of capital expenditures, provided, however,
that in the event Landlord makes capital improvements which have the
effect of reducing operating expenses, Landlord may amortize its
investment in said improvements over the useful life thereof as an
operating expense in accordance with standard accounting practices
provided that such amortization is not at a rate greater than the
anticipated savings in the operating expenses. In the event that less
than ninety-five percent (95%) of the Center is occupied during any
calendar year, all Operating Expenses on the statements provided by
Landlord shall be adjusted for each calendar year to equal Landlord's
reasonable estimate of Operating Expenses had ninety-five percent (95%)
of the total rentable area of the Center been occupied, provided that the
base year is similarly adjusted. Statements of Operating Expenses
provided by Landlord shall be final and binding upon both Landlord and
Tenant.
(b) Increases in Taxes: Tenant shall pay to Landlord as additional rent
during the term of this Lease seven point seven eight percent (7.78%) of
the amount by which the Taxes of the Center for each tax year (July 1
through June 30) exceed the Base Tax Amount; provided, however, that
Tenant shall be excused from paying such additional rent until the Center
is assessed as substantially completed. As used herein, the Base Tax
Amount shall refer to the amount determined by multiplying the tax rate
in effect for tax year 96-97 by the assessed valuation of the Center for
the tax year 96-97. The term "Taxes" shall include all real property
taxes and assessments on the Center, the parcel of land underlying and
surrounding the Center, and the various estates in the Center and the
land. Taxes shall also include all personal property taxes levied on
property used in the operation of the Center; taxes of every kind and
nature whatsoever levied and assessed in lieu of or in substitution for
existing or additional real or personal property taxes on said Center,
land or personal property; and the cost to Landlord of contesting the
amount or validity or applicability of any of the aforementioned taxes.
Taxes shall not include taxes of the kind covered under Paragraph 7 to
the extent the Landlord is reimbursed therefor by any tenant of the
Center, nor shall Taxes include any interest on taxes or penalties
resulting from failure to pay real estate taxes or assessments before
delinquency, any state, local, federal, personal or corporate income tax
measured by the income of Landlord. A copy of the tax bill received by
Landlord for Taxes hereunder shall be made available to Tenant upon
demand. Landlord may contest the amount or validity of any Taxes and if
Landlord receives a refund thereof following such contest, it shall
promptly pay to Tenant the Tenant's pro rata share of such refund after
deducting any expenses including litigation incurred in connection with
obtaining the refund.
(c) Manner of Payment of Any Increase in Operating Expenses and Taxes: During
December of each calendar year or as soon thereafter as practicable,
Landlord shall give Tenant written notice of Landlord's estimate of the
additional rent, if any, payable under this Paragraph 6 for the ensuring
calendar year. On or before the first day of each month during the
ensuing calendar year, Tenant shall pay to Landlord one-twelfth (1/12th)
of such estimated additional rent, provided that if such notice is not
given in December, Tenant shall continue to pay on the basis of the prior
year's estimate until the month after such notice is given. If at any
time it appears to Landlord that the additional rent payable under this
Paragraph 6 for the current calendar year will vary from its estimate by
more than ten percent (10%), Landlord shall, by written notice to Tenant,
revise its estimate for such year, and subsequent payments by Tenant for
such year shall be based upon such revised estimate.
3
<PAGE>
(d) Annual Statement and Adjustments: On or before ninety (90) days after the
end of each calendar year, or as soon thereafter as practicable, Landlord
shall deliver to Tenant a statement of additional rent payable under this
Paragraph 6 for the preceding calendar year. If such statement shows an
amount that is less than the estimated payments made by Tenant for such
calendar year, it shall be accompanied by a refund of the excess by
Landlord to Tenant, or, at Landlord's election, by a notice that Landlord
shall credit the excess to the next succeeding monthly installment of
rent. If such statement shows an amount that is more than the estimated
payments made by Tenant for such calendar year, Tenant shall pay the
deficiency to Landlord within thirty (30) days after delivery of such
statement.
(e) If, for any reason other than default of Tenant, this Lease shall
terminate on a day other than the last day of a calendar year, the
additional rent payable by Tenant applicable to the calendar year in
which such termination shall occur shall be prorated according to the
ratio that the number of days from the commencement of such calendar year
to and including such termination date bears to three hundred sixty-five
(365)
TAXES PAYABLE
7. (a) In addition to the rent and additional rent and other charges to be paid
by Tenant under this Lease, Tenant shall reimburse Landlord upon demand
for any and all taxes required to be paid by Landlord (excluding state,
local or federal personal and corporate income taxes measured by the
income of Landlord from all sources, and estate and inheritance taxes),
whether or not now customary or within the contemplation of the parties
hereto, when:
(i) said taxes are measured by or reasonably attributable to the cost
or value of Tenant's equipment, furniture, fixtures and other
personal property located in the Premises or by the cost or value
of any leasehold improvements made in or to the Premises by or for
Tenant, regardless of whether title to such improvements shall be
vested in Tenant or Landlord;
(ii) said taxes are measured by or reasonably attributable to the rent
and additional rent payable hereunder, or either of them,
including, without limitation, any gross income tax or excise tax
levied by any governmental entity (local, state or federal) with
respect to the receipt of such rent;
(iii) said taxes are assessed upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair,
use or occupancy by Tenant of the Premises or any portion thereof;
and
(iv) said taxes are assessed upon this transaction or any document to
which Tenant is a party creating or transferring an interest or an
estate in the Premises.
(b) In the event that it shall not be lawful for Tenant so to reimburse
Landlord, the monthly rent payable to Landlord under this Lease shall be
revised to net Landlord the same net rent after imposition of any such
tax upon Landlord as would have been payable to Landlord prior to the
imposition of any such tax. All taxes payable by Tenant under this
Paragraph 7 shall be deemed to be, and shall be paid as, additional rent.
SECURITY DEPOSIT
8. Upon the execution of this Lease by Tenant there shall be due and owing from
Tenant to Landlord a security deposit in the sum of Nine Thousand Four
Hundred Twenty-three and 90/100 Dollars ($9,423.90) for the faithful
performance of all terms, covenants and conditions of this Lease. Tenant
agrees that Landlord may apply said security deposit to remedy any failure by
Tenant to pay rent or additional rent or other sums payable by Tenant
hereunder, to repair or maintain the Premises, or to perform any other terms,
covenants or conditions contained herein. If Tenant has kept and performed
all terms, covenants and conditions of this Lease during the term hereof,
Landlord shall promptly return said security deposit to Tenant following the
termination hereof and vacation thereof. Should Landlord use any portion of
Tenant's security deposit to cure any default hereunder by Tenant, Tenant
shall forthwith replenish said security deposit to its original amount. If
Tenant has kept and performed all terms, covenants and conditions of this
lease, Landlord shall return Tenant's deposit to Tenant on or before May 30,
1998. If Tenant thereafter defaults in such a way as would have allowed
Landlord to apply the deposit to remedy the failure, Tenant shall immediately
restore the entire security
4
<PAGE>
deposit to Landlord for the remainder of the term of the lease. In any event,
Tenant shall restore the security deposit to Landlord on or before November
15, 2001.
COMPLIANCE WITH LAW
9. Tenant shall not do anything or suffer anything to be done in or about the
Premises which will in any way conflict with any law, statute, ordinance or
other governmental real, regulation or requirement now in force or which may
hereafter be enacted or promulgated. At its sole cost and expense, Tenant
shall promptly comply with all said governmental measures and also with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted to deal with the condition, use or occupancy of the
Premises, excluding structural changes not related to or affected by Tenant's
alterations, additions or improvements or Tenant's acts. The judgment of any
court of competent jurisdiction or the admission of Tenant in any judicial
action, regardless of whether Landlord is a party thereto, that Tenant has
violated any of the said governmental measures or requirements shall be
conclusive of that fact as between Landlord and Tenant.
PARKING FACILITIES
10. (a) The parking areas, or designated portions thereof, may be for the use of
tenants of the Center and, to the extent designated by Landlord, the
employees, agents, customers and invitees of said tenants. All parking
rights shall be subject to the rules, regulations, charges, rates,
validation and identification systems set forth by Landlord from time to
time. Landlord may restrict certain portions of the parking areas for
the exclusive use of one or more tenants of the Center (and their
employees and agents) and may designate other areas to be used at-large
only by customers and invitees of tenants of the Center.
(b) Tenant shall have the right to rent/use 20 parking stalls during the
term of this Lease, and additional parking for Tenant and its employees,
agents, customers and invitees may be provided at Landlord's option,
subject to availability. Landlord may from time to time impose a charge
for Tenant's parking based upon the then fair market value of such
parking as determined solely by Landlord.
Landlord, or its agents, if Landlord has delegated such privileges,
shall have the right to cause to be removed any vehicles of Tenant, its
employees, agents, customers or invitees, that are parked in violation
hereof or in violation of Rules and Regulations of the Center (Exhibit
C), without liability of any kind to Landlord, its employees or agents,
and Tenant agrees to hold Landlord harmless from and defend it against
any and all claims, losses, damages and demands asserted or arising with
respect to or in connection with the removal of such automobile(s) as
aforesaid. Landlord shall not be liable for any claims, losses, damages,
expenses or demands with respect to any vehicles of Tenant, its
employees, agents, customers or invitees, that are parked in the parking
area, except for such loss or damage as may be caused by Landlord's
active negligence. Tenant agrees to hold Landlord harmless from and
defend it against any such claim, loss, damage, expense or demand.
Tenant shall, from time to time, upon request of Landlord, supply
Landlord with a list of license plate numbers of all automobiles owned
by its employees and agents who are to have parking privileges
hereunder.
MAINTENANCE AND REPAIR
11. (a) Landlord shall repair and maintain the structural portions of the Center
in which the Premises are situated, including the exterior walls,
underflooring and roof, basic plumbing, heating, air conditioning,
elevators and electrical systems installed or furnished by Landlord,
unless such maintenance and repair become necessary in whole or in part
due to the act, neglect, fault or omission of any duty by the Tenant,
its employees, agents, customers or invitees, or due to damage caused by
a breaking and entering, in which case Tenant shall pay to Landlord the
reasonable cost of such maintenance and repair. Landlord shall not be
liable for any failure to make any repair or to perform any maintenance
unless such failure shall persist for twenty (20) days after written
notice of the need for such repair or maintenance is given to Landlord
by Tenant, provided that Landlord shall not be deemed to be in default
under this section if such default is incapable of cure within said
period and
5
<PAGE>
Landlord has commenced to complete the cure of such default within said
twenty (20) day period and is proceeding diligently. There shall be no
abatement of rent and no liability of Landlord by reason of any injury
to Tenant's business or interference with Tenant's business arising from
the making of any repairs, alterations or improvements to any portion of
the Center or to fixtures, appurtenances and equipment therein.
(b) Tenant shall keep the interior, non-structural portions of the Premises
and every part thereof in good and sanitary condition and repair, and
Tenant's taking possession of the Premises shall constitute Tenant's
acknowledgment that the Premises are in good and tenantable condition,
and Tenant agrees to surrender the Premises upon the expiration or
termination of his Lease with said appurtenances in the same condition
as when received, reasonable wear and tear and damage by fire,
earthquake, Act of God or the elements or acts of Landlord or its agents
or employees excepted. However, in no event shall Tenant's obligation to
repair under this subsection extend to (i) damage and repairs covered
under any insurance policy carried by Landlord in connection with the
Building; (ii) damage caused by any defects in the design, construction
or materials of the Building, including the Premises and improvements
installed therein by Landlord; (iii) damage caused in whole or in part
by the negligence or willful misconduct of Landlord or Landlord's
agents, employees, invitees or licensees, (iv) repairs covered under
Operating Expenses; (v) reasonable wear and tear; (vi) conditions
covered under any warranties of Landlord's contractors; or (vii) damage
by fire and other casualties, or acts of governmental authorities, or
acts of God and the elements. Landlord has no obligation to alter, add
to, improve, repair, remodel or paint the Premises except as specified
herein. Tenant also acknowledges that Landlord has made no
representation or warranty regarding the condition of the Premises or
the Center except as set forth herein or in Exhibit B hereto. Should any
standard or regulation now or hereafter be imposed on Landlord or Tenant
by any governmental body, state or federal or local charged with the
establishment, regulation and enforcement of occupational, health or
safety standards for employers, employees, landlords or tenants, then
Tenant agrees, at its sole cost and expense, to comply promptly with
such standards or regulations.
SERVICES AND UTILITIES
12. (a) Provided Tenant is not in breach hereof, Landlord agrees to furnish to
the Premises during reasonable hours of generally recognized business
days, to be determined by Landlord at its sole discretion, and subject
to the Rules and Regulations of the Center (Exhibit C) of which the
Premises are part, electricity for normal lighting and fractional
horsepower office machines, heat and air conditioning required in
Landlord's judgment for the comfortable use and occupation of the
Premises, and janitorial service. Landlord shall also maintain and keep
lighted the common stairs, common entries and toilet rooms in the
Center. Landlord shall not be liable for, and Tenant shall not be
entitled to, any reduction of rental by reason of Landlord's failure to
furnish any of the foregoing when such failure is caused by accident,
breakage, repairs, strikes, lockouts, or other labor disturbances or
disputes of any character, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord, or by rationing or
restrictions on the use of said services and utilities due to energy
shortages or other causes, whether or not any of the above result from
acts or omissions of Landlord. Landlord shall be entitled to cooperate
voluntarily in a reasonable manner with the efforts of national, state
or local government bodies or utilities suppliers in reducing energy or
other resources consumption. Furthermore, Landlord shall not be liable
under any circumstances except the negligence or willful misconduct of
Landlord or Landlord's agents or employees for a loss or injury to
property, however, occurring, through or in connection with or
incidental to failure to furnish any of the foregoing.
(b) Tenant shall not, without Landlord's prior written consent, which shall
not be unreasonably withheld, use heat generating machines or equipment
or lighting other than Building Standard lights in the Premises which
affect the temperature otherwise maintained by the air conditioning
system. If such consent is given, Landlord shall have the right to
install supplementary air conditioning units in the Premises, and the
cost thereof, including the cost of installation, operation and
maintenance thereof, shall be paid by Tenant to Landlord upon billing by
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Landlord. Said cost shall include the cost of electrical metering
necessary to determine the additional operating cost attributable to the
supplementary equipment. Tenant shall not, without Landlord's prior
written consent, install lighting requiring power in excess of that
required for normal office use in the building or install equipment
requiring power in excess of that required by normal desktop office
equipment. If such consent is given, Tenant shall pay Landlord upon
billing for the cost of such excess. All costs payable by Tenant under
this Paragraph shall be deemed to be, and shall be paid as, additional
rent.
ALTERATIONS AND ADDITIONS
13. Tenant shall not make, or suffer to be made, any additions, alterations or
improvements to the Premises or any part thereof, including the attachment
of any fixtures or equipment, without first obtaining the written consent of
Landlord, which consent shall not be unreasonably withheld. When applying
for such consent, Tenant shall, if requested by Landlord, furnish complete
plans and specifications for such alterations, additions, or improvements.
The contractor or person selected by Tenant to make such alterations,
additions, or improvements, must be approved in writing by Landlord prior to
commencement of any work, and such contractor or person shall at all times
be subject to Landlord's control while in the Center. Landlord shall have
the right to require that any such contractor hired by Tenant shall, prior
to commencing work in the Premises, provide Landlord with a performance bond
and a labor and materials payment bond in the amount of the contract price
for the work, naming Landlord and Tenant (and any other persons designated
by Landlord) as co-obligees. All additions, alterations or improvements to
the Premises, including without limitation, all carpeting, partitions and
fixtures of any kind, shall become at once a part of the realty and belong
to Landlord, except for unattached and movable personal property and trade
fixtures placed on the Premises by the Tenant. Upon the expiration or sooner
termination of the term hereof and provided that Tenant is not then in
default hereunder, Tenant may remove its trade fixtures and other personal
property (excluding the alterations, additions or improvements made by
Tenant and not specifically designated by Landlord to be removed), provided
that Tenant shall promptly repair, at its sole cost and expense, any damage
to the Premises caused by such removal. Notwithstanding any other provisions
contained in this Lease, Tenant agrees that it shall, upon Landlord's
written request made within thirty (30) days following the expiration or
termination of this Lease, at is sole cost and expense, promptly remove any
alterations, additions improvements, fixtures and/or personal property
designated by Landlord to be removed and repair any damage to the Premises
resulting from such removal.
LIENS
14. Tenant shall not permit any mechanics, materialmen's or other liens to be
filed against the real property of which the Premises from a part or against
the Tenant's leasehold interest in the Premises. The Landlord shall have the
right at all reasonable times to post and keep posted on the Premises any
notices which it deems necessary for the protection from such liens. If any
such liens are filed, Landlord may, without waving its rights and remedies
based on such breach by Tenant and without releasing Tenant from any
obligations, cause such liens to be released by any means it shall deem
proper, including payment in satisfaction of the claim giving rise to such
lien. Tenant shall pay to Landlord at once, without notice or demand, any
sum paid by Landlord to remove such liens, together with interest at the
rate of ten percent (10%) per annum from the date of payment by Landlord.
FIRE AND CASUALTY INSURANCE
15. (a) Landlord shall maintain during the term of this lease a policy of
insurance insuring the Center against loss by or damage due to fire and
other casualties covered by a standard extended coverage policy. Such
coverage may include the risks of lightning, vandalism and malicious
mischief, and it may include, at the option of Landlord, the risks of
earthquakes and additional hazards. Such policy may also include, at
Landlord's option, a rental loss endorsement and one or more loss payee
endorsements in favor of the holders of any mortgages or deeds of trust
encumbering the interests of Landlord under this Lease.
(b) Tenant shall not use the Premises nor permit the Premises to be used or
acts to be done therein which will (i) increase the premium of any
insurance described above or (ii) cause a cancellation of any such
insurance policies. Tenant shall not keep in or about the Premises any
article which may be prohibited by any standard form policy of fire
insurance. If Tenant's conduct or use of the Premises causes any
increase in the premium for such insurance policies, then Tenant shall
pay as additional rent hereunder all of such increase. Tenant shall, at
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Tenant's expense, comply with all insurance company requirements
pertaining to the use of the Premises so that the Premises shall at all
times be insurable for fire, extended coverage and the risks specified
above.
DAMAGE AND DESTRUCTION
16. If the Premises or the Center are damaged by fire or other casualty,
landlord shall forthwith repair the same, subject to the provisions of the
paragraph 16, provided such repairs can, in Landlord's opinion, be made
within one hundred and twenty (120) days of such damage, and in such event
this Lease shall remain in full force and effect. If such repairs cannot,
in Landlord's opinion, be made within one hundred and twenty (120) days of
such damage, Landlord at its option shall by written notice to Tenant given
within sixty (60) days after the date of such damage either: (1) elect to
repair or restore such damage, this Lease continuing in full force and
effect or (2) terminate this Lease as of a date specified in such notice,
which date shall not be less than thirty (30) nor more than sixty (60) days
after the date such notice is given. If such fire or other casualty shall
have damaged the Premises or common areas necessary to Tenant's occupancy,
and if such damage is not the result of the negligence or willful misconduct
of Tenant or Tenant's employees, contractors, licensees, or invitees, then
during the period the Premises are rendered unusable by such damage Tenant
shall be entitled to a reduction in rent in the proportion that the area of
the Premises rendered unusable by such damage bears to the total area of the
Premises. Landlord shall not be required to repair any injury or damage or
to make any repairs or replacements of any improvements installed in the
premises by or for Tenant, other than Landlord's work under Exhibit B, and
Tenant shall, at Tenant's sole cost and expense, repair and restore its
portion of such improvements. Tenant shall not be entitled to any
compensation or damages from Landlord for damage to any of Tenant's fixtures
or personal property, for loss of use of the Premises or any part thereof,
for any damage to Tenant's business, or for any disturbance to Tenant caused
by any casualty or the restoration of the Premises following such casualty.
Notwithstanding anything to the contrary contained in this Lease, Landlord
shall have no obligation whatsoever to repair, reconstruct or restore the
Premises when the damage resulting from any casualty occurs during the last
twelve (12) months of the term or any extension thereof. A total
destruction of the Center shall automatically terminate this Lease. If the
Bulding is damaged or destroyed to the extent that the Building cannot with
reasonable diligence be fully repaired or restored by Landlord within one
hundred twenty (120) days after the date of the damage or destruction,
Tenant may terminate this Lease immediately upon notice thereof to Landlord
and the obligation of Tenant, if any, to pay Rent to Landlord shall
terminate as of the date of such notice. If this Lease is not terminated
despite damage or destruction to the Building, and Landlord fails to proceed
with reasonable diligence to rebuild, or if the Building is not rebuilt
within one hudnred twenty (120) days of the event causing the damage or
destruction, Tenant may, at its option, terminate this Lease upon notice to
Landlord. If the Building is damaged or destroyed during the last twelve
(12) months of the term of the Lease, Tenant may terminate this Lease upon
notice to Landlord.
PUBLIC LIABILITY INSURANCE
17. Tenant agrees to purchase, at its own expense and to keep in force during
the term of this Lease, a policy or policies of comprehensive liability
insurance, including public liability and property damage, in the amount of
Two Hundred Fifty Thousand Dollars ($250,000) for property damage and Five
Hundred Thousand Dollars ($500,000) per person and One Million Dollars
($1,000,000) per occurrence for personal injuries or deaths of persons
occurring in or about the Premises. Said policy or policies shall: (a) name
Landlord as an additional insured and insure Landlord's contingent liability
under this Lease; (b) be issued by an insurance company which is acceptable
to Landlord and licensed to do business in the State of California; and (c)
provide that said insurance shall not be canceled unless ten (10) days'
prior written notice shall have been given to Landlord. Said policy or
policies or certificates thereof shall be delivered to Landlord by Tenant
upon commencement of the term of this Lease and upon each renewal of said
insurance.
SUBROGATION
18. Landlord and Tenant hereby waive any right that each may have against the
other on account of any loss or damage arising in any manner which is
covered by policies of insurance for fire and extended coverage, theft,
public liability, workmen's compensation or other insurance now or hereafter
existing during the term hereof. The parties
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each agree to have their respective insurance companies waive any rights of
subrogation that such companies may have against Landlord or Tenant, as the
case may be.
EMINENT DOMAIN
19. If the whole of the Premises or more than fifty percent (50%) of the net
rentable area thereof is taken under power of eminent domain or sold,
transferred or conveyed in lieu thereof, both Landlord and Tenant shall have
the right to terminate this Lease as of the date of such condemnation or as
of the date possession is taken by the condemning authority, whichever is
later. If any part of the Center other than the Premises is taken under
power of eminent domain or sold, transferred or conveyed in lieu thereof,
Landlord may terminate this Lease at its option as of the date of such
condemnation or as of the date possession is taken by the condemning
authority, whichever is later. In either of such events, Landlord shall
receive, and Tenant hereby assigns to Landlord, any award which may be made
in such taking or condemnation, together with any and all rights of Tenant
now or hereafter arising in or to the same or any part thereof whether or
not attributable to the value of the unexpired portion of this Lease;
provided, however, that nothing contained herein shall be deemed to give
Landlord any interest in or require Tenant to assign to Landlord any award
made payable to Tenant for the taking of personal property and fixtures
belonging to Tenant and removable by Tenant at the expiration of the term
hereof or for the interruption of or damage to Tenant's business. In the
event of a partial taking, or a sale, transfer, or conveyance in lieu
thereof, if this Lease is not terminated by Landlord and/or Tenant, then the
rent shall be apportioned according to the ratio that the remaining net
rentable area of the Premises bears to the total net rentable area of the
Premises.
ASSIGNMENT, SUBLETTING AND ENCUMBERING
20. (a) Tenant shall not, either voluntarily or by operation of law, assign,
transfer, mortgage, pledge, hypothecate, or encumber this Lease or any
interest herein and shall not sublease the said Premises or any part
thereof, or any right or privilege appurtenant thereto, or suffer any
other persons (agents and servants of Tenant excepted) to occupy or use
said Premises or any portion thereof without the written consent of
Landlord first had and obtained, which consent shall not be unreasonably
withheld or delayed, and any such act done or suffered without first
obtaining Landlord's written consent shall be void, and shall, at the
option of the Landlord, terminate this Lease.
(b) Tenant shall, by written notice, advise Landlord of its intention from
and after a stated date (which shall not be less than ninety (90) days
nor more than one hundred eighty (180) days after the date of Tenant's
notice) to sublet the Premises or any portion thereof for any part of
the term hereof; and in such event Landlord shall have the right, to be
exercised by giving written notice to Tenant thirty (30) days after
receipt of Tenant's notice, to terminate this Lease as to the portion of
the Premises described in Tenant's notice, and such notice by Landlord
shall, if given, terminate this Lease with respect to the portion of the
Premises therein described as of the date stated in Tenant's notice.
Said notice by Tenant shall state the name and address of the proposed
subtenant, and Tenant shall deliver to Landlord a true and complete copy
of the proposed sublease with said notice. If said notice shall specify
all of the Premises and Landlord shall give said termination notice with
respect thereto, this Lease shall terminate on the date stated in
Tenant's notice. If, however, this Lease shall terminate pursuant to the
foregoing with respect to less than all the Premises, the rent, security
deposit, the Operating Expenses and the direct Taxes, as defined and
reserved hereinabove, shall be adjusted on a pro rate basis to the
number of square feet retained by Tenant, and this Lease as so amended
shall continue thereafter in full force and effect. If Landlord, upon
receiving said notice by Tenant with respect to any of the Premises,
shall not exercise its right to terminate, Landlord will not
unreasonably withhold its consent to Tenant's subletting the Premises
specified in said notice.
(c) Regardless of Landlord's consent, no subletting or assignment shall
release Tenant from its obligation to perform the terms, covenants and
conditions of this Lease. Furthermore, as a condition to Landlord's
prior written consent, the subtenant or assignee shall agree in writing
to comply with and be bound by all the terms, covenants and conditions
of this Lease, and Tenant shall deliver to Landlord, promptly after
execution thereof, an executed copy of each such sublease and
assignment. The acceptance of rent by Landlord from any party other than
Tenant shall not be deemed to be a waiver of any provision of this
Lease. Furthermore, Landlord's consent to one assignment, transfer,
mortgage, pledge, hypothecation, encumbrance, subletting, occupation or
use shall not be deemed to be a consent to any subsequent occurrence
thereof.
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(d) Notwithstanding the foregoing, Tenant shall have the right, without the
need for the prior written consent of Landlord, to assign or sublet this
lease to;
1. any entity as a result of Tenant undertaking a public offering of
stock pursuant to the Securities Act of 1933 and, or Securities
Exchange Act of 1934, as amended,
2. to any entity which owns all of the issued and outstanding common
stock of Tenant, or
3. to a wholly owned subsidiary corporation.
INDEMNIFICATION OF LANDLORD
21. (a) Tenant hereby waives all claims against Landlord for damage to any
property or injury, illness or death of any person in, upon, or about
the Premises and/or the Center arising at any time and from any cause
whatsoever other than by reason of negligence or willful act of
Landlord, its employees or contractors.
(b) Tenant shall hold Landlord harmless from and defend Landlord against any
and all claims or liability for any injury or damage to any person or
property whatsoever (1) occurring in, on or about the Premises or any
part thereof, and (2) occurring in, on or about any facilities
(including, without prejudice to the generality of the term
"facilities", elevators, stairways, passageways, hallways and parking
areas), the use of which Tenant may have in common with other tenants of
the Center, when such injury or damage shall be caused in part or in
whole by the act, neglect, fault of or omission of any duty with respect
to the same by Tenant, its agents, employees, customers or invitees. The
provisions of this paragraph shall survive the expiration or termination
of the Lease with respect to any claims or liability occurring prior to
such expiration or termination.
ENTRY BY LANDLORD
22. Landlord reserves the right at reasonable business hours and upon reasonable
written notice to Tenant to enter the Premises to (1) inspect them, (2)
perform services required of Landlord, (3) take possession due to any breach
of this Lease as stated earlier, (4) submit the Premises to prospective
purchasers, mortgagees or tenants, (5) post notices of non-responsibility,
and (6) alter, improve or repair the Premises as Landlord deems necessary or
desirable. Landlord may make such entries without the abatement of rent and
may take such reasonable steps as required to accomplish the stated
purposes. Tenant hereby waives any claims for damages or for any injuries or
inconveniences of interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby,
except to the extent caused by the negligence or willful misconduct of
Landlord or Landlord's agents, emplyees or contractors.
DEFAULT
23. The occurrence of any of the following shall constitute a material default
and breach of this Lease by Tenant:
(a) Any failure by Tenant to pay the rent or any other monetary sums
required to be paid under (where such failure continues for five (5)
days after written notice by Landlord to Tenant);
(b) The abandonment or vacation of the Premises by Tenant for more than
sixty (60) consecutive days;
(c) A failure by Tenant to observe and perform any other provision of this
Lease to be observed or performed by Tenant, where such failure
continues for ten (10) days after written notice thereof by Landlord to
Tenant notwithstanding anything to the contrary therein, Tenant shall
not be deemed to be in default under this Section 23(c) if such default
is incapable of cure within said period and Tenant has commenced to
complete the cure of such default within said ten (10) day period and is
proceeding diligently;
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(d) The making by Tenant of any general assignment or general arrangement
for the benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt or of a petition for
reorganization or arrangement under any law relating to bankruptcy
(unless, in the case of a petition filed against Tenant, the same if
dismissed within sixty (60) days; the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where
possession is not restored to Tenant within thirty (30) days; or the
attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where such seizure is not discharged within thirty (30) days.
REMEDIES
24. In the event of any such material default or breach by Tenant, Landlord may
at any time thereafter, without limiting Landlord in the exercise of any
right of remedy at law or equity which Landlord may have by reason of such
default or breach:
(a) Terminate the Lease and recover damages as provided by California Civil
Code Section 1951.2, including but not limited to, recovery of the worth
at the time of award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of rental
loss for the same period that the Tenant proves could have been
reasonably avoided, as computed pursuant to subsection (b) of Section
1951.2;
(b) Continue the Lease in effect and to enforce all of its rights and
remedies under the Lease, as provided by California Civil Code Section
1951.4, including the right to recover rent as it becomes due, for so
long as Landlord does not terminate Tenant's right to possession. Acts
of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver upon Landlord's initiative to protect its
interest under this Lease shall not constitute a termination of Tenant's
right to possession;
(c) Enter the Premises and remove therefrom all persons and property, store
such property in a public warehouse or elsewhere at the cost of and for
the account of Tenant, and sell such property and apply the proceeds
therefrom pursuant to applicable California law, all as attorney-in-fact
for Tenant; and
(d) Have a receiver appointed for Tenant, upon application by Landlord, to
take possession of the Premises and to apply any rental collected from
the Premises and to exercise all other rights and remedies granted to
Landlord as attorney-in-fact for Tenant pursuant to subparagraph (c)
above.
LATE CHARGES
25. Tenant hereby acknowledges that late payment by Tenant to Landlord of rent
and other sums due hereunder will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges and late charges which may be imposed on
Landlord by the terms of any mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Tenant shall not be received by Landlord or Landlord's designee within three
(3) days after Tenant's receipt of written notice from Landlord that such
amount is past due. Tenant shall pay to Landlord a late charge equal to ten
percent (10%) of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Landlord
will incur by reason of late payment by Tenant. Acceptance of such late
charge by Landlord shall in no event constitute a waiver of Tenant's default
with respect to such overdue amount, nor prevent Landlord from exercising
any of the other rights and remedies granted hereunder.
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LANDLORD'S RIGHT TO CURE DEFAULT
26. All covenants and agreements to be kept or performed by Tenant under the
terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense and without any reduction of rent. If Tenant shall be in default on
its obligations under this Lease to pay any sum of money other than rent or
to perform any other act hereunder, and if such default is not cured within
the applicable grace period provided in Paragraph 23 hereof, Landlord may,
but shall not be obligated to, make any such payment or perform any such act
on Tenant's part without waiving its right based upon any default of Tenant
and without releasing Tenant from any obligations hereunder. All sums so
paid by Landlord and all incidental costs, together with interest thereon at
the rate often percent (10%) per annum from the date of such payment or the
incurrence of such costs by Landlord, whichever occurs first, shall be paid
to Landlord on demand. In the event of nonpayment by Tenant, Landlord shall
have, in addition to any other rights or remedies hereunder, the same rights
and remedies as in the case of default by Tenant for nonpayment of rent.
DEFAULT BY LANDLORD
27. Landlord shall not be in default unless Landlord fails to perform
obligations required of Landlord within a reasonable time, but in no event
later than thirty (30) days after written notice by Tenant to Landlord and
to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Tenant in
writing, specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of Landlord's obligation is such that
more than thirty (30) days are required for performance, then Landlord shall
not be in default if Landlord commences performance, within such thirty (30)
day period and thereafter diligently prosecutes the same to completion.
SALE OF PREMISE
29. Each conveyance of the Premises prior to expiration or termination hereof by
Landlord shall (i) be subject to this Lease and (ii) relieve the grantor of
any further obligations or liability as Landlord. Tenant hereby agrees to
attorn to Landlord's successor in interest.
ESTOPPEL CERTIFICATE
30. Within ten (10) days following any written request which Landlord may make
from time to time, Tenant shall execute and deliver to Landlord a statement
certifying: (a) the date of commencement of this Lease; (b) the fact that
this Lease is unmodified and in full force and effect (or, if there have
been modifications hereto, that this Lease is in full force and effect, as
modified, and stating the date and nature of such modifications); (c) the
date to which the rent and other sums payable under this Lease have been
paid; (d) the fact that, to the best of Tenant's knowledge, there are no
current defaults under this Lease by either Landlord or Tenant except as
specified in Tenant's statement; and (e) such other matters requested by
Landlord. Landlord and Tenant intend that any statement delivered pursuant
to this paragraph may be relied upon by any mortgagee, beneficiary,
purchaser or prospective purchaser of the Center or any interest therein.
NONMERGER
31. The termination or mutual cancellation of this Lease shall not work a
merger, and shall, at the option of Landlord, terminate all subleases and
subtenancies (to the extent same are permitted hereunder) or may, at the
option of Landlord, operate as an assignment to Landlord of any or all such
subleases or subtenancies.
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SUBORDINATION
32. Without the necessity of any additional document being executed by Tenant
for the purpose of effecting a subordination, this Lease shall be subject
and subordinate at all times to: (a) all ground leases or underlying leases
which may now exist or hereafter be executed affecting the Center or the
land upon which the Center is situated, or both, and (b) the lien of any
mortgage or deed of trust which may now exist or hereafter be executed in
any amount for which said Center, land, ground leases or underlying leases
or Landlord's interest or estate in any of said items is specified as
security. The effective subordination of this Lease to any existing or
future mortgages, deeds of trust, other security interest or leases shall be
subject to the fulfillment of the conditions precedent that (i) the holder
of such mortgage or other lien on the Building or Property shall first have
agreed in writing that so long as Tenant is not in default, the Lease shall
not be terminated by foreclosure or sale pursuant to the terms of such
mortgage or lien; and (ii) such subordination shall not otherwise restrict
to limit the rights or increase the obligations of Tenant under this Lease.
Notwithstanding the foregoing, Landlord shall have the right to subordinate
or cause to be subordinated any such ground leases or underlying lease or
any such liens to this Lease. In the event that any ground lease or
underlying lease terminates for any reason or any mortgage or deed of trust
is foreclosed or a conveyance in lieu of foreclosure is made for any reason,
Tenant covenants and agrees to execute and deliver, upon demand by Landlord
and in the form requested by Landlord, any additional documents evidencing
the priority or subordination of this Lease with respect to any such ground
leases or underlying leases or the lien of any such mortgage or deed of
trust.
NOTICES
33. Notices, requests, demands and documents required or desired to be given
hereunder shall be in writing and delivered either personally or by deposit
into the United States Mail, first class postage prepaid, or overnight
courier service addressed as follows or as Landlord or Tenant may from time
to time otherwise designate in writing.
Landlord: PARADISE POINT PARTNERS
5725 Paradise Drive, Suite 600
Corte Madera, California 94925
Attn: Mr. Glenn S. Yamaguchi
Tenant: RESTORATION HARDWARE
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15 Koch Road, Suite J
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Corte Madera, California 94925
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Attn: Thomas E. Low, CFO
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GENERAL PROVISIONS
34. (a) Holding Over: Any holding over after the expiration of the term of this
Lease or any extension thereof with the written consent of Landlord
shall be construed to be a tenancy from month-to-month at the rent,
additional rent and other terms and conditions herein set forth. If
Tenant shall retain possession of the Premises or any part thereof
without Landlord's consent following the expiration or sooner
termination of this Lease for any reason, then Tenant shall pay to
Landlord for each day of such retention double the amount of the daily
rent and additional rent for the last period prior to the date of such
expiration or termination. Tenant shall also indemnify and hold
Landlord harmless from any loss or liability resulting from delay by
Tenant in surrendering the Premises, including, without limitation, any
claims made by any succeeding tenant founded on such delay.
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(b) Waiver: The waiver by Landlord of the breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of a
subsequent breach of such term, covenant or condition of this Lease,
other than the failure of Tenant to pay the particular rent so
accepted, regardless of Landlord's knowledge of such preceding breach
at the time of acceptance of such rent.
(c) Rules and Regulations: Tenant shall faithfully observe and comply with
the Rules and Regulations attached as Exhibit C to this lease, as
modified by Landlord from time to time in writing. Landlord shall not
be responsible to Tenant for the nonperformance of any of said rules
and regulations by any other tenants or occupants of the Center.
(d) Successors and Assigns: This Lease and all of the covenants and
conditions herein contained shall be binding upon and shall inure to
the benefit of the heirs, executors, administrators, assigns and other
successors in interest (to the extent permitted under this Lease) of
each of the parties.
(e) Captions: The title or captions in this Lease are for reference
purposes only and have no effect upon the construction or
interpretation of any part hereof. The use herein of the singular
includes the plural and vice versa, and the use herein of the neuter
gender includes the masculine and the feminine and vice versa, whenever
and wherever the context so requires.
(f) Joint Obligations: If there is more than one Tenant, the obligations
imposed upon Tenant under this Lease shall be joint and several.
(g) Authority: If Landlord or Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and
warrants that he is duly authorized to execute and deliver this Lease
on behalf of said corporation, in accordance with a duly adopted
resolution of the board of directors of said corporation or in
accordance with the bylaws of said corporation, and that this Lease is
binding upon said corporation in accordance with its terms.
(h) Time: Time if of the essence in the performance of all obligations
under this Lease.
(i) Entire Agreement: This Lease sets forth the entire understanding
between Landlord and Tenant with respect to all matters referred to
herein, and the provisions hereof may not be changed or modified except
by an instrument in writing signed by both Landlord and Tenant. Tenant
acknowledges that in executing and delivering this Lease it is not
relying on any verbal or written understanding, promise or
representation outside the scope of this Lease and not described or
referred to herein.
(j) Attorneys' Fees: If either party commences litigation against the other
for the specific performance of this Lease, for damages for the breach
hereof or otherwise for enforcement of any remedy hereunder, the
prevailing party shall be entitled to recover from the other party such
costs and reasonable attorneys' fees as may have been incurred.
(k) Choice of Law: This Lease is made and delivered within the State of
California and shall be construed and enforced in accordance with the
laws of the State of California.
(l) Effectiveness: Delivery of this Lease, duly executed by Tenant,
constitutes an offer to lease the Premises as herein set forth, and
under no circumstances shall such delivery be deemed to create an
option or reservation to lease the Premises for the benefit of Tenant.
This Lease shall become effective and binding only upon execution
hereof by Landlord and delivery of a signed copy to Tenant.
(m) Severability: If any provision of this Lease or the application thereof
to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such
provision to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
(n) Brokers: Landlord and Tenant each warrants and represents for the
benefit of the other that it has had no dealings with any real estate
broker or agent
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in connection with the negotiation of this Lease, except for Orion
Partners, Ltd. ("Broker"), and that it knows of no other real estate
broker or agent who is or might be entitled to a real estate brokerage
commission or finder's fee in connection with this Lease. Landlord
shall indemnify and hold harmless Tenant from and against any claims by
Broker. Each party shall indemnify and hold harmless the other from and
against any and all liabilities or expenses arising out of claims made
by any broker (other than Broker) or individual for commissions or fees
resulting from the actions of the indemnifying party in connection with
this Lease.
(o) Exhibits: Exhibit A (Plan Outlining the Premises), Exhibit B (Work
Agreement), Exhibit C (Rules and Regulations), Exhibit D (Sale/Lease
Americans With Disability Act and Hazardous Materials Disclosure), and
Exhibit - are attached to this Lease and by this reference made a part
hereof.
(p) Additional Provisions: The attached pages, if any, containing
Paragraphs __-__ through __-__ are incorporated herein and made a part
hereof.
IN WITNESS WHEREOF, this Lease has been executed as of date set forth at the
beginning hereof.
LANDLORD TENANT
By By
---------------------------- --------------------------------
Glenn S. Yamaguchi
Its Authorized Agent Its
--------------------------- --------------------------------
By
--------------------------------
Its
--------------------------------
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EXHIBIT A
PLAN OUTLINING PREMISES
16
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EXHIBIT B
PARADISE POINT EXECUTIVE CENTER
WORK AGREEMENT
The undersigned, as Landlord and Tenant respectively, are executing
simultaneously with this Work Agreement, a written Lease covering premises as
described in the Lease as Suite 700 and hereby attach this Work Agreement to
said Lease as Exhibit B thereto.
TENANTS PLANS AND SPECIFICATIONS
1. (a) Except to the extent otherwise provided in subparagraphs (b) and (c) of
this paragraph, Landlord will, at its sole cost and expense, through its
architects furnish architectural, mechanical, and electrical engineering
plans required for the performance of work (hereinafter referred to as
"Building Standard Work") hereinbelow described.
(b) Tenant may request work (hereinafter referred to as "Building Non-
Standard Work") not conforming with, or in addition to Building Standard
Work. If Landlord approves such request any architectural, mechanical,
and electrical plans and specifications required for such Building Non-
Standard Word shall be furnished, at Tenant's sole cost and expense, by
Landlord's architects and engineers.
(c) Any interior decorating services, such as selection of wall paint colors
and/or wall coverings, fixtures, non-building standard carpet, and any
or all other decorator items required by Tenant in the performance of
said work referred to hereinabove in subparagraphs (a) and (b) shall be
at the Tenant's sole cost and expense.
(d) All plans and specifications referred to hereinabove in subparagraphs
(a), (b) and (c) are subject to the Landlord's approval, which the
Landlord agrees shall not be unreasonably withheld.
(e) When requested by Landlord's architects and engineers, Tenant will
furnish complete information respecting Tenant's requirements. Complete
plans, specifications and budgets will be approved by Tenant on or
before February 28, 1997.
BUILDING STANDARD WORK AT LANDLORD'S COST AND EXPENSE
2. Landlord will, at its sole cost and expense, furnish and install all of the
following "Building Standard Work" specified by Landlord and as indicated on
Exhibit A.
(a) Heating, Ventilation and Air Conditioning: A variable volume all-air
type year round air conditioning system with perimeter heating and
interior cooling. Each floor will be divided into thermostatically
controlled areas, the number of which will be dictated by specific
layout requirements not to exceed one (1) thermostatically controlled
area per eight hundred (800) square feet of rentable area. The number of
such areas can be increased to meet tenant requirements, but at the sole
cost and expense of Tenant.
(b) Partitions, Doors, Frames and Hardware: All required floor to ceiling
partitions (1/2" thick drywall, spackled and taped for smooth finish on
metal studs 24" on center). Solid-core, pre-finished wood doors, all
necessary door frames and hardware. Said hardware shall include locksets
and door closers on all public corridor and entrance doors, latch sets
on all interior office doors, three (3) hinges and door stops on all
doors. Landlord will provide partition within Tenant space. As shown in
Exhibit A. Floor to
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ceiling glass partitioning shall be provided in Conference Room One and
Office 3 as shown in Exhibit A. All other walls shown shall be solid
sheet rock.
(i) Doors and Door Frames: Solid core, pre-finished wood doors, (3/0 by
6/8 by 1-3/4") twenty (20) minute label, and necessary door frames
will be provided. * Non-labeled, solid core, pre-finished wood
doors and necessary door frames will be provided. * * As shown on
Exhibit A.
(ii) Hardware: Locksets and latchsets shall be provided in the same
ratios as labeled and non-labeled doors, respectively, described
above; i.e. one (1) lockset for each 20-minute labeled door and one
(1) lockset for each non-labeled door. Hinges will be supplied at
the ratio of three (3) per door. Door stops will be provided at the
ratio of one (1) per door.
(c) Painting: Initial painting one (1) coat of stipple finish latex on all
exposed gypsum wallboard through Tenant's premises. Colors to be
selected by Tenant from Building Standard color chart with no more than
two (2) colors to be in any one (1) room or office and no more than one
(1) color per wall.
(d) Ceilings: Suspended acoustical ceilings in a 2 x 4 T-Bar, lay-in system
in a single plane throughout office floor area except in passenger
elevator lobbies, public corridors and common toilet facilities, in
which areas Landlord may specify other type of material.
(e) Lighting Fixtures: 2' x 4" fluorescent lighting fixtures including
initial lamping in the Building Standard lighting pattern. Building
Standard ratios are: One (1) lighting fixture per eighty (80) square
feet of rentable area and one (1) switch per two hundred fifty (250)
square feet of rentable area.
(f) Duplex Electric Outlets: Three (3) Building Standard duplex 110 volt
electric convenience wall outlet for each office or conference room.
Each outlet will have a maximum of twenty (20) amperes per circuit. An
additional electrical outlet shall be provided for each continuous run
of workstations with sufficient amperage to accommodate those stations.
(g) Telephone Outlets: Shall be installed by Tenant's supplier coordinating
with Landlord's construction work.
(h) Floor Covering: New Building Standard carpeting and base. Throughout
except vinyl tile or vinyl sheet shall be installed in the mailroom,
kitchen and adjacent storage areas.
(i) Window Covering: Building Standard window coverings on all exterior
office windows.
(j) Life Safety System: All office buildings include a sprinkler system in
the Building Standard pattern.
(k) As shown on Exhibit A, a six foot long kitchen cabinet with sink and
space and plumbing fittings to accommodate an under-counter dishwasher
shall be installed. A six foot long upper kitchen cabinet shall be
installed. All cabinets shall be laminated surfaces. The dishwasher
shall be provided and installed by Tenant.
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3. Provided Tenant's plans and specifications are furnished by the date provided
hereinabove in Paragraph 1(e) and approved by Landlord, the Landlord shall
cause Tenant's "Building Non-Standard Work" to be installed by Landlord's
contractor, but at Tenant's sole cost and expense. Prior to commencing any
such work, Landlord, its contractor, or its architects and engineers, shall
submit to Tenant a written estimate of the cost thereof. If Tenant shall
fail to approve any such estimate within ten (10) days after submission
thereof, such failure shall be deemed a disapproval thereof, and Landlord's
contractor shall not proceed with such work. Tenant agrees to pay Landlord
promptly upon being billed therefore, the cost to Landlord of all such
Building Non-Standard Work. Such bills may be rendered during the progress
of the performance of the work and the furnishings and installation of the
materials to which such bills relate. Landlord may require Tenant to deposit
the estimated cost of such work with Landlord prior to the commencement of
such work.
4. Within the demised premises Tenant may select different new material (except
exterior window coverings) in place of "Building Standard Work" materials
which would otherwise be initially furnished and installed by Landlord for or
in the interior of the Premises under the provisions of this Work Letter
Agreement, provided such selection is indicated on said Tenant's final plans.
If Tenant shall make any such selection and if the cost of such difference
new materials of Tenant's selection shall exceed the Landlord's cost of such
different new materials of Tenant's selection shall exceed the Landlord's
"Building Standard Work" materials thereby replaced, Tenant shall pay to the
Landlord, as hereinafter provided, the difference between the work cost of
such different new materials and the credit given by the Landlord for the
materials thereby replaced. No credit shall be granted for the omission of
materials where no replacement in kind is made. There shall be credits only
for substitutions in kind, e.g., a lighting fixture credit may be applied
only against the cost of another type of lighting fixture. No such different
new materials shall be furnished and installed in replacement for any of
Landlord's "Building Standard Work" materials until Landlord, or its
contractor and/or its architects shall have advised Tenant in writing of, and
Landlord or its contractor and/or its office planning architects have agreed
in writing on, the work of such different new material and the Landlord's
cost of such replaced Landlord's "Building Standard Work" materials.
All amounts payable by Tenant to Landlord pursuant to this paragraph 4 shall
be paid by Tenant within thirty (30) days after the rendering of bills
therefore by Landlord or its contractors to Tenant, it being understood
that such bills may be rendered during the progress of the performance of
the work and/or the furnishings and installation of the materials to which
such bills relate. Any such different new materials shall be surrendered by
the Tenant to the Landlord at the end of the initial or other expiration of
the term of the Lease.
5. When Landlord's architect has furnished Landlord with a certificate that the
work to be done by Landlord pursuant to Paragraphs 2 and 3 above has been
substantially completed, the Premises will be deemed completed and possession
thereof deemed delivered to Tenant, for all purposes of the Lease, including,
without limitation, Paragraph 2 thereof. Landlord and Tenant understand that
pursuant to Paragraph 3 of the Lease, Tenant's obligation to pay rent
thereunder shall not commence until Landlord's architect has furnished such
certificate; provided, however, that if Landlord shall be delayed in
substantially completing said work as a result of:
(i) Tenant's failure to furnish information so that plans and
specifications can be completed in accordance with the date specified
hereinabove in Paragraph 1(e).
(ii) Tenant's request for materials, finishes or installations other than
Landlord's "Building Standard Work" or
(iii) Tenant's changes in the plans and specifications approved by him after
their submission to Landlord in accordance with the date specified
hereinabove in Paragraph 1(e) or
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(iv) Tenant's failure to approve pursuant to Paragraph 3 above estimates
submitted by Landlord to Tenant covering Building Non-Standard Work,
then the commencement of rent under said Lease shall be accelerated by
the number of days of such delay.
Sincerely,
PARADISE POINT PARTNERS
By
-------------------------------
Glenn S. Yamaguchi
Its Authorized Agent
-------------------------------
(Landlord)
ACCEPTED:
By
-------------------------------
(Tenant)
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EXHIBIT C
PARADISE POINT EXECUTIVE CENTER
RULES AND REGULATIONS
BUILDING
1. Tenant shall not alter any lock or install any new or additional locks or
bolts on any doors or windows of the Premises without obtaining Landlord's
written consent. Tenant shall bear the cost of any lock changes or repairs
required by Tenant. Two keys will be furnished by Landlord for the Suite,
and any additional keys required by Tenant must be obtained from Landlord at
a reasonable cost to be established by Landlord. Upon termination of
tenancy, all keys to the Center and the leased Premises shall be surrendered
to Landlord.
2. All doors opening to public corridors shall be kept closed at all times
except for normal ingress and egress of the leased Premises.
3. Landlord reserves the right to close and keep locked all entrance and exit
doors of the Center during such hours as Landlord may deem to be advisable
for the adequate protection of the Center. Tenant, its employees or agents
must be sure that the doors to the Center are securely closed and locked when
leaving the Premises if it is after the normal hours of business for the
Center. Any Tenant, its employees or agents or any other persons entering or
leaving the Center at any time when it is so locked, or any time when it is
considered to be after normal business hours for the Center, may be required
to sign the Center Register when so doing. Access to the Center may be
refused unless the person seeking access is known to the employee or agent of
the Landlord responsible for the Premises, or unless the person seeking
access has proper identification or has a previously arranged pass for access
to the Center. The Landlord and his agents shall in no case be liable for
damages for any error with regard to the admission to or exclusion from the
Center of any person. In case of invasion, mob riot, public excitement, or
other commotion, the Landlord reserves the right to prevent access to the
Center during the continuance of same by means it deems appropriate for the
safety and protection of life and property.
4. All directory strips and suite door identification signs must be Center
standard as established by Landlord. All suite door signs and directory
strips are to be ordered through Landlord at Tenant's expense. The Directory
of the Center will be provided exclusively for the display of the name and
location of Tenant only and Landlord reserves the right to exclude any other
names therefrom. Any signs, notices, logo, pictures, names or advertisements
which are installed that have not been individually approved by the Landlord
may be removed by Landlord at the sole expense of the Tenant.
5. No furniture, freight or equipment of any kind shall be brought into the
Center without prior notice to Landlord. All moving of the same into or out
of the Center shall be scheduled with Landlord and done only at such time and
in such manner as Landlord shall designate. Landlord shall have the right to
prescribe the weight, size and position of all safes and other heavy property
brought into the Center and also the times and manner of moving the same in
and out of the Center. Safes and other heavy objects shall, if considered
necessary by Landlord, stand on supports of such thickness as is necessary to
properly distribute the weight. Landlord will not be responsible for loss of
or damage to any such safe or property from any cause. All damage done to
any part of the Center, its contents, occupants or visitors by moving or
maintaining any such safe or other property shall be the sole responsibility
of the Tenant and any expense for said damage or injury shall be borne by the
Tenant.
6. No furniture, packages, supplies, equipment or merchandise will be received
in the Center or carried up or down in the elevators, except between such
hours and in such specific elevator car as designated by the Landlord.
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7. Landlord shall have the right to control and operate the public portions of
the Center, the public facilities, the heating and air conditioning, and any
other facilities furnished for the common use of the Tenants, in such manner
as it deems best for the benefit of the Tenants.
8. Landlord shall furnish heating and air conditioning during the hours of 8:00
a.m. to 6:00 p.m. Monday through Friday. In the event Tenant requires
heating and air conditioning during off hours, Saturdays, Sundays or
holidays, Landlord may, on written notice from Tenant provide this at an
hourly rate to be established by Landlord.
9. The requirements of Tenant will be attended to only upon application at the
Office of the Center or at such office location designated by Landlord.
Employees of Landlord shall not perform any work or do anything outside of
their regular duties unless under special instructions from the Landlord.
10. Tenant shall not disturb, solicit or canvas any occupant of the Center and
shall cooperate with Landlord or Agent of Landlord to prevent same.
11. The toilet rooms, urinals, wash bowls and other apparatus shall not be used
for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein. The
expense of any breakage, stoppage or damage resulting from the violation of
this rule shall be borne by the Tenant who, or whose employees or agents,
shall have caused it.
12. Tenant shall not overload the floor of the Premises, nor mark, drive nails,
screws or drill into partitions, woodwork or plaster or in any way deface
the Premises or any part thereof without Landlord' consent first had and
obtained.
13. No vending machine or machines of any description shall be installed,
maintained or operated upon the Premises without the written consent of the
Landlord.
14. Tenant shall not use or keep in or on the Premises of the Center any
kerosene, gasoline or other inflammable or combustible fluid or material.
15. Tenant shall not use any method of heating or air conditioning other than
that which may be supplied by Landlord without written consent from
Landlord.
16. Tenant shall not use, keep or permit to be used or kept, any foul or noxious
gas or substance in or on the Premises, or permit or allow the Premises to
be occupied or used in a manner offensive or objectionable to the Landlord
or other occupants of the Center by reason of noise, odors or vibrations, or
interfere in any way with other Tenants or those having business therein.
17. Tenant shall not bring into or keep within the Center or the Premises any
animals, birds, bicycles or other vehicles.
18. No cooking shall be done or permitted by an Tenant on the Premises, nor
shall the Premises be used for the storage of merchandise, for lodging, or
for any improper objectionable or immoral purposes.
19. Landlord will approve where and how telephone and telegraph wires are to be
introduced to the Premises. No boring or cutting for wires shall be allowed
without the consent of the Landlord. The location of telephones, call boxes
and other office equipment affixed to the Premises shall be subject to the
approval of Landlord.
20. Landlord reserves the right to exclude or expel from the Center any person
who, in the judgment of Landlord, is intoxicated or under the influence of
liquor or drugs, or who shall in any manner do any act in violation of any
of the rules and regulations of the Center.
21. Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and the street address of the Center
of which the Premises are a part.
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22. Without the written consent of Landlord, Tenant shall not use the name of
the Center in connection with or in promoting, or advertising the business
of Tenant, except when included as a portion of the Tenant's address.
23. Tenant shall not employ or admit any person or persons other than the
Janitor or Landlord for the purpose of cleaning or maintaining Tenant's
premises unless agreed to in writing by Landlord. Any damage to the
Premises caused by Tenant, its employees or agents while engaged in the
cleaning or maintaining of the premises, whether or not the use of said
individuals by Tenant has been approved by Landlord, will be the sole
responsibility of Tenant and any expense for damage or injuries shall be
borne entirely by Tenant. Janitor service, if provided by Landlord, shall
include ordinary dusting and cleaning by the janitor assigned to such work
and shall not include cleaning of carpets or rugs, except normal vacuuming,
nor moving of furniture or other special services. Janitorial service will
be provided to maintain a first-class office building. Landlord shall in no
way be responsible to Tenant for any loss or damage to property on the
Premises, however occurring.
24. Tenant, its employees, and agents shall not loiter in the entrances or
corridors, not in any way obstruct the sidewalks, lobby, halls, stairways or
elevators, and shall use the same only as a means of ingress and egress for
their leased Premises.
25. In all carpeted areas where desks and chairs are utilized, Landlord shall
require Tenant, at Tenant's own cost, to place mats under each and every
chair in order to protect said carpeting from unnecessary wear and tear.
26. Tenant shall not waste electricity, water or air-conditioning and agrees to
cooperate fully with Landlord to assure the most effective operation of the
Center's heating and air-conditioning, and shall refrain from attempting to
adjust any controls other than room thermostats installed for Tenant's use.
27. Each Tenant shall store all its trash and garbage within the interior of its
premises. No material shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of the ordinary
and customary manner of removing and disposing of trash and garbage in the
City of Corte Madera without violation of any law or ordinance governing
such disposal. All trash, garbage and refuse disposal shall be made only
through entryways and elevators provided for such purposes and at such times
as Landlord shall designate.
28. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental
agency.
29. Tenant assumes any and all responsibility for protecting its Premises from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
30. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular Tenant or Tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other Tenant or Tenants, nor prevent Landlord from thereafter enforcing any
such Rules and Regulations against any or all Tenants of the Center.
31. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for safety
and security, for care and cleanliness of the Center and for the
preservation of good order therein. Tenant agrees to abide by all such
Rules and Regulations hereinabove stated and any additional rules and
regulations which are adopted.
32. Tenant shall be responsible for the observance of all the foregoing Rules
and Regulations by Tenant's employees, agents, clients, customers, invitees
and guests.
33. The terms "Center" and "Premises" as used herein have the same meanings as
set forth in the Office Lease.
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TENNIS COURTS
The rules and regulations set forth below are provided to assure the comfort,
convenience and freedom from annoyance of all those using the facilities. Their
strict observance is requested out of consideration for others. Management
reserves the right to rescind or amend any of the rules and to make other such
rules and regulations from time to time as may be deemed necessary for the
safety, care and cleanliness of all the Premises, and for securing the comfort
and enjoyment of all tenants.
1. The tennis courts are for the use of tenants and their guests.
2. Tennis hours are from 8:00 a.m. until dusk, weekdays. The courts will be
closed weekends, unless prior written authorization is obtained from
Management. The courts will be closed for cleaning on Monday mornings
between the hours of 9:00 a.m. and 11:00 a.m.
3. Courtesy, good sportsmanship and good conduct should be observed on the
courts at all times. Tenants are responsible for the conduct and safety of
their guests and the observance of the rules and regulations.
4. Management assumes no responsibility for valuables or property of any kind
left in or about the premises.
5. Food, drinks and smoking will not be allowed on the courts at any time. No
pets or animals of any nature will be permitted in the tennis court area.
6. Proper tennis attire and tennis shoes must be worn for play. Tennis shirts
will be worn at all time.
7. The playing surface of the tennis courts must at all times be kept clear of
any objects or obstructions. The tennis courts will be used only for the
sport of tennis.
8. Plastic guards must be used on the heads of all metal rackets.
9. Time restrictions when playing are waiting:
One set of singles or maximum time of 45 minutes.
Two sets of doubles (all players leave court).
One set of doubles (winners stay on court).
No person may play more than two consecutive sets.
9-point tie breaker when score reaches 6-6.
10. Each court in use must have the tenant playing with his guest. Tenant may
have a maximum of one (1) guest and must use only one (1) court.
11. When deemed necessary by Management, the courts may be closed temporarily or
seasonally.
12. Gates to the tennis courts must be kept shut at all times.
13. Management assumes no responsibility or liability for physical injuries or
property damage which occurs during the tenant's or guest's use of the
tennis facilities.
RECREATION FACILITIES
1. The recreation facilities (hot tub, sauna and showers) are for the use of
tenants and their guests only.
2. Hours will be from 8:00 a.m. to 8:00 p.m. weekdays. The facilities will be
closed on weekends.
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3. Tenant may have a maximum of one guest who must be accompanied by the tenant
at all times. Tenant is responsible for the conduct and safety of his guest
and the observance of the rules and regulations.
4. Management assumes no responsibility for valuables or property of any kind
left in or about the premises.
5. Food, drinks and smoking will not be allowed inside the facilities at any
time. No pets or animals of any nature will be permitted.
6. Proper clothing should be worn at all times. "Cut-offs" are not permitted.
7. When deemed necessary by Management, the facilities may be closed
temporarily.
8. The facilities should be left in the same condition as that in which they
were found.
9. When finished with the hot tub or sauna, the timers should be turned to the
"off" position.
10. Management assumes no responsibility or liability for physical injuries or
property damage which occurs during the tenant's or their guest's use of the
facilities.
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EXHIBIT D
SALES/LEASE AMERICANS WITH DISABILITIES ACT
AND HAZARDOUS MATERIALS DISCLOSURE
ADDRESS: 5725 PARADISE DRIVE, CORTE MADERA, CALIFORNIA
---------------------------------------------
The Americans With Disabilities Act, effective July 26, 1992, prohibits
discrimination against persons with a disability in virtually all places of
public accommodation and commercial facilities. The law requires removal of
architectural and communications barriers in existing privately owned places of
public accommodation, to make buildings readily accessible to disabled persons.
A new building intended for first occupancy after January 26, 1993, must for all
practical purposes be barrier free or "readily accessible" to people with
disabilities. Compliance with the ADA may require considerable expense, and
penalties may be incurred if a property is not in compliance.
A real estate broker does not have the technical expertise to either determine
whether a building is in compliance with ADA requirements or to advise a
principal on the requirements of the ADA. Principals to the above-referenced
property are advised to consult an attorney, contractor, architect, engineer, or
other qualified professional(s) of their own choosing, to determine if and to
what extend the ADA affects their property or this transaction.
Various materials utilized in the construction of improvements to property may
contain materials that have been or may in the future be determined to be toxic,
hazardous, or undesirable. These materials may need to be specially handled or
removed from the property. For example, some electrical transformers and other
electrical components can contain PCBS. Asbestos has been used in a wide
variety of building components such as fire-proofing, air duct insulation,
acoustical tiles, spray-on acoustical materials, linoleum, floor tiles, and
plaster. Due to current or prior uses, the property or improvements may contain
materials such as metals, minerals, chemicals, hydrocarbons, biological or
radioactive materials, and other substances which are considered, or in the
future may be determined to be toxic wastes, hazardous materials, or undesirable
substances. Such substances may be in above-ground and below-ground containers
on the property or may be present on or in soils, water, building components, or
other portions of the property in areas that may not be accessible or
noticeable.
Current and future federal, state, and local laws and regulations may require
the clean-up of such toxic, hazardous, or undesirable materials at the expense
of those persons who in the past, present, or future have had any interest in
property including, but not limited to, current past and future owners and users
of the property. The parties are advised to consult with independent legal
counsel of their choice to determine the potential liability with respect to
toxic, hazardous, or undesirable materials. The parties should also consult
with such legal counsel to determine what provisions regarding toxic, hazardous,
or undesirable materials they may wish to include in purchase and sale
agreements, leases, options, and other legal documentation related to
transactions they contemplate entering into with respect to the property.
The real estate salespersons and brokers in this transaction have no expertise
with respect to toxic wastes, hazardous materials, or undesirable substances.
Proper inspections of the property by qualified experts are an absolute
necessity to determine whether or not there are any current or potential toxic
wastes, hazardous materials, or undesirable substances in or on the property.
The real estate salespersons and brokers in this transaction have not made, nor
will make, any representations, either expressed or implied, regarding the
existence or nonexistence of toxic wastes, hazardous materials, or undesirable
substances in or on the property. Problems involving toxic wastes, hazardous
materials, or undesirable substances can be extremely costly to correct. It is
the responsibility of the parties to retain qualified experts to deal with the
detection and correction of such matters.
The parties are directed to seek further information concerning any and all
future correctional measures, if any, from appropriate governmental agencies.
To the best of Seller/Lessor's knowledge, Seller/Lessor has attached to this
Disclosure copies of all existing surveys and reports known to Seller/Lessor
regarding asbestos and other hazardous materials including underground tanks and
undesirable substances related to the Property. Sellers/Lessors are required
under California Health and Safety Code Section 25915 et seq. To disclose
reports and surveys regarding asbestos
26
<PAGE>
to certain persons, including their employees, contractors, co-owners,
purchasers and tenants. Buyers/Tenants have similar disclosure obligations.
Sellers/Lessors and Buyers/Tenants have additional hazardous materials
disclosure responsibilities to each other under California Health and Safety
Code Section 25359.7 and other California laws. Consult your attorney regarding
this matter.
The undersigned acknowledge that they have read and understand this disclosure
and have received a copy.
SELLER/LESSOR:
By:
-------------------------------
Date:
-----------------------------
BUYER/LESSEE:
By:
-------------------------------
Date:
-----------------------------
27
<PAGE>
LEASE AMENDMENT
To that certain lease dated February 21, 1997
By and between Paradise Point Partners, Landlord and
Restoration Hardware, Tenant
For those certain premises known as Suite 700 at Paradise Point Executive Center
5725 Paradise Drive, Corte Madera, California
________________________________________________________________________________
Landlord and Tenant hereby agree to amend said lease as follows:
The work described in Exhibit B - Paradise Point Executive Center Work Agreement
shall be completed by Tenant at Tenant's sole cost and expense.
To compensate Tenant for completing said work, Landlord shall credit Tenant with
$23,100.00 against rent due.
Irrespective of when Tenant occupies the premises, rent shall commence beginning
May 15, 1997 and the term of the lease shall commence on May 15, 1997 and
terminate sixty (60) months thereafter.
This amendment shall be part and parcel of the original lease as if it were part
of and executed at the same time as the original lease.
Landlord:___________________________ Tenant:_______________________________
By its _____________________________ By its________________________________
Date:_______________________________ Date:_________________________________
28
<PAGE>
AMENDMENT III TO THAT CERTAIN LEASE
Dated February 21, 1997
As amended on April 24, 1997 and further amended on August 1, 1997
By and Between Paradise Point Partners "Landlord" and
Restoration Hardware "Tenant"
For Paradise Point Executive Center - 5725 Paradise Drive, Suite 700
Corte Madera, California "the Lease"
_____________________________________________________________________________
Landlord and Tenant hereby agree that "The Lease" shall be amended effective
January 1, 1998, as follows:
COVER PAGE:
The monthly rent shall be $22,166.40. The annual rent shall be $265,996.80.
The expense and tax percentage shall be 18.12%.
PAGE 1
Paragraph 1A: The net rentable square feet shall be changed from 8,064 to
- ------------
11,688.
PAGE 2
Paragraph 5A: Minimum monthly rent shall be changed from $14,918.40 to
- ------------
$22,166.40.
Paragraph 6A: Operating expense percentage shall be changed from 12.31% to
- ------------
18.12%.
PAGE 3
Paragraph B: The increase in taxes percent shall be changed from 12.31% to
- -----------
18.12%.
PAGE 5
Paragraph 10b: The number of parking spaces Tenant shall have the right to
- -------------
rent/use shall be increased from 32 parking stalls to 47 parking stalls.
Exhibit A and A1 shall be replaced with Exhibit A2 attached hereto, showing the
premises to be the entire ground floor of Building D and 3,624 square feet of
the second floor.
The additional 3,624 square feet of space on the second floor shall be available
to tenant for tenant's construction upon execution hereof.
Rent Escalation:
On May 15, 1998, the monthly rent shall increase to $22,695.49 and shall
increase each year thereafter on May 15 by 3% of the prior years rent.
Sign Rights.
Tenant shall have the right to erect signage on Building E identifiying tenants
business consistent with all applicable laws and ordinances of any government
agentcy having jurisdication and consistent with Landlorods signage policy for
the entire complex, subject to landlords approval of the design and location of
the sigh or signs, which approval shall not be unreasonably withheld.
Tenant Improvements.
Tenant shall have the right to improve the premises, inclding the cosntruction
of an interior stairwell between the first and second floor, consistent with all
applicable building codes and permits by any gobvernmental agentcy having
jursidiction and sjubject to Landlrods' approval of such improvmements which
approval shall not be unreasonaloy withheld. Tenant shall, at Landlord's sole
option, upon notice by Landlord prior to the termination of this lease, remove
said stairwell and restore the premises on each floor as though no stairwell had
existed.
Prepaid Rent For Additional Space:
Tenant shall pay to Landlord, upon execution hereof, $7,248.00 as partial
payment of the rent for the month of January, 1998.
29
<PAGE>
Option to Further Amend Lease:
Tenant shall have the right, subject only to landlord's prior right to continue
ocucpancy of the "expansion premises" to further amend this lease as described
below. IF Tenant elects the exercise tenant's right to amend this elase by
giving Landlord written notce of tenant's election on or before March 1, 1998
and Landlord confirms to Tenant by march 15, 1998 that Landlord will not
continue to occupy the "expansion space" then this else shall be further amended
as follows:
EFFECTIVE DATE:
The effective date of this further amendment shall be as designated by landlord
in writing to Tenant on or before May 1, 1998 but shall not be prior to June 1,
1998 nor later than September 1, 1998.
COVER PAGE:
The monthly rent shall be $31,689.09. The annual rent shall be $380,269.00.
The expense and tax percentage shall be 24.45%.
PAGE 1
Paragraph 1A: The net rentable square feet shall be changed from 11,688 to
- ------------
15,776.
PAGE 2
Paragraph 5A: Minimum monthly rent shall be changed from $22,166.40 and
- ------------
$31,689.09.
Paragraph 6A: Operating expense percentage shall be changed from 18.12% to
- ------------
24.45%.
PAGE 3
Paragraph B: The increase in taxes percent shall be changed from 18.12% to
- -----------
24.45%.
PAGE 5
Paragraph 10b: The number of parking spaces Tenant shall have the right to
- -------------
rent/use shall be increased from 47 parking stalls to 63 parking stalls.
Rent Escalation:
On May 15, 1999. The rent shall increase to $32,628.52 and shall increase on
each May 15th thereafter by 3% of the prior month's rent.
All other terms of the lease shall remain unchanged. The above changes shall be
incorporated in the lease as if they were part of the original lease executed by
Landlord and Tenant.
In witness thereof this Amendment has been executed as of the date set forth
below.
LANDLORD: Paradise Point Partners
By:
------------------------------- ------------------------------------
Glenn S. Yamaguchi Date
its authorized agent
TENANT: Restoration Hardware
By:
------------------------------- ------------------------------------
Thomas Low Date
Senior Vice President/Chief
Financial Officer
30
<PAGE>
AMENDMENT TO THAT CERTAIN LEASE
Dated February 21, 1997
As amended on April 24, 1997 and further amended on August 1, 1997
By and Between Paradise Point Partners "Landlord" and
Restoration Hardware "Tenant"
For Paradise Point Executive Center - 5725 Paradise Drive, Suite 700
Corte Madera, California "the Lease"
________________________________________________________________________________
Landlord and Tenant hereby agree that "The Lease" shall be amended effective
February 1, 1998, as follows:
COVER PAGE:
The monthly rent shall be $22,311.36. The annual rent shall be $267,736.32.
The expense and tax percentage shall be 18.12%.
PAGE 1
Paragraph 1A: The net rentable square feet shall be changed from 8,064 to
- ------------
11,688.
PAGE 2
Paragraph 5A: Minimum monthly rent shall be changed from $14,918.40 to
- ------------
$22,311.36.
Paragraph 6A: Operating expense percentage shall be changed from 12.31% to
- ------------
18.12%.
PAGE 3
Paragraph B: The increase in taxes percent shall be changed from 12.31% to
- -----------
18.12%.
PAGE 5
Paragraph 10b: The number of parking spaces Tenant shall have the right to
- -------------
rent/use shall be increased from 32 parking stalls to 47 parking stalls.
Exhibit A and A1 shall be replaced with Exhibit A2 attached hereto, showing the
premises to be the entire ground floor of Building D and 3,624 square feet of
the second floor.
The additional 3,624 square feet of space on the second floor shall be available
to tenant for tenant's construction upon execution hereof.
RENT ESCALATION:
On May 15, 1998, the monthly rent shall increase to $22,823.60 and shall
increase each year thereafter on May 15 by 3% of the prior month's rent.
SIGN RIGHTS.
Tenant shall have the right to erect signage on Building D identifying tenants
business consistent with all applicable laws and ordinances of any government
agency having jurisdiction and consistent with Landlord's signage policy for the
entire complex, subject to landlords approval of the design and location of the
sign or signs, which approval shall not be unreasonably withheld.
TENANT IMPROVEMENTS.
Tenant shall have the right to improve the premises upon execution hereof,
including the construction of an interior stairwell between the first and second
floor, consistent with all applicable building codes and permits by any
governmental agency having jurisdiction and subject to Landlords' approval of
such improvements which approval shall not be unreasonably withheld. Tenant
shall, at Landlord's sole option, upon notice by Landlord prior to the
termination of this lease, remove said stairwell and restore the premises on
each floor as though no stairwell had existed. Upon completion of Tenant's
improvements to the premises and presentation to Landlord of paid receipts for
such improvements, Landlord shall pay to Tenant up to $25,000.00 toward the cost
of such improvements which shall include changes needed in the HVAC systems.
31
<PAGE>
PREPAID RENT FOR ADDITIONAL SPACE:
Tenant shall pay to Landlord, upon execution hereof, $7,392.96 as partial
payment of the rent for the month of February, 1998.
OPTION TO FURTHER AMEND LEASE:
Tenant shall have the right, subject only to landlord's prior right to continue
occupancy of the "expansion premises" to further amend this lease as described
below. IF Tenant elects to exercise tenant's right to amend this lease by
giving Landlord written notice of tenant's election on or before March 1, 1998
and Landlord confirms to Tenant by March 15, 1998 that Landlord will not
continue to occupy the "expansion space" then this lease shall be further
amended as follows:
EFFECTIVE DATE:
The effective date of this further amendment shall be as designated by landlord
in writing to Tenant on or before May 1, 1998 but shall not be prior to June 1,
1998 nor later than September 1, 1998.
COVER PAGE:
The monthly rent shall be $31,817.20. The annual rent shall be $381,806.40.
The expense and tax percentage shall be 24.45%.
PAGE 1
Paragraph 1A: The net rentable square feet shall be changed from 11,688 to
- ------------
15,776.
PAGE 2
Paragraph 5A: Minimum monthly rent shall be changed from $22,311.36 to
- ------------
$31,817.20.
Paragraph 6A: Operating expense percentage shall be changed from 18.12% to
- ------------
24.45%.
PAGE 3
Paragraph B: The increase in taxes percent shall be changed from 18.12% to
- -----------
24.45%.
PAGE 5
Paragraph 10b: The number of parking spaces Tenant shall have the right to
- -------------
rent/use shall be increased from 47 parking stalls to 63 parking stalls.
TENANT IMPROVEMENTS.
Tenant shall have the right to improve the premises upon execution hereof,
consistent with all applicable building codes and permits by any governmental
agency having jurisdiction and subject to Landlords' approval of such
improvements which approval shall not be unreasonably withheld. Upon completion
of Tenant's improvements to the premises and presentation to Landlord of paid
receipts for such improvements, Landlord shall pay to Tenant up to $50,000.00
toward the cost of such improvements which shall include changes needed in the
HVAC systems.
PREPAID RENT FOR ADDITIONAL SPACE:
Tenant shall pay to Landlord, upon notice of Tenant's execution to amend this
lease and Landlord's confirmation that Landlord will not continue to occupy the
expansion space, $8,993.60 as partial payment of the rent for the month in which
the amendment becomes effective.
RENT ESCALATION:
On May 15, 1999. The rent shall increase to $32,760.48 and shall increase on
each May 15th thereafter by 3% of the prior month's rent.
32
<PAGE>
All other terms of the lease shall remain unchanged. The above changes shall be
incorporated in the lease as if they were part of the original lease executed by
Landlord and Tenant.
In witness thereof this Amendment has been executed as of the date set forth
below.
LANDLORD: Paradise Point Partners
By:____________________________ _____________________
Glenn S. Yamaguchi Date
its authorized agent
TENANT: Restoration Hardware
By:____________________________ _____________________
Thomas Low Date
Senior Vice President/Chief Financial Officer
33
<PAGE>
EXHIBIT 10.11
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[logo]
1. BASIC PROVISIONS ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purpose only, May 12,
1997, us made by and between Mortimer B. Zuckerman, an individual with an
address c/o Boston Properties, 8 Arlington Street, Boston, Massachusetts
02116 ("Lessor") and Restoration Hardware, Inc., a California corporation with
an address at 15 Koch Road, Suite J, Corte Madera, California 94925 ("Lessee"),
(collectively the "Parties," or individually a "Party").
1.2(a) Premises: The approximately 160.213 square feet of space (the
"Premises") shown on Exhibit A attached hereto in the building (the "Building")
containing approximately 220,213 square feet of space located on land (the
"Property") commonly known as 2391 West Winton Avenue, Hayward, California and
more particularly described in Exhibit B attached hereto.
In addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any
rights to the roof, exterior walls or utility raceways of the Building or to any
other buildings in the Industrial Center. The Premises, the Building, the Common
Areas, the land upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the "Industrial
Center." (Also see Paragraph 2.) See Rider Paragraph 51.
1.2(b) Parking: The unreserved vehicle parking spaces shown as "Lessee's
Parking Area" on Exhibit C attached hereto. ("Unreserved Parking Spaces"); (Also
see Paragraph 2.6.) See Rider Paragraphs 1 & 3.
1.5 Base Rent: See Rider Paragraphs 2 & 3. (Also see Paragraph 4.)
1.6(a) Base Rent Paid Upon Execution: $36,848.99 as Base Rent for the first
month after the Commencement Date.
1.6(b) Lessee's Share of Common Area Operating Expenses: seventy-two and
75/100 percent (75.75) ("Lessee's Share") as determined by pro rata square
footage of the Premises as compared to the total square footage of the Building.
1.7 Security Deposit: See Rider Paragraph 4.
1.8 Permitted Use: Distribution and warehousing and office uses ancillary
thereto. See Rider Paragraph 5. ("Permitted Use") (Also see Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph 8.)
1.10(a) Real Estate Brokers. See Rider Paragraph 6.
1.12 Addenda and Exhibits. Attached hereto is a Rider and Exhibits all of
which constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental and/or Common Area Operating Expenses, is
an approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of
debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
ninety (90) days after the Commencement Date, correction of that non-compliance
shall be See Rider Paragraph 53.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of records See Rider
Paragraph 8 and applicable building codes, regulations and ordinances in effect
on the Commence Date See Rider Paragraph 54. Lessor further warrants to Lessee
that Lessor has no knowledge of any claim having been made by any governmental
agency that a violation or violations of applicable building codes, regulations,
or ordinances exist with regard to the Premises as of the Commencement Date,.
Said warranties shall not apply to any Alterations or Utility installations
(defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do
not comply with said warranties, Lessor shall, except as otherwise provided in
this Lease, promptly after receipt of written notice from Lessee and setting
forth with specificity the nature and extent of such non-compliance, take such
action, at Lessor's expense, as may be reasonable or appropriate to rectify the
non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph 1.8
is permitted for the Premises under Applicable Laws (as defined in Paragraph
2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
satisfied itself with respect to the condition of the Premises (including by not
limited to the electrical and fire sprinkler systems, security, environmental
aspects, seismic and earthquake requirements, and compliance with the Americans
with Disabilities Act and applicable zoning, municipal, county, sate and federal
laws, ordinances and regulations and any covenants or restrictions of record
(collectively, "Applicable Laws") and the present and future suitability of the
Premises for Lessee's intended use; 9b) that Lessee has made such investigation
as it deems necessary with reference to such matters, is satisfied with
reference thereto, and assumes all responsibility therefore as the same relate
to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c)
that neither Lessor, the Brokers nor any of Lessor's agents, has made any oral
or written representations or warranties with respect to said matters other than
as set forth in this Lease. See Rider Paragraph 52.
<PAGE>
2.6 Vehicle. Lessee shall be entitled to use the Unreserved Parking Spaces on
those portions of the Common Areas designated as "Lessee's Parking Areas" on
Exhibit C attached hereto. Lessee shall not use more parking spaces than the
spaces in said Lessee's Parking Areas. Said parking spaces shall be used for
parking by vehicles no larger than full-size passenger automobiles or pick-up
trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted
Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in
the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also
see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unleaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities described
in this Paragraph 2.6, then Lessor shall have the right, without notice, in
addition to such other rights and remedies that it may have, to remove or tow
away the vehicle involved and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
(c) See Rider Paragraph 42.
2.7 Common AreasDefinition. The term "Common Areas" is defined as all areas
and facilities outside the Premises and within the exterior boundary line of the
Industrial Center and interior utility raceways within the Premises that are
provided and designated by the Lessor from time to time for the general non-
exclusive use of Lessor, Lessee and other lessees of the Industrial Center and
their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common AreasLessee's Rights. Lessor hereby grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors, customers
and invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. See Rider Paragraph 8.
Under no circumstances shall the right herein granted to use the Common Areas be
deemed to include the right to store any property, temporarily or permanently,
in the Common Areas. Any such storage shall be permitted only by the prior
written consent of Lessor or Lessor's designated agent,which consent may be
revoked at any time. In the event that any unauthorized storage shall occur then
Lessor shall have the right, without notice, in addition to such other rights
and remedies that it may have, to remove the property and charge the cost to
Lessee, which cost shall be immediately payable upon demand by Lessor.
2.9 Common AreasRules and Regulations. Lessor or such other person(s) as
Lessor may appoint shall have the exclusive control and management of the Common
Areas and shall have the right, from time to time, to establish, modify, amend
and enforce reasonable Rules and Regulations with respect thereto in accordance
with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers, customers,
contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center. See Rider Paragraph 43.
2.10 Common AreasChanges. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without limitation,
changes in the location, size, shape and number of driveways, entrances, parking
spaces, parking areas, loading and unloading areas, ingress, egress, direction
of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance purposes
so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial Center
to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To sue the Common Areas while engaged in making improvements, repairs
or alterations to the Industrial Center, or any portion thereof; and
(f) To do and perform such other acts and make such other changes in, to or
with respect to the Common Areas and the Industrial Center as Lessor may, in the
exercise of sound business judgment, deem to be appropriate.
3. Term. See Rider Paragraph 1.
4. Rent
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the
same may be adjusted from time to time, to Lessor in lawful money of the United
States, without offset or deduction, on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges for any
period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other address as Lessor may from time to
time designate in writing to Lessee.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of this
Lease, as all costs incurred by Lessor relating to the ownership and operation
of the Industrial Center, including, but not limited to, the following:
(i) The operation, repair and maintenance, in neat, clean, good order and
condition, of the following:
(aa) The Common Areas, including parking areas, loading and unloading
areas, trash areas, roadways, sidewalks, walkways, parkways, driveways,
landscaped areas, striping, bumpers, irrigation systems, Common Area lighting
facilities, fences and gates, elevators, and subject to the terms of Rider
Paragraph 40, and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to service the
Common Areas.
(iii) Trash disposal, property management and security services and the
costs of any environmental inspections.
(iv)
(v) Any increase above the Base Real Property Taxes (as defined in
Paragraph 10.2 (b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase) (as defined in Paragraph 8.1).
(vii)
(viii) Any deductible portion of an insured loss concerning the Building
or the Common Areas.
(ix) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense. See Rider
Paragraph 44.
(b) Any Common Area Opearting Expenses and Real Property Taxes that are
specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building.
(c) The inclusion of the improvements, facilities and services set forth in
Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to
either have said improvements or facilities or to provide those services unless
Lessor has agreed elsewhere in this Lease to provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable by
Lessee within thirty (30) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of actual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, durinmg each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessor shall be credited the amount of such over
<PAGE>
payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within thirty (30) days after delivery by
Lessor to Lessee of said statement. See Rider Paragraph 40.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted Use set
forth in Paragraph 1.8, and for no other purpose. Lessee shall not use or permit
the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as used
in this Lease shall mean any product, substance, chemical, material or waste
whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (I) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. See Rider
Paragraph 9 shall not engage in any activity in or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws required that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, so long as such use is not a Reportable Use and
does not expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit See Rider Paragraph 55
(including, without limitation, through the plumbing or sanitary sewer system.
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and reasonable
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for See Rider Paragraph 10 Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee See Paragraph 11 and the cost of
investigation (including consultants and reasonable attorney's fees and
testing), removal, remediation, restoration and/or abatement therefor, or of any
contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease with respect to Hazardous Substances, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record See Rider Paragraph 8 permits, the requirements of any
applicable fire insurance underwriter or rating bureau and Lessor's insurance
carriers and the recommendations of Lessor's engineers and/or consultants,
relating in any way to the Premises (including but not limited to matters
pertaining to (I) industrial hygiene, (ii) environmental conditions on, in,
under or about the Premises, including soil and groundwater conditions, and
(iii) the use, generation, manufacture, production, installation, maintenance,
removal, transportation, storage, spill, or release of any Hazardous Substance),
now in effect or which may hereafter come into effect. Lessee shall, within five
(5) days after receipt of Lessor's written request, provide Lessor with copies
of all documents and information, including but not limited to permits,
registrations, manifests, applications, reports and certificates, evidencing
Lessee's compliance with any Applicable Requirements specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Requirements. See Rider Paragraph 5. See
Rider Paragraph 45.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Rider Paragraph 7 (relating to Lessor's
improvements), Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants,
Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or
Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and
expense and at all times, keep the Premises and every part thereof in good
order, condition and repair (whether or not such portion of the Premises
requiring repair, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of such portion
of the Premises), including, without limiting the generality of the foregoing,
all equipment or facilities specifically serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, telephone and other
communication, lighting facilities, boilers, fired or unfired pressure vessels,
fire hose connections if within the Premises, fixtures, interior walls, interior
surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and
skylights, but excluding any items which are the responsibility of Lessor
pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices. See
Rider Paragraph 46.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a
contract, with copies to Lessor, in customary form and substance for and with a
contractor specializing and experienced in the inspection, maintenance and
service of the heating, air conditioning and ventilation system for the
Premises. However, Lessor reserves the right, upon notice to Lessee, to procure
and maintain the contract for the heating, air conditioning and ventilating
systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand,
for the cost thereof. See Rider Paragraph 14
(c) If Lessee fails to perform Lessee's obligations under this Paragraph
7.1, See Rider Paragraph 56 Lessor may enter upon the Premises, perform such
obligations on Lessee's behalf, and put the Premises in good order, condition
and repair, in accordance with Paragraph 13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Rider Paragraph 7
(relating to Lessor's improvements), Paragraphs 2.2 (Condition), 2.3 (Compliance
with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating
Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14
(Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2,
shall keep in good order, condition and repair the foundations, exterior walls,
structural condition of interior bearing walls, exterior roof, fire sprinkler
and/or standpipe and hose (if located in the Common Areas) or other automatic
fire extinguishing system including fire alarm and/or smoke detection
<PAGE>
systems and equipment, fire hydrants, parking lots, walkways, parkways,
driveways, landscaping, fences, signs and utility systems serving the Common
Areas and all parts thereof, as well as providing the services for which there
is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not
be obligated to paint the interior surfaces of exterior walls nor shall Lessor
be obligated to maintain, repair or replace windows, doors or plate glass of the
Premises. Lessor may, but shall not be obligated, to pain the exterior surfaces
of exterior walls. Lessee expressly waives the benefit of any statue now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Building, Industrial Center or Common Areas in good order,
condition and repair. See Rider Paragraph 63.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is used
in this Lease to refer to all air lines, power panels, electrical distribution,
security, fire protection systems, telephone and other communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "Alterations" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a).
(b) Consent. See Rider Paragraph 15. Lessee shall promptly upon completion
thereof furnish Lessor with as-built plans and specifications therefor.
(c) Lien Protection. Lessee shall pay when due all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein, Lessee shall
give Lessor not less than ten (10)) days' notice prior to the commencement of
any work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, as its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one
and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises from the effect of such lien or claim, In addition,
Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so. See Rider Paragraph 62.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and to
cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee-Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the end
of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear See Rider Paragraph 47 excepted. Ordinary wear and tear
shall not include any damage or deterioration that would have been prevented by
good maintenance practice or by Lessee performing all of its obligations under
this Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the removal of any storage tank installed by or for Lessee, and the removal,
replacement, or redemption of any soil, material or ground water contaminated by
Lessee, all as may then be required by Applicable Requirements and/or good
practice, Lessee's Trade Fixtures shall remain the property of Lessee and shall
be removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment of Premium Increases
(a) As used herein, the term "Insurance Cost Increase" is defined as any
increase in the actual cost of the insurance applicable to the Building, the
Property and the Industrial Center and required or permitted to be carried by
Lessor pursuant to Paragraphs 8.2(b), 8.3 (a) and 8.3(b), ("Required
Insurance"), over and above the Base Premium, as hereinafter defined, calculated
on an annual basis. "Insurance Cost Increase" shall include, but not be limited
to, requirements of the holder of a mortgage or deed of trust covering the
Premises, increased valuation of the Premises, and/or a general premium rate
increase. The term "Insurance Cost Increase" shall not, however, include any
premium increases resulting from the nature of the occupancy of any other lessee
of the Building. See Rider Paragraph 48.
(b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant to
Paragraph 4.2. Premiums for policy periods commencing prior to, or extending
beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
form of this Lease a Commercial General Liability policy of insurance protecting
Lessee, Lessor Lessor's managing agent and any Lenders(s) whose names have been
provided to Lessee in writing (as additional insureds) against claims for bodily
injury, personal injury and property damage based upon, involving or arising out
of the ownership, use, occupancy or maintenance of the Premises, the Building,
the Property and the Industrial Center and all areas appurtenant thereto. Such
insurance shall be on an occurrence basis providing single limit coverage in an
amount not less than $5,000,000 per occurrence with an "Additional Insured-
Managers or Lessors of Premises" endorsement and contain the "Amendment of the
Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from
a hostile fire. The policy shall not contain any intra-insured exclusions as
between insured persons or organizations, but shall include coverage for
liability assumed under this Lease as an insured contract" for the performance
of Lessee's indemnity obligations under this Lease. The limits of said insurance
required by this Lease or as carried by Lessee shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance to be carried by Lessee shall be primary to and not contributory with
any similar insurance carried by Lessor, whose insurance shall be considered
excess insurance only.
(b) Carried by Lessor, Lessor shall also maintain liability insurance, in
addition to and not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall not be named as an additional insured therein.
8.3 Property insurance-Builidng, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and to any Lender(s), insuring against loss or damage to the
Premises, the Building, the Property and the Industrial Center. Such insurance
shall be for full replacement cost, as the same shall exist from time to time,
or the amount required by any Lender(s), Lessee-Owned Alterations and Utility
Installations, Trade Fixtures and Lessee's personal property shall be insured by
Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially
appropriate, Lessor's policy or policies shall insure against all risks of
direct physical loss or damage See Rider Paragraph 16, including coverage for
any additional costs resulting from debris removal and reasonable amount of
coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Building required
to be demolished or removed by reason of the enforcement of any building,
zoning, safety or land use laws as the result of a covered loss, but not
including plate glass insurance. Said policy or policies shall also contain an
agreed valuation provision in lieu of any co-insurance clause, waiver of
subrogation, See Rider Paragraph 18
(b) Rental Value. Lessor shall also obtain and keep in force during the
term of this Lease a policy or policies in the name of Lessor, with loss payable
to Lessor and any Lender(s), insuring the loss of the full rental and other
charges payable by all lessees of the Building to Lessor for one year (including
all Real Property Taxes, insurance costs, all Common Area Operating Expenses and
any scheduled rental increases). Said insurance may provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of repairs
or replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of an co-insurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income, Real
Property Taxes, insurance premium costs and other expenses, if any, otherwise
payable, for the next 12-month period. Common Area Opearting Expenses shall
include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the premiums
for the property insurance of the Building and for the Common Areas or other
buildings in the industrial Center if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
<PAGE>
(d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall
not be required to insure Lessee-Owned Alterations and Utility Installations
unless the item in question has become the property of Lessor under the terms of
this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Trade Fixtures, See Rider Paragraph 19 and
Lessee-Owned Alterations and Utility Installations in, on, or about the Premises
similar in coverage to that carried by Lessor as the insuring Party under
Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a
deductible not to exceed $1,000 per occurrence. The proceeds from any such
insurance shall be sued by Lessee for the replacement of personal property and
the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility
Installations. Upon request from Lessor, Lessee shall provide Lessor with
written evidence that such insurance is in force. See Rider Paragraph 49.
8.5 Insurance Policies. Insurance required hereunder See Rider Paragraph 20
shall be in companies duly licensed to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least A-VIII or such other rating as may be required
by a Lender, as set forth in the must current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in this Paragraph 8. See Rider Paragraph 21.
Lessee shall cause to be delivered to Lessor, within seven (7) days after the
earlier of the Early Possession Date or the Commencement Date, certified copies
of, or certificates evidencing the existence and amounts of, the insurance
required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or
subject to modification except after thirty (30) days' prior written notice to
Lessor. Lessee shall at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies.
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
periods required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limed by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Lessee shall indemnify, protect, defend and hold harmless the
Premises, the Building, the Property and the Industrial Center, Lessor and its
agents, Lessor's master or ground lessor, partners and Lenders, from and against
any and all claims, loss of rents and/or damages, costs, liens, judgments,
penalties, loss of permits, attorneys' and consultant's fees, expenses and/or
liabilities arising out of, involving, or in connection with, the occupancy of
the Premises by Lessee, the conduct of Lessee's business, any act, omission or
neglect of Lessee, its agents, contractors, employees or invitees See Rider
Paragraph 11 and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury
or damage to the person or See Rider Paragraph 22 goods, wares merchandise or
other property of Lessee, Lessee's employees, contractors invitees, customers,
or any other person See Rider Paragraph 11 in or about the Premises, the
Building, the Property or the Industrial Center whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, from other resources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other lessee of Lessor nor from the failure by Lessor to enforce the
provisions of any other lease in the Industrial Center. Notwithstanding Lessor's
negligence or breach of this Lease. Lessor shall under no circumstances be
liable for injury to Lessee's business or for any loss of income or profit
therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding the Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and
Utility Installations and Trade Fixtures) immediately prior to such damage or
destruction. In addition, damage or destruction to the Building, other than
Lessee-owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost ) excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises, other
than Lessee-Owned Alterations and Utility Installations and Trade Fixtures,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits
involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or discovery
of a condition involving the presence of, or a contamination by, a Hazardous
Substance as defined in Paragraph 6.29a), in, on, or under the Premises.
9.2 Premises Partial DamageInsured Loss. If Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance shall be made available for repairs if made by
either Party.
9.3 Partial DamageUninsured Loss. If Premises Partial Damage that is not an
insured Loss occurs, unless caused by a negligent or willful act of Lessee. (In
which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect), Lessor may at Lessor's option, either
(I) repair such damage as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) give
written notice to Lessee within forty-five (45) days after receipt by Lessor of
knowledge of the occurrence of such damage of Lessor's desire to terminate this
Lease See Rider Paragraph 23. In the event Lessor elects to give such notice of
Lessor's intention to terminate this Lease. Lessee shall have the right within
ten (10) days after the receipt of such notice to give written notice to Lessor
of Lessee's commitment to pay for the repair of such damage totally at Lessee's
expense and without reimbursement from Lessor. Lessee shall provide Lessor with
the required funds or satisfactory assurance thereof within thirty (30) days
following such commitment from Lessee. In such even this Lease shall continue in
full force and effect, and Lessor shall proceed to make such repairs as soon as
reasonably possible after the required funds are available. If Lessee does not
give such notice and provide the funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in Lessor's
notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises total Destruction occurs (including any destruction required by any
authorized public authority), See Rider Paragraph 24.
9.5 Damage Near End of Term. If at any time during the last six (6) months of
the term of this Lease there is damage for which the cost to repair exceeds one
month's Base Rent, whether or not an insured Loss, Lessor may, at Lessor's
option, terminate this Lease See Rider Paragraph 23 by giving written notice to
Lessee of Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then Lessee
may preserve this Lease by (a) exercising such option, and (b) providing Lessor
with any shortage in insurance proceeds (or adequate assurance thereof) needed
to make the repairs on or before the earlier of (I) the date which is ten (10)
days after Lessee's receipt of Lessor's written notice purporting to terminate
this Lease, or (ii) the day prior to the date upon which such option expires. If
Lessee duly exercise such option during such period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or assurance during
such period, then this Lease shall terminate as of the date set forth in the
first sentence of this Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraphs 9.2 or 9.4 the Base
Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, redemption or restoration continues, shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired, but not in excess
of proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, redemption or restoration.
<PAGE>
(b) If Lessor shall be obligated to repair the Premises under the
provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way the repair or restoration of the Premises within sixty (60) days
after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to Lessor and to
any Lenders of which Lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than thirty (30) days following the giving of such
notice. If Lessee gives such notice to Lessor and such Lenders and such repair
ore restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after the receipt of such notice, this Lease shall continue in
full force and effect. "Commence" as used in this Paragraph 9.6 shall mean
either the unconditional authorization of the preparation of the required plans,
or the beginning of the actual work on the Premises, whichever occurs first.
9.8 TerminationAdvance Payments. Upon termination of this Lease pursuant to
this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises and the
Building with respect to the termination of this Lease and hereby waive the
provisions of any present or future statute to the extent it is inconsistent
herewith.
10.1 Real Property Taxes. See Rider Paragraph 25.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 Real Property Tax Definitions.
(a) As used herein, the term "Real Property Taxes" shall include any form
of real estate tax or assessment, general, special, ordinary or extraordinary,
and any license fee, commercial rental tax, improvement bond or bonds, levy or
tax (other than inheritance, personal income or estate taxes) imposed upon the
Industrial Center by any authority having the direct or indirect power to fax,
including any city, state or federal government, or any school, agricultural,
sanitary, fire, street, drainage, or other improvement district thereof, levied
against any legal or equitable interest of Lessor in the Industrial Center or
any portion thereof, Lessor's right to rent or other income therefrom, and/or
Lessor's business of leasing the Premises. The term "Real Property Taxes" shall
also include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in Applicable Law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Industrial Center or in the improvements thereon, the
execution of this Lease, or any modifications, amendment or transfer thereof,
and whether or not contemplated by the Parties. See Rider Paragraph 50.
(b) As used herein, the term "Base Real Property Taxes" shall be the amount
of Real Property Taxes, which are assessed against the Premises, Building or
Common Areas. See Rider Paragraph 57. In calculating Real Property Taxes for any
calendar year, the Real Property Taxes for any real estate tax year shall be
included in the calculation of Real Property Taxes for such calendar year based
upon the number of days which such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Opearting Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Opearting Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes
assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services supplied
to the Premises, including but not limited to electricity, telephone, security,
gas and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed with other
premises in the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d).
12. Assignment and Subletting. See Rider Paragraph 27
<PAGE>
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy same, or
the abandonment of the Premises. See Rider Paragraph 58.
(b) Except as expressly otherwise provided in this Lease, the failure by
Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating
Expenses, or any other monetary payment required to be made by Lessee hereunder
See Rider Paragraph 59., the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease.
(c) Except as expressly otherwise provided in this Lease, the failure by
Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (I) compliance with Applicable Requirements per
Paragraph 6.3 See Rider Paragraph 60. (ii) the inspection, maintenance and
service contracts required under Paragraph 7.19b), (iii) the rescission of an
unauthorized assignment or subleasing per Rider Paragraph 27, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of
this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or where any
such failure continues for a period of twenty (20) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee'
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by Lessee
of any general arrangement or assignment for the of creditors; (ii) Lessee's
becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor
statute thereto *unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days; (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this Subparagraph 13.19e) is contrary to any applicable law, such
provision shall be of no force or effect, and shall not affect the validity of
the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or of
any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false.
See Rider Paragraph 28.
13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation
of Lessee under this Lease, within ten (10) days after written notice to Lessee
(or in case of an emergency, without notice), Lessor may at its option (but
without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the Bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor, in such event
Lessor shall be entitled to recover from Lessee: (I) the worth at the time of
the award of the unpaid rent which had been earned at the time of termination;
(ii) the worst at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that the Lessee proves could have been reasonably
avoided; (iii)the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorneys' fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (ii) of the immediately preceding sentence shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco or the Federal Reserve Bank District in which the Premises
are located at the time of award plus one count rate of the Federal Reserve Bank
of San Francisco or the Federal Reserve Bank District in which the Premises are
located at the time of award plus one percent 91%). Efforts by Lessor to
mitigate damages caused by Lessee's Default or Breach of this Lease shall not
waive Lessor's right to recover damages under this Paragraph 13.2. If
termination of this Lease is obtained through the provisional remedy of unlawful
detainer, Lessor shall have the right to recover in such pro-
<PAGE>
ceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period under the unlawful detainer statue shall
run concurrently after the one such statutory notice, and the failure of Lessee
to cure the Default within the greater of the two (2) such grace periods shall
constitute both an unlawful detainer and a breach of this Lease entitling Lessor
to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitation, Lessor and Lessee agree that the
limitations on assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under the
laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10)) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such later charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in not even t be less than thirty (30) days after receipt by Lessor,
and by any Lender'(s) whose name and address shall have been furnished to Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the apart so taken as of the date the condemning authority takes title or
possession whichever first occurs See Rider Paragraph 29 if more than twenty-
five percent (25%) of the floor area of the Premises, or more than twenty-five
percent (25%) of the portion of the Common Areas designated for Lessee's
parking, is taken by condemnation, Lessor or Lessee may, at such party's option,
to be exercised in writing within ten (10) days after Lessor shall have given
Lessee written notice of such taking (or in the absence of such notice, within
ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes possession.
If either party does not terminate this Lease in accordance with the foregoing,
this Lease shall remain in full force and effect as to the portion of the
Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the Premises. No reduction of Base Rent shall occur if
the condemnation does not apply to any portion of the Premises. Any award for
the taking of all oar any part of the Premises under the power of eminent domain
or any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures See Rider Paragraph 30. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above Lessee's share of
the legal and other expenses incurred by Lessor in the condemnation matter,
repair any damage to the Premises caused by such condemnation authority. Lessee
shall be responsible for the payment of any amount in excess of such net
severance damages required to complete such repair. See Rider Paragraph 31.
15. Broker's Fees. See Rider Paragraph 6.
16. Tenancy and Financial Statements.
16.1 See Rider Paragraph 32.
16.2 Financial Statement. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor Lessee's
financial statements for the past three (3) years. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question f the fee title to the Premises. In the event
of a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Upon such transfer or assignment the prior Lessor shall be relieved
of all liability with respect to the obligations and/or covenants under this
Lease thereafter to be performed by the Lessor. Subject to the foregoing, the
obligations and/or covenants in this Lease to be performed by the Lessor shall
be binding only upon the Lessor as hereinabove defined. See Rider Paragraph 33.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in now way affect the validity of
any other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the date in which
the Premises are located plus two percent (2%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.14.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior to other Agreements; This Lease contains all agreements between
the Parties with respect to any matter mentioned herein, and no other prior or
contemporaneous agreement or understanding shall be effective.
<PAGE>
23. Notices. See Rider Paragraph 34.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwistanding any qualifying
statements or conditions made by Lessee in connection therewith, which such
statements and/or conditions shall be of no force or effect whatsoever unless
specifically agreed to in writing by Lessor at or before the time of deposit of
such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No right to Holdover. See Rider Paragraph 35.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initialed in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease shall be subject and subordinate to any ground
lease, mortgage, deed of trust, or other hypothecation or security device
(collectively, "Security Device"), now or hereafter placed by Lessor upon the
real property of which the Premises are a part, to any and all advances made on
the security thereof, and to all renewals, modifications, consolidations,
replacements and extensions thereof, Lessee agrees that the Lenders holding any
such Security Device shall have no duty, liability or obligation to perform any
of the obligations of Lessor under this Lease, but that in the event of Lessor's
default with respect to any such obligation, Lessee will give any Lender whose
name and address have been furnished Lessee in writing for such purpose notice
of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to
have this Lease superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3,
Lessee agrees to attorn to a Lender or any other party who acquires owner-ship
of the Premises by reason of a foreclosure of a Security Device, and that in the
event of such foreclosure , such new owner shall not: (I) be liable for any act
or omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership, (ii) be subject to any offsets of defenses which
Lessee might have against any prior lessor, or (iii) be bound by prepayment of
more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor
after the execution of this lease, Lessee's subordination of this Lease shall be
suggest to receiving assurance (a "non-disturbance agreement') from the Lender
that Lessee's possession and this Lease, including any options to extend the
term hereof, will not be disturbed so long as Lessee is not in Breach hereof and
attorns to the record owner of the Premises.
30.4 Self-Executing. Upon written request from Lessor or a lender in
connection with a sale, financing or refinancing of Premises, Lessee and Lessor
shall execute such further writings as may be reasonably required to separately
document any such subordination or non-subordination, attornment and/or non-
disturbance agreement as is provided for herein.
31. Attorney's Fees. If any party brings an action or proceeding to enforce
the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter
defined) in any such proceeding, action, or proceeding is pursued to decision or
judgment. The term "Prevailing Party" shall include, without limitation, a Party
who substantially obtains or defeats the relief sought, as the case may be,
whether by compromise, settlement, judgement, or the abandonment by the other
Party of its claim or defense. The attorney's fee award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to
attorney's fees, costs and expenses incurred in preparation and service of
notices of Default and consultations in connection therewith, whether or not a
legal action is subsequently commenced in connection with such Default or
resulting Breach.
32. Lessor' Access; Showing Premises; Repairs. See Rider Paragraph 61. Lessor
and Lessor's agents shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times for the purpose of
showing the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time place
on or about the Premises or Building any ordinary "For Sale" signs and Lessor
may at any time during the last one hundred eighty (180) days of the term hereof
place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to identify
the Building as containing space leased to Lessee so long as such signs are in a
location designated by Lessor and comply with Applicable Requirements and the
signage criteria established for the Industrial Center by Lessor. The
installation of any sign on the Premises by or for agreed herein, Lessor
reserves all rights to the use of the roof of the Building, and the right to
install advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs. See Rider Paragraph 56.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lessor estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Lessor's actual reasonable out-of-pocket costs and expenses (including but
not limited to architects', attorneys', engineers', and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to an assignment a subletting or the presence or use
of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. Lessor's consent to any act
assignment of this Lease or subletting of the Premises by Lessee shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent.
(b) All conditions to Lessor's consent authorized b this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
lessor at the time of consent of such further on other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
<PAGE>
38. Quiet Possession. Upon Payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quirt
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. Options. See Rider Paragraph 3.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations (Rules and Regulations") which
Lessor may make from time to time for the management, safety, care and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service of other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
it's agents and invitees and their property for the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restriction do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to assign any
documents reasonably requested by Lessee to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessee evidence satisfactory to Lessee of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan. Lender in
connection with the obtaining of formal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
<PAGE>
LESSOR AND LESS HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREED THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH
IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE
SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM
THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: New York, NY Executed at: Corte Madera, CA
On: May 12, 1997 on: 5/7/97
By LESSOR: By LESSEE:
/s/ M. Zuckerman RESTORATION HARDWARE, INC.
- ---------------------------------- -----------------------------------
MORTIMER B. ZUCKERMAN
-----------------------------------
By:
-----------------------------------
Name Printed:
-----------------------------------
Title:
-----------------------------------
By:
-----------------------------------
Name Printed: Thomas Low
-----------------------------------
Title: SVP CFO
-----------------------------------
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071 (213) 687-
8777.
<PAGE>
RIDER TO LEASE BETWEEN
MORTIMER B. ZUCKERMAN, AS LESSOR,
AND RESTORATION HARDWARE, INC. AS LESSEE
2391 WEST WINTON AVENUE
HAYWARD, CALIFORNIA
- --------------------------------------------------------------------------------
1. LEASE TERM. The term (the "Term") of this Lease shall be for that
period of time commencing on the "Commencement Date" (as hereinafter
defined) and expiring (the "Expiration Date") on the last day of the
eighty-fourth (84th) month following the Commencement Date (plus the
partial month, if any, immediately following the Commencement Date)
(the "Original Lease Term"), unless extended as provided in Rider
Paragraph 3 or sooner terminated as provided in this Lease. The
"Commencement Date" shall be the first to occur of (a) the later of
(i) June 1, 1997 and (ii) the date "Lessor's Work" (as defined in
Rider Paragraph 7(A)) is "Substantially Complete" (as defined in Rider
Paragraph 7(A)) and (b) the date on which Lessee commences beneficial
use of the Premises for the conduct of Lessee's normal business
operations. Lessee, in all events, shall be treated as having
commenced beneficial use of the Premises for the conduct of Lessee
normal business operations when it begins to move goods, wares,
merchandise or other property into the Premises, provided that Lessee
and Lessee's employees, agents and contractors shall be permitted to
install Lessee's trade fixtures, equipment, furniture, cabling and
related communications systems in such a manner as to not interfere
with the performance by Lessor and Lessor's contractors of "Lessor's
Work" (as defined in Rider Paragraph 7), and such installation alone
shall not constitute beneficial use of the Premises by Lessee. Any
such entry by Lessee or Lessee's employees, agents or contractors
shall be on the terms and conditions of this Lease, except for the
obligations to pay Base Rent and Common Area Operating Expenses other
than as set forth in Rider Paragraph 7 As soon as may be convenient
after the Commencement Date has been determined, Lessor and Lessee
agree to join with each other in the execution, in the form of Exhibit
E attached hereto, of a written Declaration in which the Commencement
Date and specified Term of this Lease shall be stated.
2. (A) ORIGINAL LEASE TERM-INITIAL BASE RENT. For each month within the
period beginning on the Commencement Date and ending on the last day
of the seventh (7th) month following the month in which the
Commencement Date occurs (plus the partial month, if any, in which the
Commencement Date occurs). Lessee shall pay to Lessor as monthly Base
Rent for the Premises, payments of Thirty-Six Thousand Eight Hundred
Forty-Eight and 99/100 Dollars ($36,848.99) (sometimes called the
"Original Monthly Base Rent"). All payments of monthly
<PAGE>
Base Rent (during both the Original Lease Term and the Extended Term,
if exercised, and at the monthly Base Rent provided for in this Rider)
shall be paid in legal tender of the United States and shall be paid
in advance on the first day of each and every calendar month,
provided, however, that appropriate adjustment shall be made at the
beginning and end of the Term of this Lease as it may be extended and
at the end of any period immediately preceding an adjustment date
during the Lease Term as it may be extended. Monthly Base Rent shall
commence to be paid on the Commencement Date.
2. (B) ORIGINAL LEASE TERM- FIRST RENT ADJUSTMENT. The monthly Base Rent
payable by Lessee for the period beginning on first day of the eighth
(8th) month following the Commencement Date (plus the partial month,
if any, immediately following the Commencement Date) and ending on the
last day of the thirtieth (30th) month following the Commencement Date
(plus the partial month, if any, immediately following the
Commencement Date) shall be Fifty-Two Thousand Eight Hundred Seventy
and 29/00 Dollars ($52,870.29).
2. (C) ORIGINAL LEASE TERM- SECOND RENT ADJUSTMENT. The monthly Base Rent
payable by Lessee for the period beginning on first day of the thirty-
first (31st) month following the Commencement Date (plus the partial
month, if any, immediately following the Commencement Date) and ending
on the last day of the sixtieth (60th) month following the
Commencement Date (plus the partial month, if any, immediately
following the Commencement Date) shall be Fifty-Four Thousand Four
Hundred Seventy-Two and 42/00 Dollars ($54,472.42).
2. (B) ORIGINAL LEASE TERM- THIRD RENT ADJUSTMENT. The monthly Base Rent
payable by Lessee for the period beginning on first day of the sixty-
first (61st) month following the Commencement Date (plus the partial
month, if any, immediately following the Commencement Date) and ending
on the last day of the eighty-fourth (84th) month following the
Commencement Date (plus the partial month, if any, immediately
following the Commencement Date) (being the expiration of the Original
Lease Term) shall be Fifty-Seven Thousand Six Hundred Seventy-Six and
68/00 Dollars ($57,676.68).
3. (A) EXTENSION OPTION. Provided that at the time of the exercise of the
option to extend (i) there shall not be existing any Lessee Default or
Breach (defined in Paragraph 13.1), (ii) this Lease is still in full
force and effect and (iii) Lessee has neither assigned this Lease nor
sublet more than fifty thousand (50,000) square feet of the Premises
in the aggregate (except for an assignment or subletting permitted
under Paragraph 27.2 of this Rider), Lessee shall have the right to
extend the Term of this Lease in the manner hereinafter provided upon
all of the same terms, conditions, covenants and agreements contained
in this Lease (except for the monthly Base Rent which shall be
adjusted during the option period as
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<PAGE>
herein below set forth and except, further, that there shall be no
option to extend the Term of this Lease beyond the extension option
herein provided) for one (1) period of five (5) years. The option
period is sometimes herein referred to as an "Extended Term" and
sometimes hereinafter referred to as an "Extension Option".
Notwithstanding anything contained in the Lease and this Rider to the
contrary, in no event shall the Term be extended for more than five
(5) years beyond the expiration of the Original Lease Term.
3. (B)(1) EXERCISE OF EXTENSION OPTION AND BASE RENT FOR EXTENDED TERM.
If Lessee desires to exercise the Extension Option, then Lessee shall
give notice to Lessor not earlier than twelve (12) months nor later
than nine (9) months prior to the expiration of the Original Lease
Term of Lessee's request for Lessor's quotation of the "Market Rent"
for the Premises as of the commencement date of the Extended Term. For
the purposes of this Rider Paragraph 3 the term "Market Rent" shall
mean the monthly amount per square foot in the Premises that a
willing, non-equity, tenant would pay and a willing landlord would
accept at arm's length from a comparable tenant for space in a
comparable building or buildings, with comparable tenant improvements,
in a comparable location, giving appropriate consideration to monthly
rental rates per square foot, the presence or absence of rent
escalation clauses such as operating expense and tax pass-throughs,
length of lease term, size and location of premises being leased, if
any, and other generally applicable terms and conditions of tenancy
for a similar building or buildings; provided, that the value of any
improvements made or to be made to the Premises by Lessee at Lessee's
expense shall not be considered for the purpose of valuing the Market
Rent of the Premises and in no event shall the Market Rent for the
Extended Term be less than the monthly Base Rent for the last month of
the Original Lease Term.
3. (B)(2) In order to exercise its rights hereunder Lessee shall, within fifteen
(15) days after receipt of Lessor's quotation, by written notice to
Lessor either:
(a) accept such quotation of the Market Rent as quoted by Lessor and
give notice that it exercises its option to extend the Term of
this Lease for the Extended Term and Lessee's occupancy of the
Premises during the Extended Term shall be upon all of the same
terms, conditions, covenants and agreements herein contained
except that there shall be no further option to extend the Term
of this Lease and except, further, that the monthly Base Rent
shall be equal to and be the Market Rent.
(b) make a request to Lessor for a broker determination (the "Broker
Determination") of the Market Rent for the Extended Term, which
Broker Determination shall be made in the manner set forth in
Rider Paragraph 3(B)(3) below.
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<PAGE>
3. (B)(3) If Lessee timely shall have requested the Broker Determination, then
in order to exercise its right to extend the Term of this Lease for
the Extended Term, Lessee shall, within fifteen (15) days after
receipt of the Broker Determination, give written notice to Lessor of
Lessee's exercise of the Extended Term, and Lessee's occupancy of the
Premises during the Extended Term shall be upon all of the same terms,
conditions, covenants and agreements herein contained except that
there shall be no further option to extend the Term of this Lease and
except, further, that the monthly Base Rent shall be the monthly base
rent determined by the Broker Determination in accordance with the
provisions of Rider Paragraph 3(B)(4).
3. (B)(4) If Lessee shall have requested the Broker Determination as provided in
Rider Paragraph 3(B)(2)(b) then the following procedures shall be
followed. Lessee's notice requesting a Broker Determination of the
Market Rent shall include the name of a commercial real estate
brokerage firm selected by Lessee with at least ten (10) years
experience dealing in properties of a nature and type generally
similar to the Premises located in the Hayward area. Within ten (10)
days after Lessor's receipt of Lessee's notice requesting a Broker
Determination and stating the name of such a commercial real estate
brokerage firm, Lessor shall give written notice to Lessee of Lessor's
selection of a commercial real estate brokerage firm having at least
the experience referred to above. Within (10) days thereafter the two
(2) first so selected shall select a third such commercial real estate
brokerage firm also having at least the experience referred to above.
Within thirty (30) days after the selection of the third commercial
real estate brokerage firm, the three (3) firms so selected, by
majority opinion, shall notify both Lessor and Lessee in writing of
their determination of the Market Rent for the Extended Term which may
include provision of annual increases in rent during said term if so
determined, provided, however, that if there shall be no majority
option then the determination of the broker between the other two (2)
brokers shall be deemed to be the determination of the brokers
hereunder. However, notwithstanding anything contained in the Lease
and Rider to the contrary, in no event shall the Market Rent for the
Extended Term be less than the monthly Base Rent for the last month of
the Original Lease Term and the Broker Determination shall be bound by
the provisions of this sentence. Lessor shall pay the costs and
expenses of the broker selected by it; Lessee shall pay the costs and
expenses of the broker selected by it; and each of Lessor and Lessee
shall pay fifty percent (50%) of the costs and expenses of the third
broker.
4. SECURITY DEPOSIT Concurrently with the execution of this Lease,
Lessee shall pay to Lessor a security deposit (the "Security Deposit")
in the amount of Fifty-Seven Thousand Six Hundred Seventy-Six Dollars
and 68/100 ($57,676.68) and Lessor shall hold the same, throughout the
Term of this Lease (including the Extended Term, if applicable),
unless sooner returned to Lessee as provided in this Rider Paragraph
4, as security for the performance by Lessee of all obligations on
-4-
<PAGE>
the part of Lessee to be performed under this Lease. At the option of
Lessee the Security Deposit shall be in the form of either cash or an
unconditional irrevocable letter of credit (the "Letter of Credit")
drawn on a bank satisfactory to Lessor and otherwise upon terms
satisfactory to Lessor, which Letter of Credit shall permit one or
more draws thereunder to be made accompanied only by certification by
Lessor that pursuant to the terms of this Lease, Lessor is entitled to
apply such Letter of Credit and the proceeds thereof to Lessor's
damages due to a default of Lessee under the terms and provisions of
this Lease. Any Letter of Credit shall be for a term of no less than
one (1) year and shall be renewed by Lessee each year thereafter and
each renewal shall be delivered to and received by Lessor not later
than thirty (30) days before the expiration of the then current Letter
of Credit (herein called a "Renewal Presentation Date"). In the event
of a failure to so deliver such renewal Letter of Credit on or before
the applicable Renewal Presentation Date, Lessor shall be entitled to
present the then existing Letter of Credit for payment and to receive
the proceeds thereof, which proceeds shall be held by Lessor as
Lessee's Security Deposit, subject to the terms of this Rider
Paragraph 4. Lessor shall have the right from time to time without
prejudice to any other remedy Lessor may have on account thereof, to
apply the Security Deposit, or any part thereof, to Lessor's damages
arising from any Default or Breach on the part of Lessee under the
terms of this Lease and if the Security Deposit is in the form of the
Letter of Credit, the Letter of Credit may be drawn upon by Lessor in
the event of such a Default or Breach and the proceeds thereof may be
so applied to such damages of Lessor. Provided that Lessee is not then
in Default or Breach (without benefit of any grace periods), on the
expiration of the Lease Term (as extended) and on the surrender of
possession of the Premises by Lessee to Lessor at such time in the
condition and manner provided for in this Lease, Lessor shall return
to Lessee the Security Deposit or so much thereof as shall not have
heretofore been applied in accordance with the terms of this Rider
Paragraph 4. While Lessor holds the Security Deposit, Lessor shall
have no obligation to pay interest on the same and Lessor shall have
the right to commingle the same with Lessor's other funds. No part of
the Security Deposit shall be considered to be prepayment for any
monies to be paid by Lessee under this Lease. If Lessor conveys
Lessor's interest under this Lease, the Security Deposit, or any part
thereof not previously applied, shall be turned over by Lessor to
Lessor's grantee for proper application of the Security Deposit in
accordance with the terms of this Paragraph and the return thereof in
accordance herewith.
Neither the holder of a mortgage nor the lessor in a ground lease on
property which includes the Premises shall ever be responsible to
Lessee for the return or application of the Security Deposit, whether
or not it succeeds to the position of Lessor hereunder, unless the
same shall have been received in hand by such holder or ground lessor.
-5-
<PAGE>
If the Lessor uses or applies all or any portion of the Security
Deposit, Lessee shall within ten (10) days after written demand
therefor deposit cash with Lessor in an amount sufficient to restore
the Security Deposit to the full amount and Lessee's failure to do so
shall be a Breach of this Lease.
5. USE. Notwithstanding anything contained in this Lease, Lessee shall be
solely responsible for obtaining and maintaining in full force and
effect such permits, licenses, approvals, special permits and other
governmental authorizations, if any, as shall be required for Lessee's
use of the Property, the Building, the Premises and the Industrial
Center by Applicable Requirements (except that Lessor shall be
responsible for obtaining any applicable certificate of occupancy
required for Lessee's initial occupancy of the Premises, except for
any requirements necessitated because of Lessee Improvements) and the
failure or inability of Lessee to obtain any such permits, licenses,
approvals, special permits and other governmental authorizations shall
in no way (i) constitute a breach or default of Lessor, (ii) give
Lessee any right to an abatement, offset or other reduction in monthly
Base Rent, other rent or other charges payable under this Lease or
(iii) give Lessee any right to terminate this Lease.
6. BROKERAGE. Lessor and Lessee each warrants and represents for the
benefit of the other that it has had no dealings with any real estate
broker or agent in connection with the negotiation of this Lease, and
that it knows of no real estate broker or agent who is or might be
entitled to a real estate brokerage commission or finder's fee in
connection with this Lease, except for BT Commercial Real Estate and
Warehouse Properties, Inc. (collectively, the "Broker"). Each party
shall indemnify and hold harmless the other from and against any and
all liabilities or expenses arising out of claims made by any broker
or individual other than the Broker for commissions or fees resulting
from the actions of the indemnifying party in connection with this
Lease. Lessor agrees that it shall be solely responsible for the
payment of a brokerage commission to the Broker in connection with
this Lease.
7. (A) IMPROVEMENTS. Subject to delays due to governmental regulation,
unusual scarcity of or inability to obtain labor or materials, labor
difficulties, casualty or other causes reasonably beyond Lessor's
control (collectively "Lessor's Force Majeure") or attributable to
Lessee's action or inaction (including, without limitation, the
activities of Lessee prior to the Commencement Date permitted by Rider
Paragraph 1), Lessor shall use reasonable speed and diligence in the
construction of the work for and respecting the Premises described in
Exhibit F attached hereto ("Lessor's Work"), but Lessee shall have no
claim against Lessor for Lessor's failure so to complete Lessor's
Work, except for the right to terminate this Lease, without further
liability to either party, in accordance with the provisions of Rider
Paragraph 7(B).
-6-
<PAGE>
The Premises shall be treated as having been "Substantially Complete"
on the date on which Lessor's Work has been completed except for items
of work and adjustment of equipment and fixtures which can be
completed after occupancy has been taken without causing substantial
interference with Lessee's use of the Premises (i.e. so-called "punch
list items").
Lessor shall complete as soon as conditions practically permit all
punch list items and Lessee shall cooperate with Lessor in providing
access as may be required to complete such work in a normal manner.
Lessee agrees that no delay by it, or anyone employed by it, in
performing work to prepare the Premises for occupancy (including,
without limitation, the activities of Lessee prior to the Commencement
Date permitted by Rider Paragraph 1) shall delay commencement of the
Term or the obligation to pay rent, regardless of the reason for such
delay or whether or not it is within the control of Lessee or any such
employee. No such delay caused by Lessee or anyone employed by it
shall be deemed to have occurred unless and until Lessor has given
written notice to Lessee specifying the action or inaction which
Lessor contends constitutes such a delay. If such action or inaction
is not cured within one (1) business day after Lessee's receipt of
such notice, then a Lessee delay, as set forth in such notice, shall
be deemed to have occurred commencing as of the date Lessee received
such notice and continuing for the number of days the Substantial
Completion of the Premises was in fact delayed as a direct result of
such action or inaction.
7. (B) If Lessor shall have failed substantially to complete Lessor's Work on
or before the date which is one hundred twenty (120) days subsequent
to the date of this. Lease set forth in Paragraph 1.1 of this Lease
(which date shall be extended automatically for such periods of time
as Lessor is prevented from proceeding with or completing the same by
reason of "Lessor's Force Majeure" (as defined in Rider Paragraph 7
(A)) or any act or failure to act of Lessee which interferes with
Lessor's construction of the Lessor's Work, including, without
limitation, the activities of Lessee prior to the Commencement Date
permitted by Rider Paragraph 1, without limiting Lessor's other rights
on account thereof), Lessee shall have the right to terminate this
Lease by giving notice to Lessor of Lessee's desire so to do within
thirty (30) days after such date; and, upon the giving of such notice,
the term of this Lease shall cease and come to an end without further
liability or obligation on the party of either party unless, within
thirty (30) days after receipt of such notice, Lessor Substantially
Completes Lessor's Work; and such right of termination shall be
Lessee's sole and exclusive remedy for Lessor's failure so to complete
such work within such time.
7. (C) Except as provided in this Rider Paragraph 7 and in Paragraphs 2.2 and
2.3 of the Lease, the Premises shall be delivered to Lessee and Lessee
hereby accepts the
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<PAGE>
Premises in their condition as of the Commencement Date, subject to
Applicable Requirements and the terms and provisions of this Lease and
the Exhibits attached hereto and all matters disclosed thereby and
Lessor shall have no obligations to perform any additions,
alterations, improvements or demolition in the Premises.
7. (D) Lessor, at Lessor's expense, shall be responsible for (i) Lessor's
Work complying on the Commencement Date with the requirements of Title
III of the Federal Americans With Disabilities Act of 1993 (the "ADA")
in effect on the Commencement Date and (ii) performing any other
alterations, improvements or modifications required by Title III of
the ADA in effect as of the Commencement Date because of the
performance of Lessor's Work; provided, however, that notwithstanding
the foregoing, Lessee, at Lessee's expense, shall be responsible for
(i) any improvements performed by or for Lessee or any assignee or
subtenant of Lessee other than Lessor's Work (collectively "Lessee
Improvements") complying with Title III of the ADA and (ii) compliance
with the ADA required because of "Lessee's Specific Use of the
Premises" (as defined below) or Lessee Improvements. The term
"Lessee's Specific Use of the Premises" as used in this Lease shall
not refer to the general warehouse and distribution and ancillary
office use of the Premises, but shall refer to the specific products
and operations Lessee and any assignee and subtenant of Lessee use in
the Premises and the manner in which Lessee and any assignee and
subtenant of Lessee use such products and conduct such operations.
7. (E) Notwithstanding the foregoing, Lessor shall only perform those
portions of Lessor's Work described in Exhibit F-l ("Lessee's Special
Work") if within seven (7) days after the date of this Lease Lessee
authorizes Lessor to perform Lessee's Special Work for a price which
is reasonably acceptable to Lessee ("Lessee's Special Work Cost").
Lessor's Work shall be performed at Lessor's expense, except for
Lessee's Special Work, for which Lessee shall reimburse Lessor, as
rent, Lessee's Special Work Cost on or before the date which is thirty
(30) days subsequent to the Commencement Date.
8. INSERT TO PARAGRAPHS 2.3, 2.8 AND 6.3: ", including, without
limitation, the Declaration of Covenants and Restrictions attached
hereto as Exhibit D (the "Exhibit D Covenants"),"
9. INSERT TO PARAGRAPH 6.2 (a); "Neither Lessee nor any assignee,
subtenant, agent, independent contractor, contractor, employee,
servant, invitee, customer, client, supplier, shipper or any other
individual or entity that enters upon the Premises, the Building, the
Property or the Industrial Center by, through or under Lessee
(individually, a "Lessee Party", collectively, "Lessee Parties")"
-8-
<PAGE>
10. INSERT TO PARAGRAPH 6.2(c): "Lessee or any Lessee Party or under the
control of Lessee or any Lessee Party."
11. INSERT TO PARAGRAPH 6.2(c) PARAGRAPH 8.7 AND PARAGRAPH 8.8:
"or any Lessee Party"
12. INTENTIONALLY OMITTED.
13. INTENTIONALLY OMITTED.
14. INSERT TO PARAGRAPH 7.1(b): "If Lessor reasonably determines that any
such contract fails to satisfy the requirements of this Lease, within
fifteen (15) business days after Lessor notifies Lessee of such
failure, Lessee shall deliver to Lessor a substitute contract which
complies with such requirements."
15. INSERT TO PARAGRAPH 7.3(b): "Lessee shall not make any Alterations or
Utility Installations in, on, under or about the Premises, whether
before or during the Term of this Lease, except in each instance in
accordance with plans and specifications therefore first submitted to
and approved by Lessor, which approval shall not be withheld
unreasonably or delayed. Lessor shall not be deemed unreasonable for
withholding its approval of any alterations, improvements or additions
which (a) would involve or affect any structural or exterior element
of the Building, the Premises or the Industrial Center: (b) increase
or decrease the size of the Building, the Premises or the Industrial
Center or otherwise change the exterior of the Building or the
Premises; (c) adds any other buildings, structures or improvements;
(d) would affect any Utility Installation or utility service, line or
conduit serving the Building, the Premises or the Industrial Center;
or (e) will require unusual expense to readapt the Building, the
Premises or the Industrial Center to normal warehouse and/or
distribution use upon the termination of this Lease. Lessor's review
and approval of any such plans and specifications and consent to
perform work described therein shall not be deemed an agreement by
Lessor that such plans, specifications and work conform with
Applicable Requirements nor deemed a waiver of Tenant's obligations
under this Lease with respect to Applicable Requirements nor impose
any liability or obligation upon Lessor with respect to the
completeness, design sufficiency or compliance of such plans,
specifications and work with Applicable Requirements. All consents
given by Lessor shall be deemed conditioned on Lessee prior to
commencing any such work, (i) acquiring all requisite permits,
licenses and approvals to do so from appropriate governmental
authorities and bodies and other bodies; (ii) delivering to Lessor a
statement of the names and addresses of all its contractors and
subcontractors and evidence satisfactory to Lessor that all of such
contractors and subcontractors are currently licensed by the
appropriate governmental authorities to perform such work and the
estimated costs of all labor and materials to be
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furnished by them; (iii) causing each contractor and subcontractor to
carry workmen's compensation insurance in statutory amounts covering
all contractor's and subcontractor's employees and comprehensive
general liability insurance with such limits as Lessor may require
reasonably, but in no event less than $2,000,000.00 combined single
limit (and property damage) with such insurance to be written in
companies approved reasonably by Lessor and insuring Lessor and Lessee
as well as the contractors and subcontractors and delivering to Lessor
certificates of all such insurance; and (iv) complying with all
conditions and requirements of said permits, licenses and approvals in
a prompt and expeditious manner. Lessee covenants and agrees that any
Alterations and Utility Installations made by it to or upon the
Premises shall be done in a good and workmanlike manner and in
compliance with all Applicable Requirements now or hereafter in force
and that materials of first and otherwise good and sufficient quality
shall be employed therein."
16. INSERT TO PARAGRAPH 8.3(a): "(including, without limitation, the peril
of flood and, at Lessor's option, the peril of earthquake, provided
that only fifty percent (50%) of increases in the premium for
earthquake insurance above the Base Premium shall be included in the
Insurance Cost Increase)"
17. INTENTIONALLY OMITTED.
18. INSERT TO PARAGRAPH 8.3(a): "Lessor may also maintain such other
insurance as may be required by any ground lessor or the holder of any
mortgage or deed of trust upon the Building, the Property, the
Premises or the Industrial Center or Lessor's interest therein and any
such insurance shall be deemed to be "Required Insurance.""
19. INSERT TO PARAGRAPH 8.4: "and other fixtures and equipment, goods,
wares, merchandise, products"
20. INSERT TO PARAGRAPH 8.5: "to be maintained by Lessee"
21. INSERT TO PARAGRAPH 8.5: "With respect to any insurance required to be
maintained by Lessee under this Lease,"
22. INSERT TO PARAGRAPH 8.8: "Trade Fixtures and other fixtures and
equipment, Lessee Owned Alterations and Utility Installations,
products"
23. INSERT TO PARAGRAPH 9.3 AND 9.5: "as of the date specified in Lessor's
notice, which shall not be less than thirty (30) days nor more than
sixty (60) days after the giving of such notice"
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24. INSERT TO PARAGRAPH 9.4: "Lessor may, at Lessor's option by written
notice to Lessee given within forty five (45) days after the
occurrence of such damage or destruction, either elect (i) to repair
such damage as soon as reasonably practicable under the circumstances
with (but only to the extent of) the insurance proceeds, in which case
this Lease shall continue in force or (ii) to cancel and terminate
this Lease as of a date set forth in said notice which shall be not
earlier than thirty (30) days nor later than sixty (60) days from the
date of said notice, in which case this Lease shall terminate as of
the date so set forth in Lessor's notice."
25. INSERT AT END OF PARAGRAPH 9.9:
"9.10 COMPLETION OF RESTORATION. Where Lessor is obligated or elects
to effect restoration of the Premises pursuant to the
provisions of any subdivisions of Paragraph 9 of this Lease,
unless such restoration is completed within one hundred fifty
(150) days after the date of the occurrence of the damage or
destruction, such period to be subject, however, to extensions
of (i) no more than sixty (60) days in the aggregate where the
delay in completion of such work is due to Lessor's Force
Majeure and (ii) one (1) day for each day after the tenth
(10th) day but prior to the thirtieth (30th) day after the
effective date of "Lessor's Restoration Notice" (as described
below) that Lessee does not notify Lessor that Lessee waives
"Lessee's Restoration Notice Termination Right" (as described
below), Lessee shall have the right to terminate this Lease
exercised by the giving of notice to Lessor at any time within
the time period from the expiration of such one hundred fifty
(150) day period (as extended pursuant to the provisions of
this Paragraph 9.10)) until the date which is thirty (30) days
subsequent to the expiration of such one hundred fifty (150)
day period (as so extended), such termination to take effect as
of the thirtieth (30th) day after the date of receipt by Lessor
of Lessee's notice, with the same force and effect as if such
date were the date originally established as the expiration
date hereof unless, within such thirty (30) day period such
restoration is substantially completed, in which case Lessee's
notice of termination shall be 6f no force and effect and this
Lease and the Lease Term shall continue in full force and
effect. If Lessor shall determine within such one hundred fifty
(150) day (as extended) period that such restoration shall not
be substantially completed within such one hundred fifty (150)
day (as extended) period, Lessor shall notify ("Lessor's
Restoration Notice") Lessee within thirty (30) days after such
determination and Lessor may with such notice elect to
terminate this Lease as of a date set forth in such notice
which shall not be earlier than thirty (30) days nor later than
sixty (60) days from the date of said notice, in which case
this Lease shall terminate as of the date so set forth in
Lessor's notice. If Lessor shall give Lessor's Restoration
Notice but shall
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not so terminate this Lease, Lessee shall have the right
("Lessee's Restoration Notice Termination Right") by notice to
Lessor within thirty (30) days after Lessor's notice to
terminate this Lease, whereupon this Lease shall terminate as of
the date of Lessee's notice with the same force and effect as if
such date were the date originally established as the expiration
date hereof For the purposes of this Paragraph 9.10, a
restoration shall be substantially completed if it is
"Substantially Complete" except for "punch list items" (as such
terms are defined in Rider Paragraph 7.
9.11 GENERAL. Notwithstanding anything contained in this Paragraph 9
or any other provision of this Lease to the contrary, (i) if
there is damage or destruction to the Premises, the Building,
the Property or the Industrial Center which is caused by Lessee
or any Lessee Party, Lessor shall have the right to recover
Lessor's damages from Lessee, except as released and waived in
Paragraph 8.6, (ii) Lessor's obligation to restore or repair
shall be subject to the rights of any ground lessor or the
holders of any mortgage or deed of trust on the Premises, the
Building, the Property or the Industrial Center or Lessor's
interest therein, (iii) Lessor shall not be obligated to expend
for any repair or restoration any amount in excess of the net
insurance proceeds available to Lessor plus any deductible
amount applicable to such insurance proceeds, (iv) Lessor's
obligations for any repair or restoration, including, without
limitation, the commencement of any repair or restoration as
required by Paragraph 9.6(b), shall be subject to, and Lessor's
time for performance shall be extended by, delays due to
governmental regulation, unusual scarcity of or inability to
obtain labor or materials, labor difficulties, casualty or other
causes reasonably beyond Lessor's control (collectively,
"Lessor's Force Majeure") and (v) Lessee shall in no event have
any right to reimbursement from Lessor for any funds spent by
Lessee to repair any damage or destruction."
26. INTENTIONALLY OMITTED.
27. ASSIGNMENT AND SUBLETTING.
27.1 RESTRICTIONS ON TRANSFER. Except as otherwise expressly provided
herein, Lessee covenants and agrees that it shall not assign,
mortgage, pledge, hypothecate or otherwise transfer this Lease and/or
Lessee's interest in this Lease or sublet (which term, without
limitation, shall include granting of concessions, licenses or the
like) the whole or any part of the Premises without the prior written
consent of Lessor, which consent shall not be unreasonably withheld or
delayed in accordance with the provisions of Rider Paragraphs 27.1
through 27.7. Any assignment, mortgage, pledge, hypothecation,
transfer or subletting not expressly
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permitted in or consented to by Lessor in accordance with Rider
Paragraphs 27.1 through 27.7 shall be void, ab initio; shall be of no
force and effect; and shall confer no rights on or in favor of third
parties. In addition, Lessor shall be entitled to seek specific
performance of or other equitable relief with respect to the
provisions hereof
27.2 EXCEPTIONS FOR PARENT OR SUBSIDIARY. Notwithstanding the foregoing
provisions of Rider Paragraph 27.1 above and the provisions of Rider
Paragraphs 27.3, 27.4 and 27.6 below, but subject to the provisions of
Rider Paragraphs 27.5 and 27.7 below, Lessee shall have the right to
assign this Lease or to sublet the Premises (in whole or in part) to
any parent or subsidiary corporation of Lessee or to any corporation
into which Lessee may be converted or with which it may merge,
provided that the entity to which this Lease is so assigned or which
so sublets the Premises has a credit worthiness (e.g. assets and
capitalization) and net worth (which shall be determined on a pro
forma basis using generally accepted accounting principles
consistently applied and using the most recent financial statements)
which is sufficient to perform the obligations of Lessee under the
Lease applicable to the Premises in the case of an assignment and
applicable to the portion of the Premises proposed to be sublet in the
case of a sublease.
27.3 SUBLEASE OF A PORTION OF SPACE. Notwithstanding the provisions of
Rider Paragraph 27.1 above but subject to the provisions of this Rider
Paragraph 27.3 and the provisions of Rider Paragraphs 27.5, 27.6 and
27.7 below, Lessee may sublease less than fifty thousand (50,000)
square feet of the floor area of the Premises in the aggregate
provided that in each instance Lessee first obtains the express prior
written consent of Lessor, which consent shall not be unreasonably
withheld or delayed. Lessor shall not be deemed to be unreasonably
withholding its consent to such a proposed subleasing if:
(a) the proposed sublessee is not of a character consistent with the
operation of the Building, or
(b) the proposed sublessee is not of good character and reputation,
or
(c) the proposed sublessee does not possess adequate financial
capability to perform the Lessee's obligations as and when due or
required with respect to the portion of the Premises proposed to
be sublet, or
(d) the sublessee proposes to use the Premises (or part thereof) for
a purpose other than the purpose for which the Premises may be
used as stated in Paragraph 1.8 hereof, or
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(e) the nature of the proposed subtenant's use of the Premises would
involve any increased risk of the use, release or mishandling of
Hazardous Substances, or
(f) there shall be existing any Default or Breach of Lessee (defined
in Paragraph 13.1).
27.4 SUBSTANTIAL SUBLEASING OR ASSIGNMENT. Notwithstanding the provisions
of Rider Paragraph 27.1 above, but subject to the provisions of this
Rider Paragraph 27.4 and the provisions of Rider Paragraphs 27.5, 27.6
and 27.1 below, Lessee covenants and agrees not to assign this Lease
or sublet fifty thousand (50,000) square feet of more of the floor
area of the Premises in the aggregate (which shall be deemed to
include, without limitation, any proposed subleasing which together
with prior subleasings would result in an area equal to or greater
than fifty thousand (50,000) square feet of the floor area of the
Premises in the aggregate being the subject of one or more subleases)
without, in each instance, having first obtained the prior written
consent of Lessor, which consent shall not be unreasonably withheld or
delayed. Lessor shall not be deemed to be unreasonably withholding its
consent to such a proposed assignment or subleasing if:
(a) the proposed assignee or sublessee is not of a character
consistent with the operation of the Building, or
(b) the proposed assignee or sublessee is not of good character and
reputation, or
(c) the proposed assignee or sublessee does not possess adequate
financial capability to perform the Lessee's obligations as and
when due or required, or
(d) the assignee or sublessee proposes to use the Premises (or part
thereof) for a purpose other than the purpose for which the
Premises may be used as stated in Paragraph 1.8 hereof, or
(e) the nature of the proposed assignee of subtenant's use of the
Premises would involve any increased risk of the use, release or
mishandling of Hazardous Substances, or
(f) there shall be existing any Default or Breach of Lessee (defined
in Paragraph 13.1), or
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(g) in the case of a proposed assignment (not including any
assignment pursuant to Rider Paragraph 27.2), Lessor elects, at
its option, by notice given within thirty (30) days after receipt
of Lessee's notice given pursuant to Paragraph 27.5 below, to
terminate this Lease as of the proposed effective date of such
assignment as set forth in Lessee's notice to Lessor pursuant to
Rider Paragraph 27.5; provided, however, that upon such
termination date, all of Lessor's and Lessee's obligations
relating to the period after such termination date (but not those
relating to the period before such termination date) shall cease,
or
(h) in the case of a proposed subleasing which together with prior
subleasings would result in an area equal to fifty thousand
(50,000) square feet or more of the Premises in the aggregate
being the subject of one or more subleases (not including any
subleases pursuant to Rider Paragraph 27.2), Lessor elects, at
its option, by notice given within thirty (30) days after receipt
of Lessee's notice given pursuant to Rider Paragraph 27.5 below,
to terminate this Lease as to such portions of the Premises
proposed to be sublet which would, if sublet, result in an area
greater than fifty thousand (50,000) square feet of the Premises
being sublet (herein called the "Terminated Portion of the
Premises") as of the proposed effective date of such sublease as
set forth in Lessee's notice to Lessor pursuant to Rider
Paragraph 27.5; provided, however that upon such termination
date, all of Lessor's and Lessee's obligations as to the
Terminated Portion of the Premises relating to the period after
such termination date (but not those relating to the period
before such termination date) shall cease and provided, further,
that this Lease shall remain in full force and effect as to the
remainder of the Premises, except that from and after the
termination date the floor area of the Premises shall be reduced
to be the floor area of the remainder of the Premises and the
definition of floor area of the Premises shall be so amended and
after such termination all references in this Lease to the
"Premises" or the "floor area of the Premises" shall be deemed to
be references to the remainder of the Premises and accordingly
Lessee's payments for monthly Base Rent and Lessee's Share of
Common Area Operating Expenses shall be reduced on a pro rata
basis to reflect the size of the remainder of the Premises, and
provided further that Lessor shall have the right to make such
alterations and improvements as may be required to separately
demise the Terminated Portion of the Premises.
27.5 LESSEE'S NOTICE. Lessee shall give Lessor notice of any proposed
sublease or assignment, and said notice shall specify the provisions
of the proposed assignment or subletting, including (a) the name and
address of the proposed assignee or sublessee, (b) in the case of a
proposed assignment or subletting pursuant to Rider Paragraphs 27.3 or
27.4, such information as to the proposed assignee's or
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proposed sublessee's net worth and financial capability and standing
as may reasonably be required for Lessor to make the determination
referred to in Rider Paragraphs 27.3 or 27.4 above (provided, however,
that Lessor shall hold such information confidential having the right
to release same to its officers, accountants, attorneys and mortgage
lenders on a confidential basis), (c) all of the terms and provisions
upon which the proposed assignment or subletting is to be made,
including, without limitation, the proposed effective date of such
assignment or subletting, (d) in the case of a proposed assignment or
subletting pursuant to Rider Paragraphs 27.3 or 27.4, all other
information necessary to make the determination referred to in Rider
Paragraphs 27.3 or 27.4 above and (e) in the case of a proposed
assignment or subletting pursuant to Rider Paragraph 27.2, such
information as may be reasonably required by Lessor to determine that
such proposed assignment or subletting complies with the requirements
of said Rider Paragraph 27.2.
If Lessor shall consent to the proposed assignment or subletting, as
the case may be, then, in such event, Lessee may thereafter sublease
the Premises (in whole or part) or assign pursuant to Lessee's notice,
as given hereunder; provided, however, that if such assignment or
sublease shall not be executed and delivered to Lessor within ninety
(90) days after the date of Lessors consent, the consent shall be
deemed null and void and the provisions of Rider Paragraphs 27.3 and
27.4 shall be applicable.
27.6 PROFIT ON SUBLEASING OR ASSIGNMENT. In addition, in the case of any
assignment or subleasing as to which Lessor may consent (other than an
assignment or subletting permitted under Rider Paragraph 27.2 hereof)
such consent shall be upon the express and further condition, covenant
and agreement, and Lessee hereby covenants and agrees that, in
addition to the monthly Base Rent, other rent (including, without
limitation, payments for insurance premiums and real estate taxes) and
other charges to be paid pursuant to this Lease, fifty percent (50%)
of the "Assignment/Sublease Profits" (hereinafter defined), if any,
shall be paid to Lessor.
The "Assignment/Sublease Profits" shall be the excess, if any, of (a)
the "Assignment/Sublease Net Revenues" as hereinafter defined over (b)
the monthly Base Rent, other rent (including without limitation,
payments for insurance premiums and real estate taxes) and other
charges provided in this Lease (provided, however, that for the
purpose of calculating the Assignment/Sublease Profits in the case of
a sublease, appropriate proportions in the applicable monthly Base
Rent, other rent (including, without limitation, payments for
insurance premiums and real estate taxes) and other charges under this
Lease shall be made based on the percentage of the Premises subleased
and on the terms of the sublease). The "Assignment/Sublease Net
Revenues" shall be the monthly Base
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Rent, other rent (including, without limitation, payments for
insurance premiums and real estate taxes) and all other charges and
sums payable either initially or over the term of the sublease or
assignment plus all other profits and increases to be derived by
Lessee as a result of such subletting or assignment, less the
reasonable costs of Lessee incurred for brokerage commissions, legal
fees and tenant improvements in connection with such subleasing or
assignment amortized over the term of the sublease or assignment.
All payments of the Assignment/Sublease Profits due to Lessor shall be
made within ten (10) business days of receipt of same by Lessee.
27.7 ADDITIONAL CONDITIONS. (A) It shall be a condition of the validity of
any assignment or subletting of right under Rider Paragraph 27.2
above, or consented to under Rider Paragraph 27.4 above, that the
assignee or sublessee agrees directly with Lessor, in form reasonably
satisfactory to Lessor, to be bound by all the obligations of the
Lessee hereunder, including, without limitation, the obligations to
pay the monthly Base Rent, other rent, (including, without limitation,
payments for insurance premiums and real estate taxes), and other
amounts provided for under this Lease (but in the case of a partial
subletting, such sublessee shall agree on a pro rata basis to be so
bound) including the provisions of Rider Paragraphs 27.1 through 27.7
hereof but such assignment or subletting shall not relieve the Lessee
named herein of any of the obligations of the Lessee hereunder, and
Lessee shall remain fully and primarily liable thereof.
(B) As other rent, Lessee shall reimburse Lessor promptly for
reasonable out of pocket legal and other expenses incurred by Lessor
in connection with any request by Lessor for consent to assignment or
subletting.
(C) If this Lease be assigned, or if the Premises or any part thereof
be sublet or occupied by anyone other than Lessee, after the
occurrence of a Lessee Breach or Default Lessor may upon prior notice
to Lessee, at any time and from time to time, collect monthly Base
Rent, other rent (including, without limitation, payments for
insurance premiums and real estate taxes), and other charges from the
assignee, sublessee or occupant and apply the net amount collected to
the monthly Base Rent, other rent (including, without limitation,
payments for insurance premiums and real estate taxes), and other
charges herein reserved, but no such assignment, subletting, occupancy
or collection shall be deemed a waiver of this covenant, or a waiver
of the provisions of Rider Paragraphs 27.1 through 27.7 hereof or the
acceptance of the assignee, sublessee or occupant as a lessee or a
release of Lessee from the further performance by Lessee of covenants
on the part of Lessee herein contained, the Lessee herein named to
remain primarily liable under this Lease.
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(D) The consent by Lessor to an assignment or subletting under any of
the provisions of Rider Paragraphs 27.2 or 27.4 shall in no way be
construed to relieve Lessee from obtaining the express consent in
writing to Lessor to any further assignment or subletting.
(E) Lessor shall have no liability to Lessee or to any proposed
transferee in damages if it is adjudicated that Lessor's consent has
been unreasonably withheld and such unreasonable withholding of
consent constitutes a breach of this Lease or other duty to Lessee,
the proposed transferee or any other person on the part of Lessor. In
such event, Lessee shall not have the right to terminate this Lease,
and Lessee's sole remedy shall tie to have the proposed transfer
declared valid as if Lessor's consent had been duly and timely given.
28. INSERT TO PARAGRAPH 13.1: "(h) Any other matter deemed to be a Breach
by the terms of this Lease."
29. INSERT TO PARAGRAPH 14: ",but this Lease shall terminate only as to
the portion so taken and this Lease shall continue in full force and
effect as to that portion not so taken except as hereinafter
provided."
30. INSERT TO PARAGRAPH 14: ", provided that such award does not affect
the amount of the award otherwise recoverable by Lessor from the
condemning authority if such authority's method of calculation of the
award results in Lessor's award being reduced because of any award to
Lessee."
31. INSERT TO PARAGRAPH 14: "Notwithstanding anything contained in this
Paragraph 14 or any other provisions of this Lease to the contrary,
(i) Lessor's obligations to repair or restore in the event of a
condemnation are subject to (i) the rights of and the availability of
any condemnation award from, any ground lessor or the holder of any
mortgage or deed of trust covering the Premises, the Building, the
Property or the Industrial Center or Lessor's interest therein and
(ii) Lessor's Force Majeure."
32. INSERT TO PARAGRAPH 16.1. "(a) Lessee shall at any time upon not less
than fifteen (15) days prior written notice from Lessor execute,
acknowledge and deliver to Lessor a statement in writing (i)
certifying that this Lease is unmodified and in full force and effect
(or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and
effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to
Lessee's knowledge, any uncured defaults or breaches on the part of
Lessor hereunder, or specifying such defaults or breaches if any are
claimed. Any such statement may be conclusively relied upon by any
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prospective purchaser, financier, ground lessor or encumbrancer of the
Premises, the Building, the Land or the Industrial Center or Lessor's
interest therein.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a Breach by Lessee under this Lease and/or
shall be conclusive upon Lessee (i) that this Lease is in full force
and effect, without modification except as may be represented by
Lessor, (ii) that there are no uncured defaults or breaches in
Lessor's performance, and (iii) that not more than one (1) month's
rent has been paid in advance."
33. INSERT TO PARAGRAPH 17: "In addition to the foregoing provisions,
Lessee specifically agrees to look solely to Lessor's then equity
interest in the Property and the income therefrom at the time owned,
or in which Lessor holds an interest as ground lessee, for recovery of
any judgment from Lessor, it being specifically agreed that neither
Lessor (original or successor), nor any partner of Lessor nor any
trustee or beneficiary of any trust of which any person holding
Lessor's interest is trustee, shall ever be personally liable for any
such judgment, or for the payment of any monetary obligation to
Lessee. Further, Lessor shall not be liable for any indirect or
consequential damages."
34. NOTICES AND TIME FOR ACTION. Whenever, by the terms of this Lease,
notice shall or may be given either to Lessor or to Lessee such
notices shall be in writing and shall be sent by hand, registered or
certified mail, or overnight or other commercial courier, postage or
delivery charges, as the case may be, prepaid as follows:
If intended for Lessor, addressed to Lessor at the address set
forth in Paragraph 1.1 of this Lease (or to such other address or
addresses as may from time to time hereafter be designated by
Lessor by like notice).
If intended for Lessee, addressed to Lessee at the address set
forth in Paragraph 1.1 of this Lease (or to such other address or
addresses as may from time to time hereafter be designated by
Lessee by like notice).
Except as otherwise provided herein, all such notices shall be
effective when received; provided, that (i) if receipt is refused,
notice shall be effective upon the first occasion that such receipt is
refused or (ii) if the notice is unable to be delivered due to a
change of address of which no notice was given, notice shall be
effective upon the date such delivery was attempted.
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Time is of the essence with respect to any and all notices and periods
for giving of notice or taking any action thereto under this Lease.
35. INSERT TO PARAGRAPH 26: "Lessee has no right to retain possession of
the Premises or any part thereof beyond the expiration or earlier
termination of this Lease. Any holding over by Lessee after the
expiration of the term of this Lease shall be treated as a tenancy at
sufferance at one hundred fifty percent (150%) the monthly Base Rent
herein (prorated on a daily basis) and shall otherwise be on the terms
and conditions set forth in this Lease, as far as applicable;
provided, however, that neither the foregoing nor any other term or
provision of this Lease shall be deemed to permit Lessee to retain
possession of the Premises or hold over in the Premises after the
expiration or earlier termination of the Lease Term."
36. INSERT TO PARAGRAPH 34. "Notwithstanding any consent to a sign by
Lessor, prior to installing a sign approved by Lessor, Lessee shall
comply with all Applicable Requirements, including, without
limitation, sign bylaws and the Exhibit D Restrictions and shall
deliver to Lessor copies of the applicable permits and the approval of
such sign as given by the Plan Approving Agent under the Exhibit D
Restrictions. Any such sign shall be maintained by Lessee, at Lessee 5
sole cost and expense, in good order, condition and repair and Lessee
shall do no damage to the Premises, the Building and the Industrial
Center in connection with the installation, repair and maintenance of
such sign and shall repair any such damage done, any damage caused by
the failure to properly install, repair and maintain such sign and any
damage. caused by the removal of any such sign. Upon the occurrence of
a Breach of Lessee, Lessor, at Lessor's option and at Lessee's
expense, may remove any such sign."
37. INTENTIONALLY OMITTED
38. INTENTIONALLY OMITTED.
39. TERMINOLOGY. (a) Wherever in this Lease the Term "Landlord" is used
it shall be deemed to mean "Lessor" and wherever in this Lease the
Term "Tenant" is used it shall be deemed to mean "Lessee."
(b) Whenever in the Lease or in this Rider (i) the term "mortgagee"
is used it shall be deemed to also mean the beneficiary of a deed of
trust and (ii) the term mortgage'' is used it shall be deemed to also
mean deed of trust.''
40. INSERT TO PARAGRAPH 4.2: "(e) Notwithstanding the foregoing, no
decrease in Common Area Operating Expenses shall result in a reduction
in the amount otherwise payable by Lessee to the extent said decrease
is attributable to vacancy and no other cause.
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(f) Notwithstanding the foregoing, if Lessor shall spend any amount
included within Common Area Operating Expenses or perform any
obligation of Lessor under Paragraph 7.2 of this Lease or otherwise
because of damage to the Premises, the Building, the Property or the
Industrial Center, including, without limitation, the parking lots and
areas, the truck storage drop off and other truck areas, loading areas
and loading doors, caused by Lessee or its employees, agents,
servants, independent contractors, drivers, haulers or hauling agents,
shipping companies, delivery companies, carriers, customers or clients
or any Lessee Party, Lessee shall be responsible for one hundred
percent (100%) of the cost thereof to the extent such cost is not
actually covered by insurance maintained by Lessor, which cost
(including any deductible under any such insurance) shall be payable
as rent hereunder within fifteen (15) days after Lessor bills Lessee
therefor. If Lessee fails to pay such costs as provided above, Lessor
shall have the same remedies for such non-payment as Lessor has for
the non-payment of rent hereunder.
(g) Notwithstanding the foregoing, Common Area Operating Expenses
shall not include for the purposes of this Lease the cost of
performing Lessor's obligations under Paragraph 7.2 of this Lease for
the foundation and structural components of the Building.
(h) Notwithstanding the foregoing, Common Area Operating Expenses
shall not include for the purposes of this Lease the cost of replacing
the roof on the Building and Lessee's Share of Common Area Operating
Expenses for each calendar year during the Lease Term for performing
Lessor's other obligations under Paragraph 7.2 of this Lease for the
roof ("Lessor's Roof Maintenance Costs") during such calendar year
shall not exceed the applicable "Maximum Roof Maintenance Cost" (as
hereinafter defined) for such calendar year. The "Maximum Roof
Maintenance Cost" for the first calendar year during the Lease Term
shall be Two Thousand Dollars ($2,000.00) (the "Initial Maximum Roof
Maintenance Cost"). The "Maximum Roof Maintenance Cost" for each
subsequent calendar year during the Lease Term shall be the difference
between (i) the product of (x) the number of calendar years from the
Commencement Date through the end of such subsequent calendar year
multiplied by (y) the Initial Maximum Roof Maintenance Cost, minus
(ii) the total cumulative amount of Lessor's Roof Maintenance Costs
from the Commencement Date through the end of such subsequent calendar
year (the "Total Roof Maintenance Costs"), provided for the purpose of
calculating the Total Roof Maintenance Costs no amount expended by
Lessor for Lessor's Roof Maintenance Costs in any calendar year in
excess of Two Thousand Dollars ($2,000.00) shall be included;
provided, further, in no event shall such difference be less than
zero.
(i) Notwithstanding the foregoing, the following shall not constitute
Common Area Operating Expenses for the purposes of this Lease:
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(i) Leasing fees or commissions, advertising and promotional
expenses, legal fees, the cost of tenant improvements,
build out allowances, moving expenses, assumption of rent
under existing leases and other concessions incurred in
connection with leasing space in the Building;
(ii) All capital expenditures and depreciation, except as
otherwise explicitly provided in this Lease;
(iii) The cost of repairs or replacements incurred by reason of
fire or other casualty other than costs not in excess of
the deductible on any insurance maintained by Lessor;
(iv) Damage and repairs to the extent necessitated by the gross
negligence or willful misconduct of Lessor, Lessor's
employees, agents or contractors;
(v) The cost of any item or service to the extent to which
Lessor is actually reimbursed or compensated by insurance,
any warranty, any tenant, or third party;
(vi) Executive salaries of Lessor, salaries of service
personnel to the extent that such service personnel
perform services not solely in connection with the
management, operation, repair or maintenance of the
Building or the Common Areas;
(vii) The general overhead and administrative expenses of the
home office of Lessor not related to the Building;
(viii) Interest on indebtedness, debt amortization, ground rent,
and refinancing costs for any mortgage or ground lease of
the Building, Property and/or the Industrial Center.
(ix) Legal, auditing, consulting and professional fees and
other costs, (other than those legal, auditing, consulting
and professional fees and other costs incurred in
connection with the normal and routine maintenance and
operation of the Building, Property and/or the Industrial
Center) paid or incurred in connection with financings,
refinancings or sales of Lessor's interest in the
Building, Property and/or the Industrial Center;
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(x) Legal expenses in enforcing the terms of any lease or
defending Lessor's title to the Building, the Property
and/or the Industrial Center;
(xi) Charitable or political contributions;
(xii) The cost of testing, redemption or removal of Hazardous
Substances in or on the Building, the Property or the
Industrial Center;
(xiii) Penalties and interest for late payment of any
obligations of Landlord, including, without limitation,
taxes, insurance, and other past due amounts;
(xiv) Property management fees in excess of reasonable fees
given the location of the Building, the type of occupancy
and the services rendered; and
(xv) Any advertising, promotional or marketing expenses for the
Building.
(j) Notwithstanding the foregoing, Lessee's Share of Common Area
Operating Expenses for the deductible amount under any policy of
earthquake insurance shall not exceed Seventy-Five Thousand Dollars
($75,000.00) for any individual earthquake casualty, and if Lessee's
Share of such deductible exceeds one (1) month of monthly Base Rent
payable under this Lease at the time of such earthquake casualty,
Lessee shall pay the portion of Lessee's Share of such deductible
equal to such monthly Base Rent when billed by Lessor therefor in
accordance with Paragraph 4.2 of the Lease, and the amount of such
deductible in excess of such monthly Base Rent (but not including any
amount in excess of Seventy-Five Thousand Dollars ($75,000.00)), plus
interest from the date of the expenditure of such deductible at the
Specified Rate, shall be paid by Lessee, as rent, in equal monthly
installments over the remainder of the Lease Term in the same manner
and at the same time applicable to the payment of Common Area
Operating Expenses."
41. RIGHT OF FIRST OFFER. As of the date of this Lease, the approximately
60,000 square feet of space in the Building not included in the
Premises and shown on Exhibit A attached hereto as the First Offer
Space (the "First Offer Space") is leased to Viking Office Products,
Inc. ("Viking") pursuant to a lease dated January 5, 1996 (the "Viking
Lease"). The Viking Lease and any amendments thereto and the terms
thereof including, but not limited to, the original term thereof
options to extend the term thereof and any expansion options, is
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hereinafter sometimes referred to as the "Existing Lease" and Viking
is hereinafter sometimes called the "Existing Tenant" Subject to the
Existing Lease and the rights of the Existing Tenant thereunder, which
rights are prior to the rights of Lessee under this Paragraph and
provided that at the time the First Offer Space becomes available for
reletting, (i) there shall not be existing any Lessee Default or
Breach (defined in Paragraph 13. 1), (ii) this Lease is still in full
force and effect and (iii) Lessee has not assigned this Lease nor
sublet more than fifty thousand (50,000) square feet of the Premises
in the aggregate (except for an assignment or subletting permitted
under Paragraph 27.2 of this Rider), Lessor agrees not to enter into a
lease or leases to relet the First Offer Space without first giving
Lessee notice ("Lessor's Availability Notice") of the availability of
the First Offer Space and an opportunity to lease the First Offer
Space for a coterminous period of time with the Premises upon the same
terms and conditions applicable to the Premises (including the
Extension Option), except that the monthly Base Rent applicable to the
First Offer Space shall be the fair market monthly base rent for the
First Offer Space as of the commencement of Lessee's leasing thereof
as specified by Lessor in Lessor's Availability Notice (the "First
Offer Space Market Rent"). The term "First Offer Space Market Rent"
shall mean the monthly amount per square foot that a willing, non-
equity, tenant would pay and a willing landlord would accept at arm's
length from a comparable tenant for space in a comparable building or
buildings, with comparable tenant improvements, in a comparable
location, giving appropriate consideration to monthly rental rates per
square foot, the presence or absence of rent escalation clauses such
as operating expense and tax pass-throughs, length of lease term, size
and location of premises being leased, if any, and other generally
applicable terms and conditions of tenancy for a similar building or
buildings; provided, that the value of any improvements to be made to
the First Offer Space by Lessee at Lessee's expense shall not be
considered for the purpose of valuing the Market Rent of the Premises.
In no event shall the First Offer Space Market Rent be less than the
monthly Base Rent payable for the Premises during the same time
period. If Lessee wishes to exercise Lessee's right of first offer,
Lessee shall do so, if at all, by giving Lessor notice of Lessee's
desire to lease the First Offer Space within seven (7) days after
receipt of Lessor's Availability Notice. If Lessee shall give such
notice, the same shall constitute an agreement to enter into an
amendment to this Lease to incorporate the First Offer Space into the
space demised under this Lease upon the terms and conditions set forth
in this Paragraph within thirty (30) days after the receipt by Lessee
of the proposed amendment from Lessor. If Lessee shall not so exercise
such right within such seven (7) day period or fail to execute such
Lease amendment within such thirty (30) day period, time being of the
essence, Lessee shall have no further right of offer with respect to
the entire First Offer Space and Lessor shall be free to enter into a
lease of the First Offer Space or any portion thereof with another
prospective tenant upon terms and conditions as Lessor shall
determine. Lessee's right of first offer shall only apply to the
entire First Offer Space and not only to a
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portion thereof and if Lessee exercises Lessee's right of first offer,
Lessee's right to extend the Lease Term as provided in Rider Paragraph
3 shall apply only to the Premises and the First Offer Space
collectively, and not to either of such spaces independently.
If Lessee shall exercise such right of first offer and if thereafter,
the then occupant of the First Offer Space wrongfully fails to deliver
possession of such space at the time when its tenancy is scheduled to
expire, commencement of the term of Lessee 5 occupancy and lease of
the First Offer Space shall, in the event of such holding over by such
occupant, be deferred until possession of the First Offer Space is
delivered to Lessee. The failure of the then occupant of the First
Offer Space to so vacate shall not give Lessee any right to terminate
this Lease or to deduct from, offset against or withhold monthly Base
Rent, rent or any other amount payable under the Lease (or any
portions thereof).
42. INSERT TO PARAGRAPH 2.6: "Lessee shall not be charged separately for
the use of Lessee's Parking Areas; provided that the foregoing shall
not limit Lessee's responsibility for costs relating to Lessee's
Parking Areas pursuant to Paragraph 4.2 and the Rider Paragraph
referenced therein."
43. INSERT TO PARAGRAPH 2.9: "Lessor shall not enforce any such rules and
regulations in a discriminatory manner."
44. INSERT TO PARAGRAPH 4.2(a): "(x) Depreciation for capital
expenditures made by Lessor (a) to reduce Common Area Operating
Expenses if Lessor has a reasonable basis for believing the capital
expenditure will reduce Common Area Operating Expenses, (b) to comply
with Applicable Requirements which come into effect after the date of
this Lease or (c) to perform Lessor's obligations under Paragraph 7.2
of this Lease or which are otherwise included in the definition of
"Common Area Operating Expenses" (plus, in the case of (a), (b) and
(c), an interest factor, reasonably determined by Lessor, as being the
interest rate then charged for long term mortgages by institutional
lenders on like properties within the general locality in which the
Building is located (the "Specified Interest Rate")), and in the case
of (a), (b) and (c) depreciation shall be determined by dividing the
original cost of such capital expenditure by the number of years of
useful life of the capital item acquired, which useful life shall be
determined reasonably by Lessor in accordance with generally accepted
accounting principles and practices in effect at the time of
acquisition of the capital item. Notwithstanding the foregoing,
Lessee's Share of Common Area Operating Expenses for each calendar
year during the Lease Term for depreciation for (a), (b) and (c) above
("Permitted Depreciation") combined during such calendar year shall
not exceed the applicable "Maximum Depreciation Amount" (as
hereinafter defined) for such calendar year. The "Maximum Depreciation
Amount" for the
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first calendar year during the Lease Term shall be Eight Thousand
Dollars ($8,000.00) (the "Initial Maximum Depreciation Amount"). The
"Maximum Depreciation Amount" for each subsequent calendar year during
the Lease Term shall be the difference between (i) the product of (x)
the number of calendar years from the Commencement Date through the
end of such subsequent calendar year multiplied by (y) the Initial
Depreciation Amount, minus (ii) the total cumulative amount of
Permitted Depreciation from the Commencement Date through the end of
such subsequent calendar year (the "Total Depreciation Amount"),
provided for the purpose of calculating the Total Depreciation Amount
no amount expended by Lessor for Permitted Depreciation in any
calendar year in excess of Eight Thousand Dollars ($8,000.00) shall be
included; provided, further, in no event shall such difference be less
than zero."
45. INSERT TO PARAGRAPH 6.3: "Notwithstanding the foregoing, Lessee shall
have no obligation to make any alterations or improvements to the
Premises which are required by Applicable Requirements unless such
requirement is caused by "Lessee Improvements" or "Lessee's Specific
Use of the Premises" (as such terms are defined in Rider Paragraph 7),
provided that Lessee may be required to pay for all or a portion of
the cost of such additions or alterations as explicitly provided in
Paragraphs 4.2, 7.1 and 7.3 of this Lease and the Rider Paragraphs
referenced therein and Rider Paragraph 7 of this Lease. Lessor shall
not enter into any new restrictions of record that will materially
increase Lessee's obligations or decrease Lessee's rights hereunder
without either (i) Lessor assuming such obligations in the case of
increased obligations or (ii) obtaining the prior written consent of
Lessee which shall not be unreasonably withheld, delayed or
conditioned.
46. INSERT TO PARAGRAPH 7.1(a): "Notwithstanding the foregoing, Lessee's
obligations to repair under this Rider Paragraph 7.1(a) shall not
apply to (i) damage or repairs to the extent any insurance policy
carried by Lessor in connection with the Building actually pays Lessor
for the cost of the restoration or repair, provided that Lessee shall
reimburse Lessor, as rent, within fifteen (15) business days of being
billed therefor for any deductible amount under any such insurance and
any other costs of the restoration or repair for work subject to
Lessee's obligations under Rider Paragraph 7.1 not actually paid for
by such insurance, provided, further, that if the restoration or
repair paid for by such insurance includes areas outside of the
Premises, Lessee shall only be so responsible for Lessee's Share of
such deductible, (ii) damage to the extent caused by the gross
negligence or intentional misconduct of Lessor or Lessor's employees,
agents or contractors, (iii) conditions to the extent actually covered
by any warranties of Landlord's contractors, (iv) damage or repairs
caused by fire or other casualty, which shall be subject to the
provisions of Paragraph 9 of this Lease and (v) the replacement of the
heating, ventilating and air conditioning units servicing the Premises
(the "Premises HVAC Units"), unless such replacement is a
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"Lessee Caused Replacement" (as defined below), provided that Lessee
shall be responsible for maintaining the Premises HVAC Units at
Lessee's sole cost and expense. Except for "Lessee's Caused
Replacements" (as defined below), any replacements to the base
building systems of the Premises (other than the Premises HVAC Units)
which become necessary during the Term of the Lease shall be performed
by Lessor and the cost thereof shall be amortized over the useful life
of such replacement, as reasonably determined by Landlord in
accordance with generally accepted accounting principles. Lessee shall
reimburse Lessor, as rent, at the same time and in the same manner as
applicable to the payment of Common Area Operating Expenses, for the
portion of such amortization coming due during the Term of this Lease
only plus interest at the Specified Interest Rate on the cost of such
replacement from the date of expenditure by Lessor. Notwithstanding
the foregoing, Lessee shall be required to make replacements required
pursuant to Paragraph 7.1 of the Lease at Lessee's sole cost and
expense if such replacements are required by (i) Lessee's Specific Use
of the Premises, (ii) Lessee Improvements, (iii) a Lessee Default or
Breach or (iv) the gross negligence or willful misconduct of Lessee or
any Lessee Party (collectively "Lessee Caused Replacements").
47. INSERT TO PARAGRAPH 7.4(c): "and damage to the extent caused by fire
or other casualty or the default by Lessor under the terms of this
Lease,
48. INSERT TO PARAGRAPH 8.1(a): "The Base Premium" shall be the annual
premium applicable to calendar year 1997 (being the period from
January 1, 1997 through December 31, 1997)."
49. INSERT TO PARAGRAPH 8.4: "All insurance required or permitted to be
maintained by Lessee and Lessor hereunder may be in the form of
blanket policies, so called, insuring the Premises as well as other
locations."
50. INSERT TO PARAGRAPH 10.2: "The definition of "Real Property Taxes"
shall not include (i) any amount which is imposed as a result of a
sale of the Building, the Property or the Industrial Center (other
than a transfer to a real estate investment trust (a "REIT")) during
the first year of the Lease Term provided that the definition of "Real
Property Taxes" shall include any such amounts resulting from a sale
after the first year of the Original Lease Term, (ii) any amount which
is imposed as a result of the first transfer of the Building, the
Property or the Industrial Center into a REIT, provided that the
definition of "Real Property Taxes" shall include any amounts
resulting from transfers to a REIT after the first transfer, (iii)
income, estate, gift, inheritance, franchise or transfer taxes;
provided, however, that if any time during the Lease Term the present
system of ad valorem taxation of real property shall be changed so
that in lieu of or in addition to, the whole or any part of the ad
valorem tax on real property, there
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shall be assessed on Lessor a capital levy or other tax on the gross
rents received with respect to the Industrial Center, or a Federal,
State, County, Municipal, or other local income, franchise, excise of
similar tax, assessment, levy or charge (distinct form any now in
effect in the jurisdiction in which the Industrial Center is located)
measured by or based in whole or in part, upon any such gross rents,
then any and all of such taxes, assessments, levies or charges, to the
extent so measured or based, shall be deemed to be included with in
the term "Real Property Taxes" but only to the extent that the same
would be payable if the Industrial Center were the only property of
Lessor, (iv) any increases attributable to an expansion of the
Building unless such improvements are constructed for Lessee's sole
benefit, in which event Lessee shall be responsible for one hundred
percent (100%) of such increases and (v) interest or penalties for
Lessor's failure to pay taxes when due, except to the extent such
failure is due to Lessee's failure to pay such taxes to Lessor when
provided for pursuant to this Lease. If any assessments affecting the
Premises are payable in installments and Lessor should prepay such
assessments in advance of the date such installments would become due,
Lessee shall be solely responsible for the portion of such assessment
that would have normally come due as an installment, unless consented
to by Lessee in writing."
51. INSERT TO PARAGRAPH 1.1: "Notwithstanding the foregoing, Lessor and
Lessee agree that during the time period starting with the
Commencement Date of the Lease and ending on the last day of the
seventh (7th) months following the month in which the Commencement
Date occurs (the "Initial Period"), Lessee shall have the right to
occupy an approximately 50,000 square foot portion of the Premises,
and Lessee shall not have the right to occupy the remaining portion of
the Premises (the "Remaining Portion") during such Initial Period,
except that Lessee shall have the right to sublet the Remaining
Portion of the Premises during the Initial Period, subject to the
terms of this Lease. Nothing herein shall be deemed to excuse Lessee
from Lessee's other obligations under this Lease with respect to the
Remaining Portion during the Initial Period, including but not limited
to the obligations described herein to repair and maintain the
Remaining Portion; nor shall Lessee's obligation to pay monthly Base
Rent or Share of Common Area Operating Expenses be reduced as a result
of Lessee' non-occupancy of the Remaining Portion."
52. INSERT TO PARAGRAPH 2.4: "except as otherwise expressly provided in
this Lease."
53. INSERT TO PARAGRAPH 2.3: "performed in accordance with the provisions
of Paragraphs 7.1 and 7.2 of this Lease."
54. INSERT TO PARAGRAPH 2.3: "without giving consideration to "Lessee's
Specific Uses of the Premises" (as defined in Rider Paragraph 7)."
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55. INSERT TO PARAGRAPH 6.2(b): "Lessee or any Lessee Party, to spill or
release any Hazardous Substance in, on, under or about the Premises,
the Building, the Property or the Industrial Center"
56. INSERT TO PARAGRAPH 7.1(c): "beyond any applicable notice and cure
period (except in an emergency, in which case no notice and cure
period shall be applicable),"
57. INSERT TO PARAGRAPH 10.2(b): "for calendar year 1997 (being the period
from January 1, 1997 through December 31, 1997)."
58. INSERT TO PARAGRAPH 13.1(a): "for more than ninety (90) consecutive
days."
59. INSERT TO PARAGRAPH 13.1(b): "within five (5) business days after
notice that such sum is past due"
60. INSERT TO PARAGRAPH 13.1(c): "if Lessor has a reasonable basis to
believe that Lessee is not in compliance with Applicable Requirements"
61. INSERT TO PARAGRAPH 32: "Upon reasonable advance notice (except in the
case of any emergency),"
62. INSERT TO PARAGRAPH 7.3:
"(d) Notwithstanding the terms of Paragraph 7.3 of this Lease, Lessee
shall have the right, without obtaining the prior consent of Lessor,
to make Alterations within the Premises where:
(a) the same are within the interior of the Building and do not
have any effect or appearance on the exterior of the Building, it
being specifically understood and agreed that no changes in any
exterior glass, doors or windows shall be permitted under this
Paragraph 7.3(d);
(b) the same do not affect any structural element of the
Building, any Utility Installation in the Building or the fire
protection system of the Building;
(c) the same shall not in any individual case exceed $25,000.00
in cost, and in the aggregate together with any prior work under
this Paragraph 7.3(d) shall not exceed $100,000.00 in cost; and
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(d) Lessee shall comply with all other provisions of this Lease
applicable to Alterations and Utility Installations other than
the requirement for obtaining Lessor's prior consent and if such
work increases the cost of insurance or taxes or of services,
Lessee shall pay for any such increase in cost;
provided, however, that Lessee shall, within fifteen (15) days after
making of any such Alteration, deliver to Lessor as built plans and
specifications, describing such work in reasonable detail."
63. INSERT TO PARAGRAPH 7.2: "On or prior to the date which is one (1)
year subsequent to the Commencement Date (the "Roof Replacement
Substantial Completion Date"), Lessor shall remove the existing roof
membrane and substantially complete the replacement of the roof
membrane and roof flashing of the Building substantially in accordance
with the specifications attached hereto as Exhibit G with a with a no
dollar limit warranty. The Roof Replacement Substantial Completion
Date shall be automatically extended for no more than sixty (60) days
in the aggregate for such periods of time as Lessor is delayed in the
performance of such work by "Lessor's Force Majeure" (as defined in
Rider Paragraph 7). For the purpose of this Rider Paragraph 63, such
work shall be substantially completed if it is "Substantially
Complete" except for "punch list items" (as such terms are defined in
Rider Paragraph 7)."
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EXHIBIT A
FLOOR PLAN OF THE PREMISES
(INCLUDING THE SECOND FLOOR OFFICES)
2391 WEST WINTON AVE.
HAYWARD, CA
[DIAGRAM APPEARS TO LEFT]
<PAGE>
EXHIBIT B
2391 WEST WINTON AVENUE, HAYWARD, CALIFORNIA
LEGAL DESCRIPTION
That certain parcel of land in the City of Hayward, County of Alameda, State of
California shown as Parcel 1 on Parcel Map 1530, filed November 5, 1974 in Book
84 of Maps, Page 66 with the Alameda County Records.
Excepting therefrom, all that portion conveyed in that certain "Final Order Of
Condemnation" in favor of the City of Hayward, a Municipal Corporation, Case No.
H-i 06841-8 Superior Court of Alameda County, by instrument recorded May 29,
1987, Series No. 87-151484 with the Alameda County Records.
<PAGE>
EXHIBIT C
LESSEE'S PARKING AREAS
SITE PLAN (APPEARS ABOVE)
2391 WEST WINTON AVENUE
HAYWARD INDUSTRIAL CENTER
<PAGE>
CABOT, CABOT & FORBES RECORDED AT REQUEST OF
100 CALIFORNIA STREET Title Insurance & Trust Co.
SUITE 1190 At 9 A.M.
SAN FRANCISCO, CALIFORNIA
DECLARATION OF COVENANTS
AND RESTRICTIONS
WHEREAS, CABOT, CABOT & FORBES HAYWARD PROPERTIES, INC., a Delaware
corporation (hereinafter called "Cabot") is the owner of a portion of and has a
contract to purchase the balance of all that certain real property located in
the City of Hayward, County of Alameda, State of California, more particularly
described in Exhibit A, attached hereto and incorporated herein by reference
thereto; and
WHEREAS, it is the desire and intention of Cabot to develop all of
said property as an industrial center, beginning with development of that
portion thereof more particularly described in Exhibit B, attached hereto and
incorporated herein by reference thereto (hereinafter called "Initial Restricted
Area"); and
WHEREAS, it is the desire and intention of Cabot to impose upon the
Initial Restricted Area and such other portions of the property described in
Exhibit A made subject hereto from time to time, mutually beneficial
restrictions under a general plan of improvement for the benefit of all of said
property, the improvements theron and the future owners thereof;
NOW, THEREFORE, Cabot hereby declares that the Initial Restricted Area
(and such other portions of the property described in Exhibit A as may be, from
time to time, designated by Cabot pursuant to the provision herein-after set
forth ) is held and shall be held, conveyed, hypothecated, encumbered, leased,
rented, used, occupied and improved, subject to the following limitations,
restrictions and covenants, all of which are declared and agreed to be in
furtherance of a plan for the subdivision, improvement and sale of the
Restricted Area (as hereinafter defined) and are established and agreed upon for
the purpose of enhancing and perfecting the value, desirability and
attractiveness of the real property and shall be binding on all parties having
or acquiring any right, title or interest in the property made subject hereto or
any part thereof, and shall be for the benefit of each owner of any portion of
said real property, or any interest therein, and shall inure to the benefit of
and be binding upon each successor in interest of the owners thereof.
A. Definitions.
1. "Approving Agent" means, in the following order of precedence:
(a) Cabot, so long as it owns of record any land in the Restricted Area,
or thereafter
<PAGE>
(b) Any corporation, association or trust controlled by Cabot or with
which Cabot has been merged or consolidated or by which Cabot has
been acquired, all as certified of record by Cabot (herein-after
called Cabot's Successor) so long as it owns of record any land in
the Restricted Area and provided it has been granted of record by
Cabot the exclusive right to approve plans and grant variances as
hereinafter set forth, or hereafter
(c) Any association (whether or not incorporated ) organized by a
majority of the owners of record of land in the Restricted Area for
the purpose, amont others, of approving plans and granting variances
as hereinafter provided, in which membership is available to all
such owners without charge, provided Cabot or Cabot's Successor has
granted to it of record the exclusive right to approve plans and
grant variances as hereinafter set forth which Cabot agrees will be
done by it or Cabot's Successor before Cabot or Cabot's Successor
ceases to own of record any land in the Restricted Area, if written
request therefor is received prior to that time.
2. "Restricted Area" means the Initial Restricted Area and also such other
portions of the property described in Exhibit A as may from time to time
be designated as subject to the provisions hereof by Cabot or Cabot's
Successor by duly recorded designation referring to this instrument,
whether or not such additional areas are owned by Cabot in fee at the
date hereof.
3. "Site" means an area of land in the same ownership either shown as one
lot on a recorded plan or, if not so shown, described as the Site for one
or more buildings by the owner in a recorded instrument, whether or not
in either case acquired at one time or previously so shown as more than
one lot, or shown or described for the purpose of lease but not of
conveyance as more than one lot, if an easement or easements over any
portion or portions of a Site established by recorded plan or recorded
instrument then exists or exist or is or are reserved by Cabot for any
purpose whatsoever, the area of such portion or portions shall be
included in computing the area of that Site. If subsequent to the
establishment of a Site by recorded plan or recorded instrument, any
portion or portions thereof are for railroad, street,
2.
<PAGE>
highway, utility or public purpose taken by right to eminent domain, or
deed in lieu thereof, or dedicated or conveyed pursuant to reservation by
Cabot, the area of such portion or portions shall continue to be included
thereafter in computing the area of that Site.
B. Restrictions.
1. No building shall be constructed upon any site within forty (40) feet of
any street in existence at the time of such construction or within
fifteen (15) feet of any other Site, nor have exterior walls constructed
other than of tilt-up concrete or equal material; nor shall any building
be constructed upon any Site with a roof having a difference in elevation
of more than two (2) feet unless approved in the manner hereinafter
provided.
2. Within the required set-back area from streets there shall be maintained
on each Site only paved walks, paved driveways, lawns and landscaping,
and the surface of so much of the remainder of each Site as is not
covered by buildings, by lawns or by landscaping shall be treated so as
to be dust free. At least two-thirds of the surface of the required set-
back area from streets shall be maintained in lawns or other landscaping.
3. There shall be maintained on each Site facilities for parking, loading
and unloading sufficient to serve the business conducted thereon without
using adjacent streets therefor; and no use shall be made of any Site
which will attract parking in excess of the parking spaces then available
thereon.
4. Each Site shall be used only for manufacturing, processing, storage,
wholesale, office, laboratory, professional, research and development
activities; and there shall not be permitted any junk or salvage yard or
any other use which will be offensive to the neighborhood by reason of
odor, fumes, dust, smoke, noise or pollution or will be hazardous by
reason of danger of fire or explosion. Retail uses shall be limited to
sales of goods and services reasonably required for the convenience of
occupants within the Restricted Area such as restaurants, drug stores,
barber and beauty shops, show repair shops, cleaners, post offices, banks
and automobile service stations, and no such retail uses shall be
undertaken unless and until the
3.
<PAGE>
same shall have been approved in the manner hereinafter provided.
5. The exterior of all structures and all walks, driveways, lawns and
landscaping on each Site shall be maintained in good order, repair and
condition; and all exterior painted surfaces shall be maintained in
first-class condition and shall be repainted at least once in every four
(4) years.
6. No open storage shall be permitted on any Site unless protected by
screening to a height of not more than eight (8) feet approved in the
manner hereinafter provided.
7. The ratio of building to land area in a Site shall be determined on the
basis of a Site plan to be approved in advance of construction in the
manner hereinafter provided. Such Site plan shall incorporate and show
compliance with all restrictions contained herein with respect to front,
side and rear setbacks and off street parking and shall show adequate
truck loading and maneuvering areas, which shall not be less than the
minimum areas prescribed by ordinances of the City of Hayward. No
buildings, exterior signs or structures shall be erected, or exterior
structural alterations or additions made on any Site except pursuant to
plan and specifications approved in the manner hereinafter provided as to
landscaping and architectural conformity to a garden type industrial
center. Such approvals shall not be withheld unreasonably. The
requirement of approvals set forth in this paragraph are in addition to
and not in substitution for any and all other restrictions herein
contained.
C. Approvals, Variances and Waivers.
1. So long as there in an Approving Agent it shall have the exclusive right
to grant approvals required by the Restrictions and to waive or vary the
Restrictions in particular respects whenever in its opinion such waiver
or variance will not be detrimental to a garden type industrial center.
2. After there ceases to be an Approving Agent the owners of record of the
land in the Restricted Area abutting upon each Site shall have the
exclusive right to grant approvals required by the Restrictions and the
owners of record of two-thirds (2/3) in area of land in the Restricted
Area within five hundred (500) feet of each Site (said area to be defined
by a line parallel to the boundaries of each Site and located five
hundred (500) feet therefrom) shall have the
4.
<PAGE>
exclusive right to waive or vary the Restrictions in particular respects
whenever in their opinion such waiver or variance will not be detrimental
to a garden type industrial center.
3. Any person having an interest in any Site may relay upon any instrument
of record signed by the Approving Agent or after there ceases to be an
Approving Agent by the appropriate owners referred to above purporting to
grant an approval or to waive or vary the Restrictions in particular
respects.
4. Any construction, other than exterior signs, driveways, parking areas,
grading landscaping, fences and screens, completed for more than three
(3) months shall be deemed approved, unless prior to the expiration of
such period a suit for enforcement has been commenced and notice thereof
duly recorded. No owner of any Site shall be responsible except for
violations occurring while owner.
D. Enforcement
1. All of the provisions herein contained shall run with the land and shall
be enforceable in equity.
2. So long as there is an Approving Agent it shall have the exclusive right
to enforce the provisions hereof, without liability for failure so to do,
except that each owner of record of land in the Restricted Area shall
have the right to enforce the provisions hereof then applicable to any
Site if the Approving Agent shall fail so to do within thirty (30) days
after written request from any such owner.
3. After there ceases to be an Approving Agent each owner of record of land
in the Restricted Area shall have the right to enforce the Restrictions
then applicable to any Site without liability for failure to do so.
IN WITNESS WHEREOF, CABOT, CABOT & FORBES HAYWARD PROPERTIES, INC., has
caused its corporate seal to be hereto affixed and this instrument to be
executed in its name and behalf by P.M. Gilbert and Gilmer Waggoner its General
Manager and Assistant Secretary, hereunto duly authorized this 18th day of
November, 1968.
CABOT, CABOT & FORBES HAYWARD
PROPERTIES, INC.
By ____________________
Its General Manager
By ____________________
Its Assistant Secretary
5.
<PAGE>
STATE OF CALIFORNIA )
) SS.
City and County of San Francisco )
On this 18th day of November, 1968, before me, Elizabeth A. Johnson, a
Notary Public in and for said County and State, residing therein, duly
commissioned and sworn, personally appeared P. M. Gilbert and Gilmer Waggoner,
known to me to be the General Manager and Assistant Secretary, respectively, of
CABOT, CABOT & FORBES HAYWARD PROPERTIES, INC., the corporation described in and
that executed the within instrument, and also known to me to be the persons who
executed it on behalf of the corporation therein named, and they acknowledged to
me that such corporation executed the same pursuant to its By-Laws or a
resolution of its Board of Directors.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the City and County of San Francisco, the day and year in this
certificate first above written.
________________________
Notary Public
in and for the City and County of
San Francisco, State of California
ELIZABETH A. JOHNSON
(SEAL)
<PAGE>
PROPERTY DESCRIPTION
Parcels 1, 2, 3 and 4 as shown on that certain Amended Record of Survey No.
339, recorded April 4, 1968 in Book 7 of Records of Survey at Pages 13
through 15, Alameda County Records.
EXHIBIT A
<PAGE>
EXHIBIT "B"
REAL PROPERTY IN THE CITY OF HAYWARD, COUNTY OF ALAMEDA, STATE OF
CALIFORNIA, DESCRIBED AS FOLLOWS;
LOTS 1 TO 5, INCLUSIVE, AS SAID LOTS ARE SHOWN ON THE MAP OF "TRACT 3017,
C.C.& F. HAYWARD INDUSTRIAL CENTER, CITY OF HAYWARD, ALAMEDA COUNTY,
CALIFORNIA:, FILED DECEMBER 25, 1968, IN BOOK 59 OF MAPS, PAGES 53 TO 55,
INCLUSIVE, IN THE OFFICE OF THE COUNTY OF RECORDER OF ALAMEDA COUNTY.
<PAGE>
EXHIBIT E
DECLARATION AFFIXING THE COMMENCEMENT DATE OF LEASE
THIS AGREEMENT made this ____ day of ___________________, l99__, by and
between _____________________________, (hereinafter "Lessor") and
____________________________ (hereinafter "Lessee").
WITNESSETH THAT
1. This Agreement is made pursuant to Paragraph 1 of the Rider to that
certain Lease dated ____________________ 199__, between Lessor, as lessor, and
Lessee, as lessee.
2. It is hereby stipulated and agreed that the Term of the Lease commenced
on __________________ 19__, (being the "Commencement Date" under the Lease), and
shall end and expire on ________________ 19__, unless sooner terminated or
extended, as provided for in the Lease.
WITNESS the execution hereof, by persons hereunto duly authorized, the date
first above written.
LESSOR:
________________________
________________________
LESSEE:
________________________
By__________________________
Name________________________
Office________________________
HEREUNTO DULY AUTHORIZED
(CORPORATE SEAL)
<PAGE>
EXHIBIT F
---------
MAC ASSOCIATES
ARCHITECTURE, INTERIORS, TENANT PLANNING
APRIL 23, 1997
REVISED PRICING NOTES (3)
2391 W. WINTON
MAC PROJECT NO: 7022.00
DEMOLITION NOTES
Dl REMOVE EXISTING FLOORING PREP FOR NEW.
D2 EXISTING VCT FLOORING TO REMAIN.
D3 REMOVE ALL UNUSED ELECTRICAL WIRE AND TELE DATA CABLE.
D4 REMOVE EXISTING GYP. BOARD CEILING.
D5 REMOVE EXISTING KITCHEN/RESTROOM. CAP ALL PLUMBING. PRICE AS TENANT
ALTERNATE (1).
D6 REMOVE EXISTING WINDOW.
D7 REMOVE EXISTING PARTITION.
D8 REMOVE AND SAVE SLOP SINK. CAP ALL PLUMBING. SEE CONSTRUCTION NOTES FOR
RELOCATION.
D9 REMOVE EXISTING DOOR AND FRAME. SEE CONSTRUCTION NOTES FOR RELOCATION.
D10 REMQVE EXISTING SHELVING. PRICE AS TENANT ALTERNATE (3).
Dl1 REMOVE EXISTING DOOR AND FRAME. SEE CONSTRUCTION NOTES FOR RELOCATION.
PRICE AS TENANT ALTERNATE (7).
D12 REMOVE EXISTING DOOR, PARTITION AND WINDOW. PRICE AS TENANT ALTERNATE (2).
D13 REMOVE EXISTING FLOORING, PREP FOR NEW. PRICE AS TENANT ALTERNATE (8)
200 PINE STREET, SUITE 200 * SAN FRANCISCO, CALIFORNIA 94104
* TEL: 415/989.4040 * FAX: 415/989.4056
<PAGE>
MAC ASSOCIATES
ARCHITECTURE, INTERIORS, TENANT PLANNING
APRIL 23, 1997
REVISED PRICING NOTES (3)
2391 W. WINTON
MAC PROJECT NO: 7022.00
CONSTRUCTION NOTES
C1 NEW VINYL WALL COVERING OVER EXISTING WALL COVERING. WOLF-GORDON OR EQUAL.
PRICE As ALTERNATE (4a): FLOAT AND PAINT, (4b): REMOVE (E) WALL COVERING
AND PAINT.
C2 NEW VCT FLOORING, ARMSTRONG STANDARD EXELON OR EQUAL.
C3 NEW LEVEL LOOP GLUE DOWN CARPET, SHAW COMMERCIAL "SEA ISLAND 11" OR EQUAL.
C4 NEW SHEET VINYL FLOORING.
C5 FILL EXISTING WINDOW/DOOR OPENING.
C6 NEW CEILING HEIGHT PARTITION.
C7 NEW KITCHEN WITH SINGLE COMPARTMENT SINK, 10 LINEAR FEET OF CABINETS,
PLASTIC LAMINATE COUNTER TOP. CONNECT TO EXISTING WATER HEATER.
C8 RELOCATED SLOP SINK. PRICE AS TENANT ALTERNATE (5).
C9 RELOCATED ENTRY DOOR, FRAME, LOCKSET,
C10 NEW CEILING GRID AND TILE, EXTEND PREDOMINANT CEILING GRID IF POSSIBLE.
C11 NEW GYP BOARD CEILING. ONE EXHAUST FAN PER RESTROOM.
C12 RELOCATE EXISTING DOOR AND FRAME. FILL EXISTING DOOR OPENING. PRICE AS
TENANT ALTERNATE (6).
C13 NEW LEVEL LOOP GLUE DOWN CARPET, SHAW COMMERCIAL "SEA ISLAND 11" OR EQUAL.
PRICE As TENANT ALTERNATE (9).
C14 NEW CEILING GRID AND TILE, EXTEND PREDOMINANT CEILING GRID IF POSSIBLE.
PRICE As TENANT ALTERNATE (10).
C15 FILL EXISTING DOOR OPENING. PRICE As TENANT ALTERNATE (11).
200 PINE STREET, SUITE 200 * SAN FRANCISCO, CALIFORNIA 94104
* TEL: 415/989.4040 * FAX: 415/989.4056
<PAGE>
MAC ASSOCIATES
ARCHITECTURE, INTERIORS, TENANT PLANNING
APRIL 23, 1997
REVISED PRICING NOTES (3)
2391 W. WINTON
MAC PROJECT NO: 7022.00
MECHANICAL/ELECTRICAL NOTES
Ml PROVIDE AND INSTALL FIVE (5) NEW 2X4 FLUORESCENT FIXTURES FOUR (4) AT
RESTROOM AND ONE (1) AT HALLWAY.
M2 REUSE EXISTING WATER HEATER FOR RESTROOMS AND KITCHEN.
M3 PROVIDE RESTROOM FIXTURES AS SHOWN.
M4 RELOCATE EXISTING 2X4 FLUORESCENT FIXTURES.
M5 PROVIDE WALL MOUNTED STROBELIGHITS (8), AND ASSOCIATED SMOKE DETECTORS, AND
THREE FIRE PULL STATIONS (ONE AT EACH EXIT).
200 PINE STREET, SUITE 200 * SAN FRANCISCO, CALIFORNIA 94104
* TEL: 415/989.4040 * FAX: 415/989.4056
<PAGE>
MAC ASSOCIATES
ARCHITECTURE, INTERIORS, TENANT PLANNING
APRIL 23, 1997
REVISED PRICING NOTES (3)
2391 W. WINTON
MAC PROJECT NO: 7022.00
RESTROOM NOTES
. FIXTURES AS SHOWN TO BE AMERICAN STANDARD OR EQUAL.
. FLOORING AND BASE TO BE SHEET VINYL.
. WALL FINISH TO BE VINYL WALLCOVERING.
. LAVATORY COUNTERS TO BE PLASTIC LAMINATE.
. PROVIDE CODE REQUIRED SIGNAGE.
. PROVIDE AND INSTALL ACCESSORIES, BOBRICK OR EQUAL, INCLUDING TOILET
PARTITIONS, MIRRORS, GRAB BARS, PAPER TOWEL DISPENSOR, FEMININE NAPKIN
DISPENSOR, COMBO TOILET PAPER/SEAT COVER/FND UNITS.
FINISHES NOTES
. ALL WALLS TO RECEIVE PAINT.
200 PINE STREET, SUITE 200 * SAN FRANCISCO, CALIFORNIA 94104
* TEL: 415/989.4040 * FAX: 415/989.4056
<PAGE>
Title: 1ST FLOOR DEMO PLAN
- --------------------------------------------------------------------------------
MAC Associates
ARCHITECTURE, INTERIORS, TENANT PLANNING
200 Pine Street, Suite 200, San Francisco, CA 94104
Tel: (415) 989-4040, Fax (415) 989-4056
- --------------------------------------------------------------------------------
Proj. Name: RESTORATION HARDWARE
- --------------------------------------------------------------------------------
Proj. No.: 7022.00
- --------------------------------------------------------------------------------
Location: 2391 W. WINTON AVE.
- --------------------------------------------------------------------------------
Drawn by: BCM
- --------------------------------------------------------------------------------
Scale: 1/8" = 1'-0"
- --------------------------------------------------------------------------------
Date: 4/23/97
- --------------------------------------------------------------------------------
Sheet: 1A.0
- --------------------------------------------------------------------------------
<PAGE>
Title: 1ST FLOOR PLAN
- --------------------------------------------------------------------------------
MAC Associates
ARCHITECTURE, INTERIORS, TENANT PLANNING
200 Pine Street, Suite 200, San Francisco, CA 94104
Tel: (415) 989-4040, Fax (415) 989-4056
- --------------------------------------------------------------------------------
Proj. Name: RESTORATION HARDWARE
- --------------------------------------------------------------------------------
Proj. No.: 7022.00
- --------------------------------------------------------------------------------
Location: 2391 W. WINTON AVE.
- --------------------------------------------------------------------------------
Drawn by: BCM
- --------------------------------------------------------------------------------
Scale: 1/8" = 1'-0"
- --------------------------------------------------------------------------------
Date: 4/23/97
- --------------------------------------------------------------------------------
Sheet: 1A.1
- --------------------------------------------------------------------------------
<PAGE>
Title: 1ST FLOOR PLAN
- --------------------------------------------------------------------------------
MAC Associates
ARCHITECTURE, INTERIORS, TENANT PLANNING
200 Pine Street, Suite 200, San Francisco, CA 94104
Tel: (415) 989-4040, Fax (415) 989-4056
- --------------------------------------------------------------------------------
Proj. Name: RESTORATION HARDWARE
- --------------------------------------------------------------------------------
Proj. No.: 7022.00
- --------------------------------------------------------------------------------
Location: 2391 W. WINTON AVE.
- --------------------------------------------------------------------------------
Drawn by: BCM
- --------------------------------------------------------------------------------
Scale: 1/8" = 1'-0"
- --------------------------------------------------------------------------------
Date: 4/23/97
- --------------------------------------------------------------------------------
Sheet: 1A.2
- --------------------------------------------------------------------------------
<PAGE>
Title: 2ND FLOOR DEMO PLAN
- --------------------------------------------------------------------------------
MAC Associates
ARCHITECTURE, INTERIORS, TENANT PLANNING
200 Pine Street, Suite 200, San Francisco, CA 94104
Tel: (415) 989-4040, Fax (415) 989-4056
- --------------------------------------------------------------------------------
Proj. Name: RESTORATION HARDWARE
- --------------------------------------------------------------------------------
Proj. No.: 7022.00
- --------------------------------------------------------------------------------
Location: 2391 W. WINTON AVE.
- --------------------------------------------------------------------------------
Drawn by: BCM
- --------------------------------------------------------------------------------
Scale: 1/8" = 1'-0"
- --------------------------------------------------------------------------------
Date: 4/22/97
- --------------------------------------------------------------------------------
Sheet: 2A.0
- --------------------------------------------------------------------------------
<PAGE>
Title: 2ND FLOOR PLAN
- --------------------------------------------------------------------------------
MAC Associates
ARCHITECTURE, INTERIORS, TENANT PLANNING
200 Pine Street, Suite 200, San Francisco, CA 94104
Tel: (415) 989-4040, Fax (415) 989-4056
- --------------------------------------------------------------------------------
Proj. Name: RESTORATION HARDWARE
- --------------------------------------------------------------------------------
Proj. No.: 7022.00
- --------------------------------------------------------------------------------
Location: 2391 W. WINTON AVE.
- --------------------------------------------------------------------------------
Drawn by: BCM
- --------------------------------------------------------------------------------
Scale: 1/8" = 1'-0"
- --------------------------------------------------------------------------------
Date: 4/22/97
- --------------------------------------------------------------------------------
Sheet: 2A.1
- --------------------------------------------------------------------------------
<PAGE>
Title: HANDICAP PARKING PLAN
- --------------------------------------------------------------------------------
MAC Associates
ARCHITECTURE, INTERIORS, TENANT PLANNING
200 Pine Street, Suite 200, San Francisco, CA 94104
Tel: (415) 989-4040, Fax (415) 989-4056
- --------------------------------------------------------------------------------
Proj. Name: RESTORATION HARDWARE
- --------------------------------------------------------------------------------
Proj. No.: 7022.00
- --------------------------------------------------------------------------------
Location: 2391 W. WINTON AVE.
- --------------------------------------------------------------------------------
Drawn by: BCM
- --------------------------------------------------------------------------------
Scale: 1/8" = 1'-0"
- --------------------------------------------------------------------------------
Date: 4/22/97
- --------------------------------------------------------------------------------
Sheet: HCP.1
- --------------------------------------------------------------------------------
<PAGE>
"RESERVED FOR HANDICPAPED" SIGN
<PAGE>
EXHIBIT F - CONTINUED
1. Install approximately 400 linear feet of chain link fence, 8 ft high, with
vinyl slats to divide property line shown on attached plan.
2. Remove existing 8 ft fence and rolling gate, and reinstall chain link fence
and gate with new posts, approximately 40 ft north from the existing location.
<PAGE>
FENCE INSTALLATION DIAGRAM
<PAGE>
EXHIBIT F-1
TENANT RESPONSIBILITY
SCOPE OF WORK
1. Remove existing cabinetry located in original kitchen (D5).
2. Remove existing shelving (D10).
3. Remove existing door and relocate door (D11) and fill existing door opening
(C12).
4. Remove existing flooring (D13) and replace with new carpet (C13).
5. Remove existing door, partition, and window (D12) and fill window and door
opening (C15). Also provide for new ceiling grid and tiles or extend
existing ceiling grid (C14).
6. Remove existing slop sink (D8) and relocate to original kitchen. (C8).
<PAGE>
EXHIBIT G
SPECIFICATIONS
PART 1.00 - GENERAL
1.01 DESCRIPTION
A. Scope of work:
Furnish all labor, materials, equipment and services necessary to
install a new built-up roof and flashings as indicated and
specified herein.
B. Work included in this section:
1. Installation of new roofing.
2. Inspection by the contractor's field supervisory personnel.
C. Work not included in this section:
1. Sheet metal work
2. Electrical
3. Plumbing
4. Carpentry
5. Asbestos (Unless predetermined with building owner and
proper parameters have been followed with regards to
membrane testing for friability).
1.02 QUALITY ASSURANCE AND GUARANTEE
A. Roofing Contractor shall be authorized by the manufacturer. All
work shall be done with their specifications and conditions.
B. A unit guarantee shall be provided by the contractor for
materials and installation.
1.03 MATERIALS HANDLING
A. Delivery of materials:
1
<PAGE>
All roofing materials shall be delivered to the site in the
original unbroken manufacturer's wrappings, materials and
containers with the original label thereon intact. If any bulk or
unlabeled materials are to be used, a properly attested
certificate from the manufacturer stating that such materials
shall comply with the specification requirements shall be
furnished to the contractor prior to installation.
B. Storage of materials at job site:
1. Roofing materials shall be raised above the supporting
surfaces, such as on pallets. Roll goods, insulation and any
other materials which may have moisture contact shall be
kept dry. Wet materials shall not be permitted to be used on
the job and shall be removed promptly.
2. Materials containing solvents shall be stored in a dry, cool
area with proper fire and safety precautions.
3. Roll goods shall be stored on end.
4. If stored on other than the ground, all material shall be
distributed so that their resultant weight does not exceed
the design of live load of the deck.
1.04 PROTECTION AND CLEANING
A. Protection:
1. Any work or materials damaged during the handling of
bitumans and roofing materials shall be resotred to their
original (undamaged condition or replaced by the roofing
applicator.
2. Protective covering shall be installed at all paving and
exposed building walls adjacent to hoist and kettles prior
tot he start of work.
3. Protection shall remain in place for the duration of the
roofing work.
1.05 GUARANTEE
2
<PAGE>
A. The contractor shall provide a written guarantee that all roofing
materials and installation will be maintained in a waterproof
condition for a period of three (3) years from the date of final
approval of the roofing at no charge to the building owner.
PART 2.00 PRODUCTS
2.01 MATERIALS
A. All materials shall be manufactured by Manville Corporation or
equal.
B. Asphalt: ASTM D-312-78, Type III, Bituman when labeled with a
Softening Point (SP), Minimum Flash Point (FP), Minimum Finished
Blowing Temperature (FBT), and Equiviscous Temperature Range
(EVT) shall not be heated above the FP, held at the FBT longer
than 4 hours and must be applied within 25 degrees of the EVT.
If the asphalt is not so labeled or the foregoing information is
not otherwise available, the asphalt shall be heated in
accordance with information contained in the current
Manufacturer's manual.
C. GlasBase. Asphalt coated fiberglass mat, Approximate weight per
100 square feet, 28 lbs.
D. GlasPly. Asphalt coated fiberglass mat. Approximate weight per
100 square feet, 12 lbs. ASTM D-2176 Type IV.
E. GlasKap. Mineral surfaced cap sheet. Asphalt coated fiberglass
mat with ceramic granule surfacing. Approximate weight per 100
square feet, 72 lbs. Federal Specification # ??-R-630D Class III.
2.02 SUMMARY OF MATERIALS PER 100 SQUARE FEET
A. Built-up roofing system shall be Specification #3GNC:
GlasBase Felt 28 lbs.
Asphalt 25 lbs.
3
<PAGE>
GlasPly Felt 12 lbs.
Asphalt 25 lbs.
GlasKap 72 lbs.
Total Average Weight 162 lbs.
B. Roofing and flashings shall be installed in strict accordance
with Manufacturer's recommendations and as specified herein.
PART 3.00 EXECUTION
3.01 GENERAL INSTALLATION REQUIREMENTS
A. All surfaces shall be adequately anchored, even, and free of any
foreign material, moisture, or unevenness.
B. Immediately notify owner of any defects. Built-up roofing shall
not be installed until defects have been corrected. (We
anticipate no significant defects on this project.)
C. Verify that any curbs or nailers are in place and properly
installed.
3.02 DEMOLITION AND REMOVAL OF EXISTING MEMBRANE
A. Remove and dispose of the roofing and flashings down to the deck.
If complete removal is not possible because of solid attachment,
the materials shall be removed down to the original membrane.
B. Minor deck repairs shall be made at no charge to the owner. If
major deck repairs are necessary, the owner shall be informed of
the additional cost and the work shall be performed for a cost
mutually acceptable to the owner and the contractor.
3.03 INSTALLATION OF MATERIALS
A. Asphalt:
1. All kettles and tankers shall have both
4
<PAGE>
thermostatic controls and an accurate visible thermometer.
2. Heat and apply at correct EVT between 400 and 500 degrees
Fahrenheit.
3. Solidly map heated asphalt between and under layers of felt
and insulation so that at not point does felt touch felt.
B. Deck Preparation:
Existing roof membrane shall be torn off to the deck as outlined
in section 3.02 above.
C. Base Sheet: Schuller #26 GlasBase (or equal)
Nail and/or mechanically fasten as necessary to the prepared
deck. Side laps to be 2", and laps 4". Broom felts to insure
total adhesion where necessary.
D. Ply Felts: Schuller #12 GlasPly (or equal)
Starting at low edge apply one 18" wide, then a full 36" wide
GlasPly overlapping the preceding felt by 2". All following felts
are to be applied full width with the same 2" overlap. Install
each felt so that it shall be uniformly set, without voids.
E. Cap Sheet: Schuller #72 GlasKap (or equal)
Before starting application of the cap sheet, cut it into 13' to
18' lengths and allow it to flatten. This is especially important
in cold weather to assure good contact with the asphalt.
Starting at the low edge (on slopes up to 2") or at the side
opposite of the prevailing wind (on slopes over 2"), apply one
layer of cap sheet, lapping each layer over the selvage edge of
the preceding one. Lap the end 6" over the preceding felt. Mop
the full width under each layer with asphalt at the rate of 25
lbs. Per 100 sq. feet, making sure that all edges are well sealed
with the cap sheet uniformly set without voids into the hot
asphalt.
F. Angle reinforcement: Items 1 through 5 below shall be done with
multi-layer felts, set in hot asphalt with one layer SBS modified
reinforcement sheet set in hot asphalt.
<PAGE>
1. Curbs and walls with metal counterflashing, apply one layer
of Reinforced Base Flashing in the angle formed by the roof
and vertical surface. Base flashing shall be set in a solid
bed of asphalt and nailed at 4" centers adjacent to the top
edge.
2. Voids are not acceptable. Rub materials into all angles.
3. Coat any concrete surfaces with primer and allow to dry.
4. At low curbs, wrap flashing over top of curb. Extend down
over cant area onto roof surface at least 4".
5. At air conditioning housing curbs, which are to receive
roofing on top of housing, run flashing from at least 4" on
roof surface up cant area and over curb. Extend felts over
curb at least 4" and stagger felts, top felt overlapping
bottom felt by at least 4".
G. Sheet Metal:
All sheet metal which shall have contact and be bonded to any
roofing material shall be primed and allowed to dry before
applying roofing materials.
H. Vent Pipe Flashing:
Metal roof jacks and other metal flashing with metal deck flanges
shall be removed, as necessary, prior to the installation of new
roofing. Contractor shall provide and install new jacks to
replace those damaged or otherwise deemed unserviceable. The new
jacks (lead only), either new or existing shall be installed as
follows: Install on top of completed membrane. The deck flange
shall be set in a solid bed of industrial roof cement (nailed if
over a nailable deck) and shall be covered with two collars of
roofing felt. Felts to extend 4" and 6" beyond the outside
dimension of the deck flange and extend to the inside of the base
of the protrusion. Felts to be set in a solid be of industrial
roof cent or hot asphalt.
I. Can Strip:
Provide new cant strip in angles of roof deck and
6
<PAGE>
curbs where present cant strip is unserviceable, or non-existent.
Fit flush at ends and to wall surface. Secure to deck with
adhesive or hot asphalt.
J. Nosing:
New 24 gauge galvanized metal nosing shall be installed as
necessary to the roof edge. Side laps to be set in industrial
roof cement.
K. Pitch Pans:
New sheet metal pitch pans shall be installed around all poles,
brackets, pipe supports, and other items which rest upon or are
attached to the roof deck. Pitch pans shall have dimensions at
least 2" larger than the dimensions of the pole, brackets, pipe
supports, etc. They shall have flanges not less than 3" wide
which shall be set on top of all roofing plies in a full bed of
industrial roof cement. The flange shall then be flashed with two
strips of felt set in hot asphalt. The top strip shall be wider
than that below by at least 3" on all sides. Pitch pans shall be
filled about 1/3 full with roof cement, and the balance with
asphalt. After the asphalt has cooled and settled, refill pitch
pans with roof cement and slope tops to the outside edge.
7
<PAGE>
EXHIBIT 21.1
List of Subsidaries
Restoration Hardware Blackhawk Incorporated
The Michaels Furniture Company, Inc.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report included in this Registration Statement
of Restoration Hardware, Inc. on Form S-1 of our report dated April 16, 1998
for Michael's Concepts in Wood, Inc., appearing in the Prospectus, which is
part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche llp
San Francisco, California
April 24, 1998
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