<PAGE>
As filed with the Securities and Exchange Commission on December 4, 1998
Registration No. 333-63527
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- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ROLLING PIN KITCHEN EMPORIUM, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 5719 31-1421571
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
No.)
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John D. Critser
President and Chief Executive Officer
Rolling Pin Kitchen Emporium, Inc.
4264 Winters Chapel Road, Building B 4264 Winters Chapel Road, Building B
Atlanta, Georgia 30360 Atlanta, Georgia 30360
(770) 457-2600 (770) 457-2600
(Address and Telephone Number of Principal Executive (Name, Address and Telephone Number of Agent for
Offices and Principal Place of Business) Service of Process)
</TABLE>
Copies To:
William E. Sudow, Esq. Jay M. Kaplowitz, Esq.
John K. Hughes, Esq. Arthur S. Marcus, Esq.
Brown & Wood LLP Gersten, Savage, Kaplowitz & Fredericks, LLP
815 Connecticut Avenue, N.W. 101 East 52nd Street, 9th Floor
Washington, D.C. 20006 New York, NY 10022
(202) 973-0600 (212) 752-9700
(202) 223-0485 (212) 980-5192
Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after the date this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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(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 delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Proposed Proposed
Number of Maximum Maximum Amount of
Shares to be Offering Price Aggregate Registration
Title of Each Class of Securities to be Registered Registered Per Share Offering Price(1) Fee
<S> <C> <C> <C> <C>
Class A Common Stock, $0.01 par value ............... 1,500,000 $ 7.00 $ 10,500,000 $ 3,098
Underwriters' Warrants(2) ........................... 150,000 $ 0.01 $ 1,500 $ 0(3)
Class A Common Stock, $0.01 par value(4) ............ 150,000 $ 11.55 $ 1,732,500 $ 511
Class A Common Stock, $0.01 par value(5) ............ 225,000 $ 7.00 $ 1,575,000 $ 465
Total ............................................... 2,025,000 $ 13,809,000 $ 4,074(6)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee, pursuant
to Rule 457(a) under the Securities Act of 1933, as amended.
(2) Represents warrants sold to the Representative of the Underwriters.
(3) None pursuant to Rule 457(g).
(4) Represents shares issuable upon exercise of the warrants to be issued to
the Representative of the Underwriters, which warrants have an exercise
price of $11.55 per share. See "Description of Securities -- Warrants."
(5) Represents shares issuable upon the exercise of the Underwriters' option to
cover over-allotments, if any.
(6) This amount was previously paid.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer of sale is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 4, 1998
PROSPECTUS
[GRAPHIC OMITTED]
1,500,000 shares of common stock
$6.00 to $8.00 per share
This prospectus relates to the offering of up to 1,500,000 shares of Class
A common stock, par value $.01 per share.
Shares of the predecessor company, Gaylord Companies, Inc., were traded on
the Nasdaq's SmallCap Market and OTC Bulletin Board under the symbol "GJCO."
Prior to filing for bankruptcy, shares of the predecessor company ceased
trading on Nasdaq's SmallCap Market. Effective August 12, 1998, the predecessor
company emerged from bankruptcy and ceased trading on the OTC Bulletin Board.
Application has been made to list the Class A common stock of the Company on
the Nasdaq SmallCap Market under the symbol "RPKE."
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
Price per share ......... $ $ $
Total(3) ................ $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
underwriters and other matters.
(2) Before deducting expenses payable by the company, estimated at $_______.
(3) The company has granted the underwriters a 30-day option to purchase up to
225,000 additional shares of common stock solely to cover over-allotments,
if any. If the underwriters exercise the option in full, the price to the
public will total $____, the underwriting discount will total $____ and
the proceeds to the company will total $_____. See "Underwriting."
The shares are being offered by the underwriters when, as and if received and
accepted by them, subject to prior sale, to withdrawal of the offer without
notice, to the approval of counsel and to certain other conditions.
NUTMEG SECURITIES, LTD.
December , 1998
<PAGE>
[Map depicting store locations]
CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
SHARES, INCLUDING PURCHASES OF SHARES TO MAINTAIN THEIR MARKET PRICE OR
PURCHASES TO COVER SOME OR ALL OF THE UNDERWRITERS' SHORT POSITION IN THE
SHARES.
<PAGE>
[Photographs of various store locations]
<PAGE>
Table of Contents
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Page
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Summary .................................................................................. 3
About Our Company ....................................................................... 3
Recent Bankruptcy of our Predecessor .................................................... 3
The Offering ............................................................................ 3
Common Stock ............................................................................ 3
Warrants Held by the Underwriter ........................................................ 3
Other Warrants .......................................................................... 3
Our Predecessor Entity Failed to Make Certain Required Securities Filings ............... 4
Where You Can Find More Information ..................................................... 4
Key Facts ................................................................................ 5
Summary Financial Information ............................................................ 6
RISK FACTORS ............................................................................. 7
Recent Bankruptcy of our Predecessor .................................................... 7
Our History of Losses and Recent Operating Losses ....................................... 7
Seasonal Variations in the Quality Cookware Industry Will Affect Our Revenues ........... 7
Risks Related to Our Acquistion Strategy; Unspecified Acquisitions ...................... 7
Need for Additional Capital for Acquisitions ............................................ 8
Difficulties Related to Integration of Acquired Companies ............................... 8
Competition in the Quality Cookware Industry May Affect Our Revenues and Market Position 8
Risks Associated with Our Cookware Store Franchises ..................................... 8
Lack of Written Contracts with Suppliers ................................................ 8
Dependence on Existing Leased Locations in Shopping Malls ............................... 9
Inability to Retain and Attract Key Executives .......................................... 9
Control by Current Officers and Directors; Relationship of Principal Stockholders ....... 9
Immediate and Substantial Dilution in the Value of Your Shares .......................... 9
Effects on Our Business If We Fail to be Year 2000 Compliant............................. 9
Our Broad Discretion in Application of Proceeds ......................................... 9
Certain Anti-Takeover Provisions in Our Charter and Bylaws;
Possible Future Issuances of Preferred Stock ........................................... 10
Our Predecessor Entity Failed to Make Certain Required Securities Filings ............... 10
Risks Associated with the Franchise Regulation of Our Cookware Store Franchises ......... 10
Negotiated Public Offering Price of the Common Stock .................................... 10
No Liquid Trading Market for Your Common Stock .......................................... 10
Potential Effects of Failure to List Common Stock on The Nasdaq SmallCap Market; Risks
of Penny Stock ........................................................................ 11
The Price of Our Stock May Fluctuate Which May Affect the Value of Your Shares .......... 11
Lack of Independent Director Approval of Certain Related Party Transactions ............. 11
Future Sales of Our Common Stock May Affect the Value of Your Shares .................... 11
Risks Associated with Forward-Looking Statements ........................................ 12
THE COMPANY .............................................................................. 13
USE OF PROCEEDS .......................................................................... 14
DIVIDEND POLICY .......................................................................... 14
CAPITALIZATION ........................................................................... 15
DILUTION ................................................................................. 16
PRICE RANGE OF COMMON STOCK .............................................................. 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................................... 18
Historical .............................................................................. 18
Overview ................................................................................ 18
Business and Operational Model of the Company ........................................... 18
Expansion ............................................................................... 19
Acquisition of Aropi .................................................................... 20
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i
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Page
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Franchise Operations .................................................................... 20
The Company ............................................................................ 20
Aropi, Inc. ............................................................................ 21
Liquidity and Capital Resources ........................................................ 22
Year 2000 Compliance ................................................................... 24
Treatment of Cost of Goods Sold ........................................................ 25
Seasonality ............................................................................ 25
BUSINESS ................................................................................. 26
The Company ............................................................................. 26
Industry Background ..................................................................... 26
Competition ............................................................................. 26
Strategy ................................................................................ 27
Reorganization of Predecessor ........................................................... 28
Acquisition of Aropi .................................................................... 29
Discontinued Operations ................................................................. 29
Properties .............................................................................. 30
Franchise Regulation .................................................................... 30
Trademarks .............................................................................. 30
Employees ............................................................................... 30
Legal Proceedings ....................................................................... 30
MANAGEMENT ............................................................................... 31
Executive Officers, Directors and Key Employees ......................................... 31
Board of Directors ...................................................................... 32
Executive Compensation .................................................................. 32
Summary Compensation Table .............................................................. 32
Stock Option Grants ..................................................................... 33
1998 Equity Incentive Plan .............................................................. 33
Employment Agreements ................................................................... 35
Indemnification of Officers and Directors ............................................... 35
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS ..................................... 36
The Home Retail Acquisition Corp. Junior Participation; The Merger ...................... 36
The Reorganization ...................................................................... 36
Other Transactions ...................................................................... 36
Control by Certain Directors ............................................................ 37
Advisory Agreement ...................................................................... 37
PRINCIPAL STOCKHOLDERS ................................................................... 38
DESCRIPTION OF SECURITIES ................................................................ 39
Common Equity Securities ................................................................ 39
Preferred Stock ......................................................................... 40
Registration Rights ..................................................................... 40
Warrants ................................................................................ 40
Transfer Agent and Registrar ............................................................ 42
SHARES ELIGIBLE FOR FUTURE SALE .......................................................... 42
UNDERWRITING ............................................................................. 43
LEGAL MATTERS ............................................................................ 44
EXPERTS .................................................................................. 44
ADDITIONAL INFORMATION ................................................................... 44
INDEX TO FINANCIAL STATEMENTS ............................................................ F-1
</TABLE>
ii
<PAGE>
SUMMARY
This summary highlights selected information from this document and may
not contain all of the information that is important to you. To understand the
specific terms of the common stock we are offering, you should carefully read
this document. It describes the company, its finances, and products. Federal
and state securities laws require that we include in this prospectus all the
important information that investors will need to make an investment decision.
We have not authorized anyone to provide you with information that is different
from what is contained in this prospectus.
About Our Company
We operate a chain of specialty retail stores for quality cookware and
serving equipment, cooking accessories and certain select food products as well
as cookbooks and food-related publications. We operate 19 company-owned stores
and 21 franchised locations under the trademarks The Cookstore and Rolling Pin
Kitchen Emporium, which are located primarily throughout the Midwest and
Southeast regions of the United States.
Our business is comprised of the cookware business of (i) our
predecessor entity that was organized in the State of Delaware on July 19,
1994, and operates four retail cookware stores in Ohio, and (ii) Aropi,
Incorporated, which operates 15 company-owned stores in eight states and 21
franchised stores in nine states. We acquired Aropi, Incorporated on August 21,
1998. See "Business."
Recent Bankruptcy of Our Predecessor
Our predecessor entity, Gaylord Companies, Inc., filed for a chapter 11
reorganization in bankruptcy on November 13, 1997 and emerged from bankruptcy
on August 12, 1998. During the reorganization, we sold our bookstore
operations, closed two of our cookware stores and brought in certain of the
current management. We incurred substantial losses in 1996 and 1997 and while
in bankruptcy during 1998. Since emerging from bankruptcy, we have continued to
incur losses. We cannot be certain that our future operations will be
profitable. We may, in fact, continue to incur losses for the foreseeable
future.
The Offering
We are selling shares of our common stock to raise capital in order to
open additional cookware stores, acquire existing cookware chains and for
general working capital.
Common Stock
Holders of the company's common stock are entitled to receive dividends
declared by the board of directors. Currently, we do not pay dividends and we
do not expect to pay dividends in the foreseeable future. Each holder of common
stock is entitled to one vote per share and has no preemptive or cumulative
voting rights. Prior to the offering, we had 1,522,041 shares of common stock
outstanding. After giving effect to the offering, there will be 3,022,041
shares of common stock outstanding.
Warrants Held by the Underwriter
We have issued warrants to purchase 150,000 shares of common stock to
Nutmeg Securities, Ltd., the lead underwriter of this offering. The exercise
price of the warrants is equal to 165% of the public offering price. The
warrants may be exercised at any time during a four year period that begins one
year from the effective date of this prospectus. These warrants include demand
and piggyback registration rights as well as anti-dilution provisions that
provide for adjustment to the exercise price and number of shares subject to
the warrants if certain events occur.
Other Warrants
We also have issued warrants to warrant holders of our predecessor
entity as required under the plan of reorganization. In addition, we have
issued warrants to our creditors in order to induce them to enter into
financing arrangements with us. In the aggregate, we have issued warrants to
purchase up to 518,754 shares of common stock.
3
<PAGE>
Our Predecessor Entity Failed to Make Certain Required Securities Filings
Prior to filing for bankruptcy, our predecessor entity failed to make
certain regular disclosure filings that such entity was required to make under
the Securities Exchange Act of 1934. Although we will resume compliance with
the Securities Exchange Act of 1934 once we are subject to this law, we may be
subject to various sanctions, disabilities and damages as a result of our
previous non-compliance.
Where You Can Find More Information
We will file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file at the Securities and Exchange Commission's public
ref-erence rooms in Washington, DC, New York, New York, and Chicago, Illinois.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Our filings are also
available to the public at the Securities and Exchange Commission's web site at
http://www.sec.gov.
Our principal executive offices are located at 4264 Winters Chapel Road,
Building B, Atlanta, Georgia 30360, and our telephone number is (770) 457-2600.
4
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KEY FACTS
<TABLE>
<S> <C>
Class A Common Stock Offered
To The Public .............. 1,500,000 shares
Total Shares Outstanding After
Offering ................... 3,022,041(1)
Use Of Proceeds .............. Acquisition of cookware store chains; opening new stores;
capital investment; refinance debt; working capital; and
general corporate purposes.
Nasdaq SmallCap Market
Symbol ..................... RPKE
</TABLE>
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(1) Excludes options, warrants, Class B common stock and 180,000 shares of
common stock reserved under the 1998 Equity Incentive Plan. See
"Description of Securities."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table depicts the summarized statement of operations and
balance sheet data of the company and Aropi, Incorporated on a historical, pro
forma and as adjusted basis. The information is only a summary and does not
provide all of the information contained in the actual financial statements,
including the related notes, beginning at page F-1 and the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Statement of Operations Data:
<TABLE>
<CAPTION>
Rolling Pin Kitchen
Pro forma(2) Emporium, Inc.
-------------------------------- ---------------------
Period From
Nine Months August 12, 1998 The Gaylord
Companies, Inc.
ended Year Ended through -------------------------------
Years ended December 31,
September 30, December 31, September 30, -------------------------------
1998 1997 1998 1997 1996
--------------- -------------- --------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues .............. $ 5,433,345 $ 10,122,079 $ 728,767 $ 3,724,157 $3,497,940
Cost of goods sold ........ 3,125,657 6,740,176 436,628 3,508,874 2,899,932
Gross profit (loss) ....... 2,307,688 3,381,903 292,139 215,283 598,008
Operating expenses ........ 3,896,609 4,718,050 1,123,642 1,414,976 458,457
Other income
(expenses) .............. (1,516,861) (1,208,517) (383,873) (191,687) (177,394)
Loss from continuing
operations .............. (3,105,782) (2,945,313) (1,215,376) (1,792,029) (37,843)
Loss per share ............ (1.85) (1.77) (.72)
</TABLE>
Aropi, Incorporated
Years ended June 30,
-----------------------------
1998 1997
------------- -------------
Net revenues .......................... $6,310,362 $6,572,905
Cost of goods sold .................... 3,134,668 3,407,466
Gross profit (loss) ................... 3,175,694 3,165,439
Operating expenses .................... 3,100,287 3,188,113
Other income (expenses) ............... (90,126) 65,968
Income (loss) from operations ......... (14,719) 43,294
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------
Actual As Adjusted(1)(2)(3)
---------------- --------------------
<S> <C> <C>
Working Capital (Deficit) .............. $ (2,335,490) $ 4,183,260
Total Assets ........................... 5,277,982 11,026,732
Total Liabilities ...................... 6,156,588 4,669,088
Stockholders' Equity (Deficit) ......... (878,606) 6,357,644
</TABLE>
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(1) Adjusted for the sale of the 1,500,000 shares of Class A common stock
offered hereby (less underwriting discount and estimated offering
expenses) and the application of the net proceeds therefrom.
(2) Adjusted to reflect the acquisition of Aropi and the adoption of fresh
start accounting as if both had occurred on January 1, 1997. Adjustments
include amortization of the goodwill arising in the acquisition, the
amortization of the reorganization value in excess of amounts allocable to
identifiable assets which was recorded upon the adoption of fresh start
accounting, the interest expense on the additional debt arising from the
acquisition and the amortization of debt discount and financing costs.
(3) Adjusted to reflect the payment of $350,000 for removal of puts on warrants
recorded at $550,000, and an associated gain of $200,000.
6
<PAGE>
RISK FACTORS
The shares of common stock offered by this prospectus are speculative and
involve a high degree of risk of loss. In addition to the other information in
this prospectus, the following factors should be considered carefully in
evaluating an investment in the common stock offered hereby. This prospectus
contains forward-looking statements that involve risks and uncertainties. The
company's actual results may differ materially from the results discussed in
the forward-looking statements. The factors that may cause such a difference
include, but are not limited to, those discussed below in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Prior to making an investment, you should carefully read this
entire prospectus and consider the following risk and speculative factors.
Recent Bankruptcy of Our Predecessor
Our predecessor entity, The Gaylord Companies, Inc., filed for a chapter
11 reorganization in bankruptcy on November 13, 1997 and emerged from
bankruptcy on August 12, 1998. During the reorganization, we sold our bookstore
operations, closed two of our cookware stores and brought in certain of the
current management. We incurred substantial losses in 1996 and 1997 and while
in bankruptcy during 1998. Since emerging from bankruptcy, we have continued to
incur losses. We cannot be certain that our future operations will be
profitable. We may, in fact, continue to incur losses for the foreseeable
future.
Our History of Losses and Recent Operating Losses
The company had a net working capital deficiency of $2,335,490 and an
operating loss of $1,215,376 as of September 30, 1998. The company had an
accumulated deficit of $999,218 and $4,274,492 for the years ended December 31,
1996 and 1997, respectively. As of September 30, 1998, the company had a
stockholders' deficit of $878,606 and a negative cash flow from operations of
$332,597. For the year ended December 31, 1997, the company had negative working
capital of $1,650,154 and a negative capital deficit of $1,291,704. The company
has continued to generate losses since emerging from bankruptcy. The company is
likely to continue to generate losses until such time as it achieves higher
sales levels. There can be no assurances that we will achieve profitability in
the near future or, if so, the timing or amount thereof. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
Seasonal Variations in the Quality Cookware Industry Will Affect Our Revenues
Our business is subject to seasonal variations. Historically, a
significant portion of our net sales and net earnings have been realized during
the period from October through December, and levels of net sales and net
earnings have generally been significantly lower during the period from January
through September. This is the general pattern associated with similar retail
industries, including those companies in our industry segment. If for any
reason our sales were to be substantially below seasonal norms during the
October through December period, our annual results of operations could be
materially and adversely affected. Unfavorable economic conditions affecting
retailers generally during the Christmas selling season in any year could
materially and adversely affect our results of operations for the year. We must
also make decisions regarding how much inventory to purchase well in advance of
the season in which it will be sold, especially for the Christmas season.
Significant deviations in actual demand from the projected demand for products
can have an adverse affect on our sales and profitability.
Risks Related to Our Acquisition Strategy; Unspecified Acquisitions
We plan to acquire retail cookware businesses, such as the recent
acquisition of Aropi, Incorporated, and other companies complementary to our
core business. The success of any such acquisitions will depend on many
factors, including our ability to identify suitable acquisition candidates and
investigate their business prospects; negotiate the appropriate price to be
paid for acquired companies; the ability to obtain financing on acceptable
terms; and our ability to effectively integrate the acquired businesses into
our operations. Although we plan to make acquisitions, we may not complete any
future acquisitions. Presently, we do not have any agreements with any
acquisition candidates although we have had preliminary discussions with
representatives of various potential acquisition candidates. Our stockholders
do not have the right to approve future acquisitions and will not
7
<PAGE>
have the opportunity to review the financial statements of potential
acquisition candidates prior to the consummation of any acquisition. No
assurances can be given that we will be able to operate acquired businesses
profitably or otherwise successfully implement our expansion strategy. No
assurance can be made that the profits expected from any of the companies
acquired in the future will justify our investment in them.
Need for Additional Capital for Acquisitions
We expect to finance future acquisitions and planned internal growth
through financing arrangements or the issuance of equity securities. We have no
commitment for any debt or equity financing, and we may not be able to obtain
sufficient credit on favorable terms. If we do not obtain additional financing
when required, we may be required to modify, delay, or abandon some or all of
our development and expansion plans, which may have a material adverse effect
on our business and negatively impact the value of our outstanding securities.
We plan to use $1,000,000, or 13.55%, of the proceeds from the offering for the
acquisition of existing retail cookware businesses. See "Use of Proceeds."
Further, the issuance of additional equity securities could have a
significant dilutive effect on the value of the shares held by the Company's
stockholders, including stockholders that acquired their shares in the
offering. Such acquisitions may result in increased costs, significant
goodwill, increases in depreciation and amortization expenses, and could also
result in write downs of purchased assets. All of these factors could adversely
affect our operating results in future periods. In the event that our plans for
expansion are not successful, our business will be materially adversely
affected.
Difficulties Related to Integration of Acquired Companies
We will attempt to (i) hire, train, and integrate qualified employees, and
(ii) adapt our management information and other operational systems to the
extent necessary to grow in a profitable manner. Integrating diverse operations
of different companies may result in delays and complications and may be
costly. Although we believe our systems to be adequate for our current
purposes, the acquisition of new companies will require modification,
improvement or replacement of our current computer networks, accounting and
other operational systems. No assurance can be made that we will be able to
successfully integrate new companies into our company.
Competition in the Quality Cookware Industry May Affect Our Revenues and Market
Position
We face significant competition from companies that are similarly
specialized and also from companies that are involved in more generalized
retailing. We also face competition from other companies, such as catalogue
companies, which have added or may add cookware to existing or future product
lines. Many of our existing and potential competitors are larger and have
significantly greater financial, marketing, technological, and other resources
than we possess. We may not be able to compete effectively. See
"Business--Competition."
Risks Associated with Our Cookware Store Franchises
Our ability to operate our existing stores on a profitable basis is
dependent to some degree on the continued success of our franchised cookware
stores. If the franchisees do not provide the service required pursuant to
their franchise agreements with the company or experience an unfavorable change
in public perception, we may be materially adversely effected. Further, a
decline in the operations or profitability of the franchise cookware stores
could adversely affect our revenues since we derive a portion of our revenues
from certain minimum franchise fees and fees based upon a percentage of the
revenues of franchise cookware stores. See "Business--Strategy;" "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Franchise Operations."
Lack of Written Contracts with Suppliers
We currently purchase products from over 300 suppliers. We do not have any
written contracts with our suppliers. If we cannot maintain our existing
relationships with these suppliers on terms similar to those currently
available, or if we experience any delay or difficulty in obtaining alternative
suppliers on comparable terms, then there could be an adverse affect on our
business.
8
<PAGE>
Dependence on Existing Leased Locations in Shopping Malls
We currently lease all of our properties. We may not be able to comply
with the provisions of the current leases or renegotiate favorable lease terms
as they expire. Once the current leases expire, if we cannot renew the existing
leases, we may not be able to find favorable store sites for expansion or
negotiate leases on satisfactory terms and conditions for new sites. See
"Business--Properties."
Inability to Retain and Attract Key Executives
Our success depends upon the contributions of our senior management. We
believe that our future success will depend upon our ability to attract,
motivate, and retain highly skilled managerial, and marketing personnel. The
loss of our key executives or the inability to hire and retain qualified
personnel could have an adverse effect upon the company's business. The company
intends to carry key man life insurance on its chief executive officer, but no
other executive officers or technical personnel will be covered under such a
policy. See "Management--Executive Officers, Directors and Key Employees."
Control by Current Officers and Directors; Relationship of Principal
Stockholders
Certain related persons currently own an aggregate of approximately 40% of
our common stock, 20% after this offering, and all but two of our directors are
or have been affiliated. As a result, Messrs. Danovitch, Lucaci, Dukoff and
Czarnecki will be in a position to exercise significant influence over the
company and the election of our directors and otherwise essentially control the
outcome of all matters requiring stockholder approval. Global Strategic
Holdings, Inc. also owns an aggregate of approximately 40% of our common stock
prior to this offering and 20% after this offering. Thomas Tuttle, a director of
the company, is the investment advisor to Global Strategic Holdings, Ltd.
Additionally, we have entered into an advisory agreement with DDG Management
Services Corp., that will give it a significant advisory role with respect to
certain aspects of our business. David Danovitch and George Lucaci, directors of
the company, are also directors of DDG Management Services Corp. In 1998, Mr.
Lucaci and Donald Jackson, one of the founders of the company, entered into
a consent agreement with NASD Regulation, Inc. in which they consented to a
finding that they violated certain regulatory guidelines and rules in connection
with a transaction unrelated to the company or this offering. See "Management --
Executive Officers, Directors and Key Employees" and "Certain Relationships and
Related Party Transactions."
Immediate and Substantial Dilution in the Value of Your Shares
After giving effect to the sale of the 1,500,000 shares of common stock
under this offering at a price of $6.00 per share and the application of the
net proceeds therefrom, there will be a total of 3,022,041 shares of common
stock outstanding with a net tangible book value of $1.73 per share. This would
represent an immediate increase in net tangible book value of $3.05 to existing
shareholders and an immediate dilution of $4.27, or 71.2%, per share to new
investors. In addition, the price paid by existing shareholders was $1.11 per
share compared to the price paid by the new investors of $6.00 per share. See
"Dilution."
Effects on Our Business If We Fail to be Year 2000 Compliant
While we believe that our core operating and computer systems are fully
year 2000 compliant, there can be no assurance until such time that all systems
will then function adequately. Additionally, we believe that if certain other
non-computer systems (such as time clocks, alarm systems and facsimile machines)
are not year 2000 compliant by the end of 1999, that it will not have a material
adverse effect on our operations. There can be no assurance until such time,
however, that any such noncompliance will not have a material adverse effect on
such operations. We believe that if some of our systems fail because of year
2000 problems, we may experience significant delays in our ability to perform
certain functions that may have a material adverse effect on our operations. We
will continue to review and assess these risks and develop appropriate
contingency plans and procedures to minimize the effects of such scenarios. See
"Year 2000 Compliance -- Management's Discussion and Analysis of Results of
Operations."
Our Broad Discretion in Application of Proceeds
Approximately 19% of the net proceeds of the offering will be applied to
working capital and general corporate purposes. Accordingly, we will have broad
discretion over the use of the proceeds. Although we may utilize a portion of
the net proceeds for potential acquisitions of complementary businesses, as of
the date hereof, the company has not identified any particular acquisition
targets. See "Use of Proceeds."
Certain Anti-Takeover Provisions in Our Charter and Bylaws; Possible Future
Issuances of Preferred Stock
Our amended and restated certificate of incorporation and bylaws and
Delaware General Corporation Law contain certain provisions that may have the
effect of inhibiting a non-negotiated merger or other business combination
involving the company. Such provisions are intended to encourage any person
interested in acquiring us to negotiate with and obtain the approval of the
board of directors in connection with any such transaction. These provisions
include a staggered board of directors, undesignated preferred stock,
super-majority voting provisions and the application of the Delaware General
9
<PAGE>
Corporation Law. Certain of these provisions may discourage a
future acquisition of our company that is not approved by the board of
directors in which stockholders might receive a premium over the market value
for their shares. As a result, stockholders who might desire to participate in
such a transaction may not have the opportunity to do so.
The board of directors has the power to designate the issuance of up to
1,000,000 shares of undesignated preferred stock. The rights and preferences
for any series or class may be set by the board of directors at its sole
discretion and without the approval of the holders of common stock. The rights
and preferences of any such preferred stock may be superior to those of the
common stock, thus adversely affecting the rights of the holders of common
stock. The company currently has 320 shares of preferred stock outstanding
which resulted from the conversion of debt instruments that were privately
placed while we were in bankruptcy. While we have no present intention to issue
any additional shares of preferred stock, any such issuance could be used to
discourage, delay, or make more difficult a change in control of the company.
In addition, such preferred stock may have other rights, including economic
rights, senior to the common stock. As a result, the issuance of additional
shares of preferred stock could decrease the market value of the common stock.
See "Description of Securities--Preferred Stock."
Our Predecessor Entity Failed to Make Certain Required Securities Filings
Prior to filing for bankruptcy, our predecessor entity failed to make
certain regular disclosure filings that such entity was required to make under
the Securities Exchange Act of 1934. Although we will resume compliance with
the Securities Exchange Act of 1934 once we are subject to this law, we may be
subject to various sanctions, disabilities and damages as a result of our
previous non-compliance.
Risks Associated with the Franchise Regulation of Our Cookware Store Franchises
As a franchisor, we are subject to federal and state regulation in the
states in which we offer franchises or where franchised stores are currently
operating. Federal regulations require that we provide each prospective
franchisee with a disclosure document that provides information regarding the
company and the relevant provisions of the franchise agreement and other
ancillary contracts. In addition, certain state regulations require that we be
registered or be exempt from the applicable registration requirements. Federal
and state franchising laws prohibit certain deceptive trade practices and, in
some cases, impose fairness and anti-discrimination standards on the company.
We believe that the company is currently in compliance with all such federal
and state franchise regulations. If at any time we are found not to be in
compliance with such regulations, we may be subject to sanctions, disabilities
and damages that may have a material adverse effect on our business. See
"Business--Franchise Regulation."
Arbitrary Detemination of Public Offering Price of the Common Stock
The public offering price of the common stock has been arbitrarily
determined through negotiations between the company and the underwriter. The
public offering price bears no relationship to earnings, asset values, book
value or any other recognized criteria of value. See "Underwriting."
No Liquid Trading Market for Your Common Stock
Our common stock currently has no liquid public trading market and we
cannot be certain that a regular public trading market for our common stock
will develop or, if developed, be sustained. As a result, you may not be able
to resell any shares of our common stock that you purchase in the offering.
Potential Effects of Failure to List Common Stock on The Nasdaq SmallCap
Market; Risks of Penny Stock
In the event that we are unable in the future to satisfy the Nasdaq
SmallCap Market listing requirements, trading would be conducted in the pink
sheets or on the OTC Bulletin Board. In the absence of the common stock being
quoted on the Nasdaq SmallCap Market, trading of the common stock would be
covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934 for
non-Nasdaq and non-exchange listed securities. Under this rule, broker-dealers
that recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the
10
<PAGE>
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per share. If the
common stock were subject to the regulations applicable to penny stocks, the
market liquidity for the securities would likely be reduced by limiting the
ability of broker-dealers to sell the securities and the ability of
stockholders to sell their securities in the secondary market. There is no
assurance that trading in our common stock will not be subject to these or
other regulations that would adversely affect the market for such securities.
The Price of Our Common Stock May Fluctuate Which May Affect the Value of Your
Shares
From time to time, there may be significant volatility in the market price
of our common stock. Our quarterly operating results, changes in earnings
estimated by analysts, if any, changes in the general conditions of the quality
cookware industry, the economy or financial markets, or other developments
affecting our business could cause the market price of our common stock to
fluctuate substantially. In addition, in recent years the stock market has
experienced significant price and volume fluctuations. This volatility has had
a significant effect on the market prices of securities issued by many
companies for reasons unrelated to their operating performance.
Lack of Independent Director Approval of Certain Related Party Transactions
Upon emerging from bankruptcy, there were no independent directors
represented on our board of directors when the company entered into an advisory
agreement with DDG Management Services Corp. or a management agreement with
Deltennium Consulting, Inc. Messrs. Danovitch and Lucaci, directors of the
company, are also directors of DDG Management Services Corp. and Mr. Czarnecki,
the chairman of our board of directors, is also the chairman of the board of
directors of Deltennium Consulting, Inc. See "Certain Relationships and Related
Party Transactions."
Future Sales of Our Common Stock May Affect the Value of Your Shares
Our sale of substantial amounts of common stock in the public market
following this offering could lower the market price of our common stock. Of
the 3,022,041 shares of common stock to be outstanding after this offering
(assuming no exercise of outstanding options, warrants, conversion of the Class
B common stock or the over-allotment option), 1,500,000 shares will be freely
tradeable without restriction. Upon expiration of lock-up agreements entered
into by our officers, directors, and stockholders prior to the offering, an
additional 1,383,691 shares will become eligible for sale 13 months after the
closing of this offering, subject to the provisions of Rule 144. In addition,
the 138,350 shares of common stock held by certain stockholders that acquired
their shares as creditors of our predecessor entity pursuant to the plan of
reorganization are subject to certain registration rights as provided by the
plan of reorganization. See "Shares Eligible for Future Sale."
In addition, we intend to file a registration statement on Form S-8 with
respect to our common stock issuable upon exercise of options under the 1998
Equity Incentive Plan. The 1998 Equity Incentive Plan authorizes the issuance
of options for up to 180,000 shares of common stock. Currently, no options have
been issued under the 1998 Equity Incentive Plan. See "Management--1998 Equity
Incentive Plan." Upon filing of such registration statement, the holders of
such options may, subject to vesting requirements including certain performance
targets, exercise and sell their shares immediately without restriction, except
affiliates who are subject to certain volume limitations and manner of sale
requirements of Rule 144. See "Shares Eligible for Future Sale." Holders of
warrants to purchase 466,181 shares of our common stock are entitled to
registration rights with respect to such shares. Upon registration, such shares
may be sold in the market without limitation. In addition, pursuant to the plan
of reorganization the Company's predecessor has granted warrants to purchase
52,573 shares of common stock, exercisable at a price of $11.57 per share, to
the holders of all of the then outstanding warrants of such predecessor entity.
These warrants do not contain registration rights. See "Description of
Securities--Registration Rights." Sales of such shares of our common stock may
decrease the market price for the common stock. See "Underwriting."
Risks Associated with Forward-Looking Statements
This prospectus contains certain statements that are considered
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
11
<PAGE>
Act of 1934. Those statements include, among other things, the discussions of
our business strategy and expectations concerning developments in the quality
cookware industry, our market position, future operations, ability to grow
through making acquisitions, margins and profitability, and liquidity and
capital resources. Investors are cautioned that reliance on any forward-looking
statement involves risks and uncertainties, and that although we believe that
the assumptions on which the forward-looking statements contained herein are
reasonable, any of those assumptions could prove to be inaccurate, and as a
result, the forward-looking statements based on those assumptions also could be
incorrect. The uncertainties in this regard include, but are not limited to,
those identified in the risk factors discussed herein. In light of these and
other uncertainties, the inclusion of a forward-looking statement herein should
not be regarded as a representation by us that our plans and objectives will be
achieved.
12
<PAGE>
THE COMPANY
Rolling Pin Kitchen Emporium, Inc. (together with its wholly owned
subsidiaries, the "Company") operates a chain of specialty retail stores for
quality cookware and serving equipment, cooking accessories and certain select
food products as well as cookbooks and food-related publications. The Company
operates 19 Company-owned stores and 21 franchised locations under the
trademarks The Cookstore and Rolling Pin Kitchen Emporium, which are located
primarily throughout the Midwest and Southeast regions of the United States.
The Company's business is comprised of the cookware business of (i) its
predecessor entity, which was organized under the name The Gaylord Companies,
Inc. in Delaware on July 19, 1994 (the "Predecessor Entity"), and was
reorganized and renamed Home Retail Holdings, Inc. during the bankruptcy
reorganization pursuant to Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") that was completed on August 12, 1998 (the "Reorganization")
and which operates four retail cookware stores in Ohio, and (ii) Aropi,
Incorporated, an Iowa corporation ("Aropi"), which operates 15 Company-owned
stores in eight states and 21 franchised stores in nine states. The Company
acquired Aropi on August 21, 1998. On September 15, 1998, the Company changed
its name from Home Retail Holdings, Inc. to Rolling Pin Kitchen Emporium, Inc.
See "Business."
The Company's goal is to build a consolidated enterprise with national
market reach through the acquisition and integration of independent quality
cookware businesses, the opening of new cookware stores in large markets, and
developing franchised cookware stores in targeted markets throughout the United
States. Although the Company has had preliminary discussions with
representatives of certain potential acquisition candidates, it currently does
not have any agreement with any other company with regard to any acquisitions.
The Company's stores range in size from approximately 1,600 square feet to
3,300 square feet and operate in regional retail malls. Each store offers a
wide range of products, from over 300 vendors in 12 distinct categories
including accessories, bakeware, books, cookware, cutlery, electronics, food,
furniture, gadgets, gifts, tableware and textiles. The Company intends to use
its existing stores as the basic store design prototype for most of its
anticipated expansion through Company-owned and franchised locations. The
Company has four stores currently operating under The Cookstore trademark in
Ohio and recently acquired Aropi which has 15 Company-owned stores operating
under the Rolling Pin Kitchen Emporium trademark in Alabama, Florida, Georgia,
Kentucky, Louisiana, South Carolina, Tennessee, and Virginia and 21 franchised
stores operating under the Rolling Pin Kitchen Emporium trademark in Arkansas,
Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South Carolina, and
Tennessee. The Company expects to convert the four Company-owned stores in Ohio
currently operating under The Cookstore trademark to the Rolling Pin Kitchen
Emporium trademark in the near future.
The Company's principal executive offices are located at 4264 Winters
Chapel Road, Building B, Atlanta, Georgia 30360.
13
<PAGE>
USE OF PROCEEDS
If all 1,500,000 shares (the "Shares") of the Company's Class A Common
Stock (the "Common Stock") offered pursuant to this prospectus (the
"Prospectus") are sold (the "Offering"), the Company will receive gross
proceeds of approximately $9,000,000 (assuming the public offering price is
$6.00, and assuming the over-allotment option is not exercised). If the
underwriters ("Underwriters") exercise the over-allotment option, the Company
will receive an additional $1,575,000. The estimated net proceeds of $7,380,000
were determined after deduction of all commissions, discounts and expenses paid
to the Underwriters (estimated to be $1,170,000) and after all expenses of the
Offering (estimated to be $450,000). Pending the uses listed below, the net
proceeds will be invested in short-term, interest-bearing, investment grade
securities.
The Company intends, in the following order of priority, to use the net
proceeds from this Offering approximately as follows:
<TABLE>
<CAPTION>
Amount Percentage
------------- -----------
<S> <C> <C>
Expansion of Business Operations
Opening of New Stores(1) ..................................... $2,250,000 30.49%
Acquisition of Existing Chains ............................... 1,000,000 13.55%
Expenses Associated with Selling New Franchises .............. 250,000 3.39%
Expand Alternative Distribution Channels ..................... 600,000 8.13%
---------- ------
Total -- Expansion of Business Operations ..................... $4,100,000 55.56%
Repayment of a portion of Existing Indebtedness(2)
Repayment of Interim Financing ............................... $ 562,500 7.62%
Paydown of Amounts Owed to Greenfield ........................ 593,750 8.05%
---------- ------
Total -- Repayment of Existing Indebtedness ................... $1,156,250 15.67%
---------- ------
Working capital and general corporate purposes ................ 1,430,000 19.38%
---------- ------
Redemption of Convertible Series A Preferred Stock(3) ......... $ 343,750 4.65%
Termination of Redemption Provisions of Certain
Warrants(4)................................................... $ 350,000 4.74%
TOTAL ......................................................... $7,380,000 100.00%
========== ======
</TABLE>
- ------------
(1) Assumes that 9 stores are opened over the next 18 months at an average cost
of $250,000 per store (including costs to stock inventory).
(2) The proceeds will be used to repay a portion of existing indebtedness with
Greenfield Commercial Credit, L.L.C. ("Greenfield") which bears interest
at three percentage points over the Prime Rate as published in the Wall
Street Journal and the aggregate amounts of $562,500 due to Gabledon, Ltd.
and Barajay, Inc., which includes principal of $500,000 plus accrued
interest of $62,500 during the term of the note. The $562,500 represents
the entire balance due to Gabledon, Ltd. and Baraja, Inc. Amounts due to
Liberty Bidco Investment Corporation ("Bidco") under that certain Business
Loan Agreement With Covenants, dated as of August 12, 1998, by and between
the Company and Bidco, as such agreement has been amended by that certain
First Amendment, dated August 20, 1998, by and between such parties (the
"First Amendment"), and as further amended by the Second Amendment, dated
November 1, 1998, by and between such parties (as so amended the "Loan
Agreement") are expected to be refinanced subsequent to the completion of
this Offering. The outstanding balance due Greenfield after the
application of the $593,750 is expected to be refinanced. The existing
indebtedness with Greenfield and Bidco was obtained to finance the
acquisition of Aropi in August 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) The Company will redeem 275 shares of Convertible Series A Preferred Stock
held by the Delacroix Foundation, Ltd. at the time of the Offering for a
redemption premium of 25% over the $1,000 par value of such shares.
(4) Upon the consummation of the Offering, Bidco will receive $250,000 and
Greenfield will receive $100,000 as consideration for the termination of
redemption provisions in their warrants.
DIVIDEND POLICY
Holders of the Common Stock are entitled to dividends only, as and if,
declared by the Company's Board of Directors, out of funds legally available
therefor. The Company has not yet paid any dividends and does not expect to do
so in the foreseeable future. The Company intends to use all retained earnings
for working capital and to finance the anticipated growth and expansion of its
business.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998: (i) on an actual basis; and (ii) on an adjusted basis,
giving effect to the proceeds and use of proceeds from the sale of the Common
Stock the Company offered pursuant to this Prospectus after deducting
underwriting discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------
Actual As Adjusted
--------------- ---------------
<S> <C> <C>
Long term debt less current portion(1) ................ $ 0 $ 0
Put option on Warrants ................................ 550,000 0
------------ ------------
Stockholders' equity:
Cumulative Preferred Stock, 1,000,000 shares authorized
320 issued and outstanding (actual) and 45,000 shares
(as adjusted); redeemable, convertible and bearing a
liquidation preference of $1,000 per share(2)......... 240,000 45,000
Class A Common Stock, par value $.01 per share,
20,000,000 shares authorized; 1,522,041 shares issued
and outstanding actual; 3,022,041 shares issued and
outstanding as adjusted(3)(4) ........................ 15,220 30,220
Class B Common Stock, par value $.01 per share,
154,951 shares issued and outstanding actual pro forma
and pro forma as adjusted(4) ......................... 1,550 1,550
Additional Paid-in Capital ............................ 80,000 7,445,000
Accumulated deficit (5) ............................... (1,215,376) (1,164,126)
------------ ------------
Total stockholders equity (deficit) ................... (878,606) 6,357,644
------------ ------------
Total capitalization .................................. $ (38,606) $ 6,357,644
============ ============
</TABLE>
- ------------
(1) As of September 30, 1998, the current portion of obligations under long
term debt was approximately $4,020,000 (net of discount of $550,000).
(2) Includes a discount of $80,000 (Actual), which is written off as a
preferred stock dividend (As Adjusted) with the preferred stock's initial
convertibility due to the Offering and reflects the redemption of 275
shares of Convertible Series A Preferred Stock for $343,750 with proceeds
from the Offering with the $68,750 excess of consideration paid over the
face amount redeemed charged as a preferred stock dividend.
(3) Excludes (i) 92,595 shares of the Common Stock subject to warrants granted
to Bidco, exercisable at $0.01 per share (the "Bidco Warrants"), 40,602
shares of Common Stock subject to warrants granted to Bidco, exercisable
at 165% of the public offering price (the "New Bidco Warrants"), 40,602
shares of Common Stock subject to warrants granted to Greenfield,
exercisable at 165% of the public offering price (the "Greenfield
Warrants"), 52,573 shares of the Common Stock subject to warrants granted
to all of the holders of the outstanding warrants of the Predecessor
Entity pursuant to the Plan of Reorganization, exercisable at $11.57 per
share (the "New Warrants"), 29,261 shares of the Common Stock subject to
warrants granted to the holders of all of a certain class of securities of
the Predecessor Entity, exercisable at 80% of the public offering price
(the "Individual Warrants"), 8,875 shares of the Common Stock subject to
warrants granted to DLM Asset Management, Inc. and Spinnernet Financial
Systems, Ltd. exercisable at 165% of the public offering price (the
"Financing Warrants"), and 104,246 shares of the Common Stock subject to
warrants granted to JRP Consulting Corp. and Laux, Holmes & Company
exercisable at 165% of the public offering price (the "Other Financing
Warrants"); (ii) 180,000 shares of the Common Stock reserved for issuance
pursuant to the 1998 Equity Incentive Plan; (iii) the exercise of the
Underwriters' over-allotment option; (iv) 154,551 shares of the Common
Stock issuable upon contingent conversion of the outstanding Class B
Common Stock; and (v) 150,000 shares of the Common Stock subject to
warrants granted to the Underwriters, exercisable at 165% of the public
offering price (the "Underwriters' Warrants"). See "Description of
Securities."
(4) The Class B Common Stock automatically converts into shares of Common Stock
upon the occurrence of certain events. See "Description of Securities."
(5) Adjusted to reflect the payment of $350,000 for removal of puts on warrants
recorded at $550,000, and an associated gain of $200,000.
15
<PAGE>
DILUTION
As of September 30, 1998, there were 1,522,041 shares of Common Stock
outstanding, having a negative net tangible book value per share of
approximately $(1.32). Net tangible book value per share represents the amount
of the Company's total tangible assets less its total liabilities, divided by
the number of shares of the Company's Common Stock outstanding.
After giving effect to the sale of the 1,500,000 shares of Common Stock
under this Offering at a price of $6.00 per share and the application of the
net proceeds therefrom (but assuming none of the options, warrants or shares of
Class B Common Stock are exercised), there would be a total of 3,022,041 shares
of Common Stock outstanding with a net tangible book value of approximately
$1.73 per share. This would represent an immediate increase in net tangible
book value of $3.05 per share to existing stockholders and an immediate
dilution of $4.27 per share to new investors. Dilution is determined by
subtracting net tangible book value per share after the Offering from the
amount paid by new investors per share of Common Stock. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share ............................... $ 6.00
Net tangible book value per share -- 09/30/98 actual ......... (1.32)
Increase attributable to new investors ....................... 3.05
------
Net tangible book value per share after Offering .............. 1.73
------
Dilution to new investors ..................................... $ 4.27
======
</TABLE>
The following table summarizes, on a pro forma basis, as of September 30,
1998, the difference between the existing stockholders and the new investors
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share:
Shares Purchased
<TABLE>
<CAPTION>
Total Average Price
Number Percent Consideration Per Share
----------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Existing stockholders ......... 1,522,041 50.4% $ 1,695,500 $ 1.11
New investors ................. 1,500,000 49.6% 9,000,000 6.00
--------- ----- ----------- ------
Total ......................... 3,022,041 100.00% $10,695,500
========= ====== ===========
</TABLE>
The foregoing table assumes: (i) no exercise of the Underwriters'
over-allotment option; (ii) no exercise of the Underwriters' Warrants to
purchase 150,000 shares of Common Stock, exercisable at 165% of the public
offering price; (iii) no exercise of the Bidco Warrants to purchase 92,595
shares of Common Stock, exercisable at $0.01 per share, (a) New Bidco Warrants
to purchase 40,602 shares of Common Stock, exercisable at 165% of the public
offering price, (b) Greenfield Warrants to purchase 40,602 shares of Common
Stock, exercisable at 165% of the public offering price, (c) New Warrants to
purchase 52,573 shares of Common Stock, exercisable at $11.57 per share, (d)
Individual Warrants to purchase 29,261 shares of Common Stock, exercisable at
80% of the public offering price, (e) Financing Warrants to purchase 8,875
shares of Common Stock, exercisable at 165% of the public offering price, or
(f) Other Financing Warrants to purchase 104,246 shares of Common Stock,
exercisable at 165% of the public offering price; (iv) no conversion of the
Class B Common Stock; and (v) no exercise of stock options outstanding after
September 30, 1998. As of September 30, 1998, there were 180,000 shares of
Common Stock reserved for issuance under the Incentive Plan. To the extent that
any shares of Common Stock are issued on exercise of any of these warrants or
conversion of the Class B Common Stock, or, possibly, options granted after
September 30, 1998, there will be further dilution to new investors. See
"Description of Securities."
16
<PAGE>
PRICE RANGE OF COMMON STOCK
Shares of the Predecessor Entity's common stock and redeemable warrants
were traded on the Nasdaq's SmallCap Market and OTC Bulletin Board under the
trading symbols "GJCO" and "GJCOW," respectively, and on the Boston Stock
Exchange under the symbols "GJC" and "GJCW," respectively. No other class of
the Predecessor Entity's common stock was publicly traded.
The following table sets forth the high and low sales prices for shares of
the Predecessor Entity's common stock on the Nasdaq's SmallCap Market and OTC
Bulletin Board for the periods indicated:
High Low
Sale Sale
---------- ----------
Fiscal year ended December 31, 1996
First quarter ................................... $ 5.00 $ 1.50
Second quarter .................................. 3.31 0.87
Third quarter ................................... 2.00 0.87
Fourth quarter .................................. 1.53 0.84
Fiscal year ended December 31, 1997
First quarter ................................... $ 1.44 $ 1.00
Second quarter .................................. 1.31 0.75
Third quarter ................................... 1.22 0.38
Fourth quarter .................................. 0.69 0.02
Fiscal year ended December 31, 1998
First quarter ................................... $ 0.28 $ 0.09
Second quarter .................................. 0.32 0.14
Third quarter (through August 12, 1998) ......... 0.23 0.13
On August 7, 1998, the last sale price for shares of the Predecessor
Entity's common stock as reported by the Nasdaq's OTC Bulletin Board was $0.17
per share. Since August 12, 1998, there has been no established public trading
market for the Predecessor Entity's common stock because the common stock was
exchanged for the Company's Common Stock. There is currently no trading market
for the Company's Common Stock. At November 25, 1998, there were approximately
343 holders of record of shares of Common Stock. See "Shares Eligible for
Future Sale."
17
<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 Financial Statements and related Notes contained elsewhere in this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in "Risk Factors."
Historical
The Company is the successor entity to the Predecessor Entity, which filed
for bankruptcy on November 13, 1997 and operated under bankruptcy protection
during the first half of 1998. The Predecessor Entity began as a family
business operating a chain of bookstores and eventually expanded the franchise
to include cookware stores as well. The various operations were consolidated in
a corporate entity under the name Gaylord Companies, Inc. in July 1994. In
October 1995, the Predecessor Entity effected a public offering of its common
stock. Although the Predecessor Entity had expected to raise approximately $4
million to $5 million in that offering to finance the expansion of its
operations, net proceeds to the Predecessor Entity totaled approximately $2
million. Management believes that the failure to secure an appropriate level of
capital, along with competitive pressures from larger bookstore competitors and
increased operating expenses as a result of the additional expenses of
operating as a public company, resulted in the bankruptcy.
In July 1998, the chain of bookstores previously operated by the Company
was sold in connection with a separate plan of reorganization. As a result, the
Company did not recognize a gain on the transfer of the bookstores in the
bankruptcy. Additionally, while the Predecessor Entity was in bankruptcy it
closed two stores with minimal costs since it occurred as part of the
reorganization process. In the future the Company expects that it will incur
significantly greater costs if it decides to close stores or discontinue
operations out of bankruptcy.
Overview
Notwithstanding the difficulties encountered by the Predecessor Entity,
management believes that the quality cookware industry has substantial growth
potential and that the cookware store business is an attractive business model
that is capable of generating consistent levels of sales and profitability.
Management believes that the potential market for the type of products
found in the Company's stores consists of nearly every home in the country.
According to estimates by the National Housewares Manufacturers Association,
annual retail sales of housewares are approximately $54 billion annually. The
higher-end segment (which the Company defines as its primary target market and
which includes such items as kitchen gadgets, tools, and accessories) captures
in excess of $1.8 billion in annual sales.
Management believes that this industry niche is an attractive opportunity
for several reasons:
o Historically this market provides for higher gross profit margins and
higher average ticket sales than the broader-based housewares market, which
includes many more highly competitive, lower-end products.
o There are presently a limited number of companies of significant size
that appear to have targeted this market in a similar manner and approach
to the market as the Company anticipates doing.
o There appears to be a growing segment of the general population that
has a keen interest in cooking. The Company's stores intend to cater to the
high-end niche of the industry.
Business and Operational Model of the Company
The Company's business plan is based on the premise that retail success
today is a function of the traditional tenants of location, price, and
promotion combined with a disciplined operational and logistical
infrastructure. The Company recognizes that same-store sales growth is
essential to the success of any retail enterprise and the Company will continue
to build a marketing organization that is responsive to retail trends in
general, and to local retail demand in particular. The Company's ability to
tailor each stores offerings to meet the
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demands of a local market is essential to the continued success of the stores.
Traditional merchandising techniques are complemented by a constant use of
creative marketing efforts that focus on making the consumer's visit to the
store as much an entertainment experience as a shopping task.
The Company's commitment to operational focus means that its success is
dependent in large part on its ability to manage information systems, inventory
levels, distribution logistics, controlling shrinkage of inventory, purchasing
efficiencies and effective customer service at the store level. In order to
achieve its goal, the Company expects to focus on operating efficiencies and
synergies by combining administrative functions. The Company plans to manage
costs through an expense control system that will require an analysis of the
cost benefits of each expenditure and thorough analysis of the decision process
for selecting new sites.
The Company is in the early stages of enhancing its operational and
control systems. The Company has recently begun implementing certain augmented
reporting and internal audit procedures necessary to assure the adequate flow
of information throughout the current organization and which will be capable of
serving the Company's needs as it grows. The Company plans to use a portion of
the proceeds of this Offering to improve its computer and point-of-sale systems
in order to more effectively implement these enhanced systems. The Company
believes that it will take approximately six months and cost approximately
$250,000 to fully establish and implement the planned operational and
informational systems. The Company believes that once implemented, the new
computer and reporting systems should serve its needs through its anticipated
growth during the next 12-18 months.
The Company believes its operating strategy will enable it to service its
anticipated debt levels after the Offering as well as enable the Company to
generate consistent levels of earnings in the future. In particular, the
Company intends to maintain tight expense controls, particularly at the
corporate level. Moreover, to improve operating margins, the Company plans to
rely on sources of revenue from franchise fees, revenues derived from Internet
sales, and revenues derived from enhanced catalogue operations. The Company
currently believes that the maintenance of a ratio of franchised stores to
Company-owned stores of 2:1 is an optimal ratio to cover corporate overhead
while expanding Company locations. Additionally, the Company intends to
optimize the number of product offerings or SKUs per store. The Company
believes that by reducing the number of SKUs per store, it will reduce the
level of capital necessary to maintain inventory, thereby increasing cash and
ultimately profitability. Management believes that as the Company's
profitability improves, the increased internally generated funds will enable it
to pay down a portion of existing debt to a level that will ultimately be
refinanced or paid off with the proceeds of an additional equity offering in
the future. No assurances can be given that the Company will be able to
successfully implement its operating strategy.
Expansion
The Company plans to engage in an expansion program involving the opening
of new stores in both existing and new markets and the expansion or replacement
of existing stores with larger stores in certain locations. The Company
anticipates that as a result of this program, the total number of Company-owned
stores will increase from 19 stores at current, to approximately 28 stores by
November 1999, with total square footage of store space increasing from
approximately 42,000 square feet at present, to approximately 72,000 square
feet by November 1999. No assurance can be made that the Company will be able
to successfully implement its expansion plans. The average cost to open a new
store is approximately $250,000 (including costs to stock inventory).
The Company believes that the anticipated growth of the Company is
dependent, in large part, on the success of its store expansion program. As
part of its expansion program, the Company expects to open new stores which
will be patterned after the larger "Cookstore" format. It also intends to
experiment with a larger format store in certain markets, which would, if
implemented, be approximately 5,000 square feet in size. In determining whether
to open new stores (including larger format stores) in a particular market, the
Company expects to evaluate a number of factors, including the availability of
prime real estate and demographic information (such as data relating to income
and education levels, age and occupation).
The Company believes that because it does not rely heavily on a central
distribution center and since it does not rely on paid advertising to any
significant extent, it has the flexibility to enter a new market with only a
single store. The Company will consider opening additional stores in that
market, once the initial store has proven successful. The Company has already
begun to evaluate sites for additional stores in markets proximate to existing
locations.
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Acquisition of Aropi
On August 21, 1998, the Company acquired Aropi for approximately $2.6
million, consisting of approximately $2.1 million in cash, two convertible
promissory notes for $250,000 each. The convertible promissory notes bear
interest at the rate of 8% and are mandatorily convertible into Common Stock
having a fair market value of $500,000 as of the conversion date. Such shares
shall not represent less than 2% of all of the issued and outstanding Common
Stock on a fully diluted basis. The convertible promissory notes are
mandatorily convertible if the Company completes an offering of its Common
Stock prior to August 20, 1999 in which it receives proceeds of at least
$5,000,000 and the Company has a specified capital structure as of the
conversion date. The Company financed the acquisition of Aropi by entering into
the First Amendment with Bidco and the Loan and Security Agreement with
Greenfield. The estimated goodwill calculated on the Aropi acquisition was
approximately $1,004,877.
Franchise Operations
The Company operates 21 franchised stores under the Rolling Pin Kitchen
Emporium trademark in nine states including Arkansas, Florida, Georgia,
Illinois, Iowa, Kentucky, North Carolina, South Carolina and Tennessee. The
franchise agreements have an initial term of five to ten years and will be
automatically renewed for a five-year term with an additional option to renew
for two five-year terms upon certain conditions and terms. A few of the
franchise agreements are in the first renewal period, but most are in their
initial terms.
Each existing franchise agreement grants to the franchisee the right and
license to operate a franchised store in a specified territory. The franchise
agreements require that the franchisee construct or remodel, at its own
expense, and operate the franchised store in accordance with certain
requirements, standards and specifications prescribed by the Company, including
that the franchisee purchase certain initial equipment, fixtures and supplies
designated by the Company and promote and sell only products specified by the
Company. The Company, in turn, is obligated to provide the franchisee with,
among other things, advisory assistance in the operation of the franchised
store and assistance in connection with advertising and promotional programs.
In addition, in the event any franchisee wishes to accept an offer from a
third party to purchase an interest in the franchise that would have the effect
of transferring a controlling interest in the franchise, each franchise
agreement grants the Company a right of first refusal to purchase the interest
in such franchise.
For the year ended June 30, 1998, Aropi's revenues from its franchisees
totaled $466,519. Aropi historically attributed a significant portion of its
corporate overhead as being attributable to franchise-related expenses, which
resulted in the income from franchise operations being less than the expense
from such operations. The Company plans to re-evaluate this practice and
anticipates an allocation that tracks actual expenditures with respect to
franchise development and maintenance. The reallocation of such expenses will
result in an increase in the Company's operating expenses related to
Company-owned stores and a decrease in franchise-related expenses. This change
in accounting procedures does not result in increased expenses and does not
affect the gross margin.
<PAGE>
The Company
Results of Operations -- The Company
The Company operates a chain of specialty retail stores for quality
cookware and serving equipment. The Company's revenue is derived primarily from
the sale of cookware and serving equipment.
Fresh Start Reporting From August 12, 1998 To September 30, 1998 -- The
Company
The information presented below is presented on a fresh-start basis as of
August 12, 1998.
Net Revenues. From August 12 to September 30, net revenues were $728,767.
Cost of Goods Sold. For the period from August 12 to September 30, cost of
goods sold were $436,628, representing approximately 60% of sales.
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Selling, General and Administrative Expenses. For the period from August
12 to September 30, selling, general and administrative expenses were
$1,076,415, which includes approximately $271,000 of professional fees.
Period Ended August 12, 1988 Compared To the Period Ended September 30,
1997 -- The Company
Net Revenues. For the period ended August 12, 1998, net revenues decreased
$1,021,618, or 41.3%, from $2,475,892 for the period ended September 30, 1997
to $1,454,274 for the period ended August 12, 1998, of which $445,661, or 18%,
was attributable to the difference in the length of the periods and $575,957,
or 23.3%, was due to decreases in comparable store volumes caused by lower than
normal store inventory levels. Lower inventory levels were the result of "cash
in advance" policies for the Company and the limited cash resources of the
Company during this period.
Selling, General and Administrative Expenses. For the period ended August
12, 1998, selling, general and administrative expenses decreased $296,663, or
28.8%, from $1,029,935 for the period ended September 30, 1997 to $733,272 for
the period ended August 12, 1998, of which $185,388, or 18%, was attributable
to the difference in the length of the periods and $111,275, or 10.8%, was due
to decreases in general corporate overhead.
Results For 1997 Compared To 1996 -- The Company
Net Revenues. Net revenues increased $200,000, or 6%, from $3.5 million in
1996 to $3.7 million in 1997, primarily due to the opening of two new
Cookstores on December 1, 1996.
Operating Expenses. Operating expenses increased approximately $957,000, or
209%, from $458,000 in 1996 to $1.42 million in 1997. As a percentage of net
revenues, operating expenses increased from 13.1% in 1996 to 38% in 1997,
primarily due to increased costs associated with the newest Cookstores (which
were opened on December 1, 1996) and the increased costs of borrowing associated
with a refinancing of its debt.
General and Administrative Expenses. General and administrative expenses
increased $448,000, or 115%, from $390,000 in 1996 to $838,000 in 1997. As
a percentage of net revenues, general and administrative expenses increased
from 11.1% in 1996 to 22.5% in 1997. This increase as a percentage of net
revenues was primarily due to an increase in professional, consulting and
financing fees.
<PAGE>
Liquidity and Capital Resources -- The Company
The Company used $332,597 in net cash from operating activities from
August 12 to September 30. Net cash used in investing activities was
approximately $2,125,000 during such period for the acquisition of Aropi. Net
cash provided by financing activities was $2,460,000 representing financing for
the Aropi acquisition. At September 30, 1998, the Company had a working capital
deficit of $2,335,490, with all debt being classified as current. See
"Description of Securities."
Aropi, Incorporated
Results Of Operations -- Aropi
Aropi operates a chain of specialty retail stores for quality cookware and
serving equipment. Aropi's revenue is derived primarily from the sale of
cookware and serving equipment. Aropi's fiscal year ended on June 30.
Results For Fiscal Year ended June 30, 1998 Compared To Fiscal Year ended
June 30, 1997 -- Aropi
Net Revenues. Net revenues decreased $262,543, or 4%, from $6.57 million
in 1997 to $6.31 million in 1998. Of this decrease $228,142, or 3.4% was due to
the closing of one store in February 1997, the balance of $34,401, or .5%, was
due to changes in comparable store volumes.
Cost of Sales. Cost of sales decreased approximately $272,798, or 8.0%,
from $3.41 million in 1997 to $3.14 million in 1998. Approximately $115,000 of
the decrease is attributable to decreased sales. The balance of the decrease
resulted from greater discounts from vendors and a one-time accounting change
that resulted in a $69,000 decrease to freight-in charges, a component of cost
of goods sold. As a percentage of net revenues the
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cost of sales decreased from 51.84% in 1997 to 49.68% in 1998 primarily due to
a change in accounting procedure which required capitalization of inventory
freight charges as an asset which will be amortized with the fluctuation of
inventory and resulted in a one time decrease in Aropi's cost of sales.
Operating Expenses. Operating expenses decreased approximately $87,826, or
2.75%, from $3.19 million in 1997 to $3.10 million in 1998. As a percentage of
net revenues, operating expenses increased from 48.50% to 49.13%, primarily due
to increases occuring in the ordinary course of business.
General and Administrative Expenses. General and administrative expenses
decreased $85,445, or 5.31%, from $1.61 million in 1997 to $1.52 million in
1998. As a percentage of net revenues, general and administrative expenses
decreased from 24.46% in 1997 to 24.13% in 1998. This decrease as a percentage
of net revenues was due to a decrease in overall rent expense.
Results For Fiscal Year ended June 30, 1997 Compared To Fiscal Year ended
June 30, 1996 -- Aropi
Net Revenues. Net revenues decreased $260,019, or 3.81%, from $6.83
million in 1996 to $6.57 million in 1997, primarily resulting from changes in
comparable store sales volumes resulting from increased competition in certain
markets.
Operating Expenses. Operating expenses decreased approximately $44,081, or
1.36%, from $3.23 million in 1996 to $3.19 million in 1997. As a percentage of
net revenues, operating expenses increased from 47.30% in 1996 to 48.50% in
1997, primarily due to lower sales and the fact that overhead in the store
which had closed decreased at a slower rate than sales.
General and Administrative Expenses. General and administrative expenses
decreased $74,224, or 4.41%, from $1.68 million in 1996 to $1.61 million in
1997. As a percentage of net revenues, general and administrative expenses
decreased from 24.62% in 1996 to 24.46% in 1997. This decrease as a percentage
of net revenues was due to changes in the normal course of business.
<PAGE>
Liquidity and Capital Resources -- Aropi
Aropi provided $438,499 in net cash from operating activities in 1997. For
the year ended June 30, 1998, $186,218 of cash was provided by operating
activities. Net cash used in investing activities was approximately $14,417 in
1997 and $16,659 in 1998, principally for the purchase of fixed assets. Net
cash used by financing activities was $434,976 in 1997, primarily to repay
debt. For the year June 30, 1998, net cash used in financing activities was
$176,703. At June 30, 1998, Aropi had a working capital surplus of $958,754,
and had $670,502 of long-term debt outstanding net of current maturities of
$176,313.
Liquidity and Capital Resources
When the Company emerged from Bankruptcy on August 12, 1998, it had a
working capital deficit of $(55,044). At September 30, 1998, the Company had a
working capital deficit of $(2,335,490). The decrease in working capital of
$2,280,446 is primarily attributable to cash used by operations of $332,597,
and the addition of long-term assets in the Aropi acquisition (fixed assets --
$352,891; goodwill -- $1,004,877) which was financed by short-term debt.
Since emerging from bankruptcy, the Company has utilized $332,597 in
operations, which was funded primarily by debt borrowing in excess of what was
needed to fund the Aropi acquisition. For the foreseeable future, the Company
intends to retain all earnings for use in the operation and expansion of its
business.
The Company has not entered into any material commitments for capital
expenditures at this time. The Company's expansion program is likely to require
the Company to make capital expenditures for furniture and fixtures and
leasehold improvements on an ongoing basis of approximately $250,000 per new
store (including the costs of inventory).
The Company had deferred tax assets totaling $1,735,000, with $1,635,000
representing the tax effects of net operating loss carryforwards, and the
effect of book depreciation in excess of tax depreciation of approximately
$100,000 as of August 12, 1998 upon its emergence from bankruptcy. The Company
has a full valuation
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allowance as a reserve against such deferred tax assets. The net operating loss
carryforwards totaling approximately $4,087,000, expire in the years 2009
through 2013. Annual utilization of the net operating loss carryforwards will
be restricted due to the ownership change in the plan of reorganization. The
Company would need to average annual taxable income of at least $272,000 over
the carryover period to fully utilize such deferred tax assets.
Bidco Loan Agreement
In August 1998, the Company entered into the Loan Agreement with Bidco.
The Loan Agreement provided financing in the amount of $1,300,000 as
contemplated by the terms of the Plan of Reorganization. The First Amendment
provided for an additional $700,000 in financing that was used to fund the
Aropi acquisition and that is available for working capital purposes.
Borrowings under the Loan Agreement were used to repay the outstanding
balance owed by the Company under the Loan and Security Agreement, dated April
23, 1998, between the Company and Fremont Financial Corporation, a California
corporation ("Fremont"), as well as for working capital needs and general
corporate purposes. The Loan Agreement and First Amendment include restrictions
on, among other things, additional debt, capital expenditures, investments,
dividends and other distributions, mergers and acquisitions, and contains
covenants requiring the Company to meet a specified minimum current assets to
current liabilities ratio, and a minimum net worth test. As of the date hereof,
the Company is in compliance with all such financial covenants.
The Loan Agreement and First Amendment established a first security
interest in the current assets of the Company and a second security interest in
the current assets of Aropi, including, among other items, instruments,
furniture, accounts receivable and inventory. In addition, the First Amendment
provided Bidco with a second security interest in the stock of Aropi.
Pursuant to the Loan Agreement, the Company executed a Promissory Note
that bears interest, which is payable monthly, at the rate of three percentage
points over the Prime Rate as published in the Wall Street Journal on the first
of every month. The Promissory Note was amended pursuant to the First Amendment
to reflect the current amount of the loan which was $2,000,000. Pursuant to the
Loan Agreement, the Company issued the Bidco Warrants to purchase 92,595 shares
of Common Stock, exercisable at a price of $0.01 per share. Pursuant to the
First Amendment, the Company executed the New Bidco Warrants for the right to
purchase 40,602 shares of Common Stock, exercisable at 165% of the public
offering price. Each of the Bidco Warrants and the New Bidco Warrants contain
registration rights for the shares received by the Bidco pursuant to such
warrants. The Bidco Warrants and the New Bidco Warrants have been amended to
terminate redemption provisions in those warrants. Upon the consummation of the
Offering, Bidco will receive $250,000 as consideration for such termination.
Under the terms of the Loan Agreement, Bidco has a right of first refusal on
any mezzanine financing for a three-year period and the Company is required to
pay a prepayment penalty of 20% on any amount prepaid unless the entire balance
is prepaid from the proceeds of the Offering or a private placement by the
Company. The Loan Agreement and the First Amendment expire on January 31, 1999
and are required to be paid in full by that time. Although no assurances can be
given, the Company currently anticipates that upon completion of the Offering,
Bidco will refinance the existing indebtedness for a term of three to five
years and on terms and conditions substantially similar to the current
agreement. See "Description of Securities -- Warrants."
As of December 1, 1998, there was an outstanding balance of $2,000,000 on
the Bidco loan.
Greenfield Loan Agreement
In August 1998, the Company entered into a Loan and Security Agreement
(the "Loan and Security Agreement") with Greenfield, that provided acquisition
financing in the amount of $2 million, of which $500,000 is pursuant to a
non-revolving bulge loan facility ("Bulge Loan") and $1.5 million is pursuant
to a revolving credit loan facility ("Term Facility").
Borrowings under the Loan and Security Agreement were used to finance the
acquisition of Aropi, to repay certain outstanding indebtedness and for working
capital purposes. The Loan and Security Agreement includes restrictions on,
among other things, additional debt, dividends and other distributions, and
mergers and acquisitions. As of the date hereof, the Company is in compliance
with all such financial covenants.
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The Loan and Security Agreement granted Greenfield a continuing priority
after Bidco's subordinated security interest in the current assets of the
Company and its subsidiaries, including, among other items, accounts
receivable, general intangibles, inventory, instruments, furniture, and other
property. In addition, Greenfield has a first security interest in the assets
and stock of Aropi.
Pursuant to the Loan and Security Agreement, the Company executed a
Revolving Credit Note that bears interest at the rate of interest which is
three percentage points above the Prime Rate as published in the Wall Street
Journal and a Bulge Loan Note that bears interest at a fixed 15% per annum
rate. The interest on each note is computed upon the basis of a 360 day year
for the actual number of days elapsed in a month. Pursuant to the Loan and
Security Agreement, the Company also executed the Greenfield Warrants granting
Greenfield the right to purchase 40,602 shares of Common Stock, exercisable at
a price per share equal to 165% of the public offering price. The Greenfield
Warrants contain registration rights for the shares received by the Greenfield
pursuant to such warrants. The Greenfield Warrants have been amended to
terminate the redemption provision. Upon the consummation of the Offering,
Greenfield will receive $100,000 as consideration for such termination. See
"Description of Securities -- Warrants."
As of December 1, 1998, there was an outstanding balance of $500,000 under
the Bulge Loan and a balance of approximately $1.5 million under the Term
Facility. The outstanding balance on the Term Facility is to be repaid in full
no later than January 29, 1999. The outstanding balance on the Bulge Loan is
due December 31, 1998. The Company currently anticipates replacing the Term
Facility with a new secured facility proximate to or shortly after completion
of the Offering. The Bulge Loan as well as a portion of the Term Facility will
be repaid with a portion of the proceeds from the Offering. See "Use of
Proceeds."
Year 2000 Compliance
The Year 2000 ("Y2K") issue is the result of computer programs using two
numbers to define the year, with the assumption that the first two numbers of
the year are "19." Therefore, any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Left uncorrected, this could result in both information
technology ("IT") and non-IT system failures or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process sales transactions, update databases, produce management reports or
engage in normal business activities.
The Company operates certain accounting software at the corporate level as
well as inventory control and point-of-sale systems at the store and corporate
levels. See "Business and Operational Model of the Company." In the normal
course of operations, the Company has recently upgraded its computer hardware
and software systems with systems that are certified as Y2K compliant.
Therefore, the Company believes that its internal IT systems are fully Y2K
compliant. The Company will begin to individually test its non-IT systems for
Y2K compliance in early 1999 and intends to complete the testing by the end of
the third quarter of the fiscal year 1999. Given the type of non-IT systems used
by the Company such as time clocks, alarm systems and facsimile machines, it
believes that even if its non-IT systems are not Y2K compliant, such
noncompliance will not materially effect its operations. The Company will
continue to review and evaluate its IT and non-IT systems for potential Y2K
issues. Additionally, the Company expects to upgrade its existing accounting
software during 1999 and will only effect such an upgrade with a system that has
been rated Y2K compliant.
Management does not currently expect that the costs related to Y2K
remediation or compliance to be material to the Company's financial condition
or results of operations. To date, the Company has not expended any funds for
Y2K remediation or compliance. In total, the Company estimates it will spend
less than $20,000 on Y2K remediation or compliance. Funds for Y2K remediation
and compliance will be drawn from normal operating capital.
The Company will be dependent on its vendors and suppliers to ensure that
they are Y2K compliant. The Company believes the Y2K risk with its suppliers is
low because no supplier accounts for a significant percentage of the Company's
purchases. The Company, however, is developing contingency plans to identify
alternative suppliers. Also, for suppliers that the Company subsequently
determines are materially significant, the Company intends to require such
suppliers to confirm Y2K compliance in any agreements with the Company. No
assurance, however, can be made that such suppliers will agree to that
requirement.
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While the Company can not accurately predict a "reasonable worst case
scenario" with regard to its Y2K issues, the Company believes that if some of
its systems fail because of Y2K problems, the Company may experience
significant delays in its ability to perform certain functions which may have a
materially adverse effect on the Company's operations. The Company will
continue to review and assess these risks and develop appropriate contingency
plans and procedures to minimize the effects of such scenarios.
Treatment of Cost of Goods Sold
The financial statements for the Company include store occupancy and
delivery expenses in the cost of goods sold. Aropi's financial statements do
not include these items in the cost of goods sold. Following the Offering the
Company's financial statements will include store occupancy and delivery
expenses.
Seasonality
Historically, a significant portion of our net sales and net earnings have
been realized during the period from October through December, and levels of
net sales and net earnings have generally been significantly lower during the
period from January through September. This is the general pattern associated
with similar retail industries. If for any reason our sales were to be
substantially below seasonal norms during the October through December period,
our annual results could be materially and adversely affected.
The Company expects to use a portion of the net proceeds of this Offering
for its acquisition and expansion program, and for working capital and general
corporate purposes. A portion of the proceeds may also be used for acquisitions
of complementary businesses; however, at this time the Company has no
definitive acquisition targets. The Company expects the proceeds from this
Offering will satisfy its operational and acquisition needs for the next 18-24
months. See "Use of Proceeds."
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BUSINESS
The Company
The Company operates a chain of specialty retail stores for quality
cookware and serving equipment, cooking accessories and certain select food
products as well as cookbooks and food-related publications. It operates 19
Company-owned stores and 21 franchised locations under the trademarks The
Cookstore and Rolling Pin Kitchen Emporium, which are situated primarily
throughout the Midwest and Southeast regions of the United States.
The Company's goal is to build a consolidated enterprise with national
market reach through the acquisition and integration of independent quality
cookware businesses, the opening of new cookware stores in large markets, and
developing franchised cookware stores in targeted markets throughout the United
States. Although the Company has had preliminary discussions with
representatives of various potential acquisition candidates, the Company
currently has no agreement with any company with regard to any acquisitions.
The Company's cookware stores range in size from approximately 1,600
square feet to 3,300 square feet and operate in regional retail malls. Each
store offers a wide range of products, purchased from over 300 vendors in 12
distinct categories including accessories, bakeware, books, cookware, cutlery,
electronics, food, furniture, gadgets, gifts, tableware and textiles. The
Company intends to use its existing stores as the basic store design prototype
for most of its anticipated expansion through Company-owned and franchised
locations. The Company has four stores currently operating under The Cookstore
trademark in Ohio and recently acquired Aropi that has 15 Company-owned stores
operating under the Rolling Pin Kitchen Emporium trademark in Alabama, Florida,
Georgia, Kentucky, Louisiana, South Carolina, Tennessee, and Virginia and 21
franchised stores operating under the Rolling Pin Kitchen Emporium trademark in
Arkansas, Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South
Carolina, and Tennessee. The Company expects to convert the four Company-owned
stores in Ohio currently operating under The Cookstore trademark to the Rolling
Pin Kitchen Emporium trademark in the near future.
Industry Background
The Company believes numerous factors exist which create a favorable
environment for a consolidation within the quality cookware industry. As
businesses have become nationwide in scope, the need and demand for a
nationwide vendor supplying uniformly high-quality products and services has
increased.
Similarly, as brand consciousness among end users has increased in certain
industries, national brands have realized significant advantages in the
marketplace, such as the ability to differentiate their products and services,
allowing premium pricing and enhanced customer loyalty. Larger businesses
formed through mergers or acquisitions continue to achieve competitive
advantages by creating operating synergies through, among other things, the
elimination of redundant corporate functions and the use of information
technology to decrease cost and increase revenue. Furthermore, manufacturers
have developed an increased interest in dealing with large distributors, which
has enabled manufacturers to generate efficiency gains due to streamlined
production, distribution, and marketing operations.
The Company believes that its standard store format (between 1,600 - 3,300
square feet) works especially well in regional malls and strip shopping centers
and other select sites that can be classified as middle to upper income
shopping destinations because upper income consumers tend to have more
disposable income, which can be used to purchase more expensive cookware. The
Company's target areas for acquisition and expansion include regional shopping
malls located in suburban and urban core revitalization areas, smaller
specialty malls, and select, upper end in-line shopping centers. The Company
believes that due to the industry's highly fragmented nature, and the
relatively small number of companies, such as Williams-Sonoma, Inc., Bed Bath &
Beyond Inc. and Linens 'N Things, Inc., there are hundreds of prime locations
available for future store openings or acquisitions.
Competition
The specialty retail business is fragmented and highly competitive. The
Company's specialty retail stores compete with other retail stores, including
other specialty stores, so-called super stores, department stores, and
26
<PAGE>
mail order catalogs. Such competitors include: (i) upscale department stores,
which often carry many of the same product lines as the Company but do not
typically have the same depth or breadth of product selection or service; (ii)
specialty stores (such as specialty linens or housewares retailers), which
often have a depth of product selection but typically carry only a limited
portion of the product lines carried by the Company; and (iii) discount and
mass merchandise stores. In addition, the Company competes with many different
types of retail stores that sell many of the products sold by the Company. The
Company competes to a more limited extent with factory outlet stores that
typically offer limited quantities or limited lines of high quality merchandise
at discount prices. Certain of the Company's competitors have greater
financial, distribution and marketing resources than the Company. The recent
substantial sales growth in the mail order catalog industry has encouraged the
entry of many new competitors and an increase in competition from established
companies. The Company competes on the basis of merchandise quality and
customer service.
Strategy
The Company's goal is to become a leading national retailer of quality
cooking and serving equipment. In addition to opening new locations and sales
of franchises, the Company intends to acquire established local or regional
cookware operations and combine and integrate them into the existing
organization. In order to achieve its goal, the Company will focus on: (i)
identifying acquisition candidates that meet the Company's consolidation
criteria; (ii) opening new locations; (iii) selling new franchises to augment
the store brand in smaller markets; and (iv) achieving operating efficiencies
and synergies by combining administrative functions, eliminating redundant
facilities, implementing system and technology improvements in acquired
entities, and purchasing products in large volumes for both Company-owned and
franchise stores.
Identify and Pursue Strategic Consolidation Opportunities. The Company
plans to acquire companies with established sales presences in certain markets
and/or local brand names. The Company believes that the smaller-store, high-end
quality cookware industry is highly fragmented and often characterized by
family-owned smaller-store owner/operators who desire liquidity and may be
unable to gain the scale necessary to access the capital markets effectively or
to expand beyond a local or regional base. The Company plans to acquire such
operations with a combination of cash from the proceeds of this Offering and
Common Stock. Currently, the Company has no specific acquisition targets
identified. See "Use of Proceeds."
The Company plans to pursue acquisition opportunities in markets of at
least 250,000 population with fragmented competition that will benefit from
economies of scale. Within such markets, the Company intends to focus on the
acquisition of stores or chains having some or all of the following
characteristics: (i) stable cash flows and recurring revenue streams from
long-term operations or market presence; (ii) the ability to improve sales,
operations, and profitability through superior management techniques, access to
larger financial resources, and improved purchasing terms; (iii) long-term
growth prospects for products offered given the market demographics; (iv) a
strong "franchise" or presence in the communities served by the acquisition
candidate; (v) an ability to retain, promote, and motivate management teams;
(vi) favorable demographic trends within the local regions serviced; and (vii)
an under-penetrated market for products provided by the acquisition candidate.
Open new locations. The Company plans to open new stores in its current
Midwest and Southeast market areas. The Company will select locations for new
stores based on market and site demographics, the nature of local competition,
and the logistics of shipping and store operations. The approximate cost to
open a new store (including the costs of inventory) is $250,000.
The Company's strategy is to present the merchandise in an upscale and
fashionable setting. The full range of the stores' products are displayed and
stocked on the retail floor. The merchandise is arranged by category for
shopping convenience. Feature displays are arranged throughout the store
emphasizing seasonal products or particular themes.
Selling new franchises. The Company believes that franchising offers the
opportunity to deploy the cookware store model, and hence the Company's
"brand," with no significant capital requirements. This franchise expansion
will allow brand expansion into markets that the Company determines would not
support a larger Company-owned store. The Company believes that in smaller
markets, the local franchisee is better positioned
27
<PAGE>
to commit the effort it takes to make a smaller store successful. The Company
will continue to use business brokers as a primary vehicle for franchise
development, but the Company will also augment its in-house commitment to
finding new markets and prospects. The Company expects franchise locations to
grow at about double the pace as the internally developed stores. Rolling Pin
Kitchen Emporium franchises are available in all states, except for California,
Hawaii, Indiana, Maryland, Minnesota, North Dakota, Rhode Island, South Dakota,
Washington, New York, Texas, and Wisconsin. The Company does not know when or
if it will ever make available franchises in these states.
Alternative Channels -- The Internet and Catalogs. The Company plans to
expand its existing catalog operation. The expanded catalog will be used in
selected direct mailing campaigns so as to develop a customer base that
complements the Company's existing market locations and develops brand
recognition in markets the Company does not currently have retail cookware
stores. The Company has an existing web site which generates a modest volume of
transactions. The Company expects that this electronic commerce vehicle will be
significantly expanded to capture that segment of the growing market that is
comfortable with, or prefers, purchasing products on the internet. The Company
will use a variety of marketing strategies designed to increase brand
recognition and awareness of the web site. This effort is an important
component of the brand identity strategy.
Operating efficiencies. The Company believes that it can achieve greater
operating efficiencies as it expands and acquires cookware chains, new stores,
and franchised locations. Such operating efficiencies include:
o Combining Administrative Functions. The Company plans to institute a
Company-wide management information system and to combine
administrative functions, such as financial reporting and finance,
insurance, employee benefits, and legal support, at the corporate
level.
o Implementing System and Technology Improvements. The Company
believes it will be able to increase the operating margin of
existing stores and acquired companies by using computerized
inventory management and order processing systems, computerized
quotation and job costing systems and computerized logistics and
distribution systems. The Company believes the implementation of
such systems may significantly increase the speed and accuracy of
order processing at acquired companies, while increasing inventory
turns and providing measurement and analysis tools that facilitate
efficient operation.
o Using Volume Purchasing. The Company believes that if it is
successful in expanding its operations and acquiring more stores,
then the Company can achieve operating efficiencies through volume
purchasing and should benefit from favorable prices and rebates
accruing as the result of higher volume purchases. The Company plans
to negotiate improved arrangements with wholesalers and
manufacturers to reduce inventory levels of certain acquired
companies, thereby allowing more efficient operations by decreasing
inventory holding costs and increasing operating margins.
Reorganization of Predecessor
The Company is the successor entity to the Predecessor Entity, which filed
for bankruptcy on November 13, 1997 and operated under bankruptcy protection
during the first half of 1998. The Predecessor Entity began as a family
business operating a chain of bookstores and eventually cookware stores as
well. The various operations were consolidated in a corporate entity under the
name Gaylord Companies, Inc. in July 1994. In October 1995, the Predecessor
Entity effected a public offering of its common stock. Although the Predecessor
Entity had expected to raise approximately $4 million to $5 million in that
offering to finance the expansion of its operations, net proceeds to the
Predecessor Entity totaled approximately $2 million. Management believes that
the failure to secure an appropriate level of capital, along with competitive
pressures from larger bookstore competitors and increased operating expenses,
resulted in the bankruptcy.
The Company formerly operated under the name The Gaylord Companies, Inc.,
which was reorganized in a Chapter 11 bankruptcy which was completed on August
12, 1998 (the "Effective Date"). In the Reorganization, the Company sold its
bookstore operations, closed two cookware stores, and brought in its current
management and was renamed Home Retail Holdings, Inc. On September 15, 1998,
the Company changed its name from Home Retail Holdings, Inc. to Rolling Pin
Kitchen Emporium, Inc.
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<PAGE>
Acquisition of Aropi
In August 1998, the Company acquired Aropi from Mr. Glenn Kaas for
approximately $2.6 million, consisting of approximately $2.1 million in cash
and two notes each for $250,000 that are convertible into Common Stock. Under
the purchase agreement, the Company agreed to secure one of the $250,000
convertible promissory notes pursuant to a letter of credit in the amount of
$250,000. The letter of credit was not delivered. Pursuant to a letter
agreement between the Company and Mr. Kaas, the Company agreed that instead of
providing the letter of credit, Mr. Kaas will receive an aggregate of $100,000
payable over a 12-month period (the "Letter Agreement"). The entire amount
remaining under the Letter Agreement will be accelerated and become due and
payable upon the consummation of the Offering. The Company has also agreed to
make a good faith effort to deliver to Mr. Kaas a letter of credit in the
amount of $150,000 to secure a convertible promissory note in the amount of
$250,000. See "Certain Relationships and Related Party Transactions."
Aropi was founded in 1978 as Rolling Pin Kitchen Emporium, a sole
proprietorship, by members of Mr. Kaas' family. In 1981, Rolling Pin Kitchen
Emporium incorporated in the State of Iowa under the name "Aropi,
Incorporated." Aropi owned and operated 15 cookware stores in eight states and
21 franchised stores in nine states. Aropi's stores offer on average 4,000
stock-keeping-units ("SKUs"), which are marketed to consumers with a keen
interest in cooking and feature categories that include cookware, cutlery,
bakeware, books, food, and associated accessories and gadgets. Aropi
distinguishes itself from competition by broader and deeper product offerings
and a product mix that it believes is continuously revised and revitalized.
Aropi's stores, doing business under the trademark Rolling Pin Kitchen
Emporium, occupy primary locations in mid- and upper-scale malls enjoying the
status as a destination center as well as sales to convenience and impulse
buyers throughout the year, particularly during the fourth quarter in
correlation with the holiday season.
At the time Aropi was acquired, the Company appointed Mr. Kaas as
President, Chief Executive Officer and a director of the Company. On August 20,
1998, Mr. Kaas entered into an employment agreement (the "Employment Agreement")
with the Company which provided for an annual base salary of $105,000 for the
first 12 month period and a signing bonus of $125,000 payable in twelve equal
monthly installments. On November 4, 1998, the Company's stockholders removed
Mr. Kaas from the Board of Directors of the Company, and the Board of Directors
terminated his employment as President and Chief Executive Officer of the
Company. Mr. Kaas was terminated without Cause (as defined in the Employment
Agreement), and under the terms of Employment Agreement, he was entitled to
receive within 30 days of such termination, a lump sum equal to his base salary
for 12 months plus all amounts owed to him by the Company with respect to his
signing bonus. The Company has has paid Mr. Kaas amounts specified under the
Employment Agreement. Following the Offering, Mr. Kaas, assuming conversion of
the two promissory notes, will own approximately 2% of the Common Stock and will
have an option to acquire an additional 5,000 shares of Common Stock received in
connection with the acquisition of Aropi.
Discontinued Operations
In the Reorganization, the Company sold six bookstores and closed two
cookware stores which were unprofitable and could not be restructured through
the reorganization process to become cost effective.
29
<PAGE>
Properties
The Company-owned stores are all in leased facilities. The Company does
not currently own any of the facilities where its stores are located. The
Company-owned stores (which do not include any franchise stores) are located in
the following markets:
Riverchase Galleria, Birmingham, Alabama
Aventura Mall, Aventura, Florida
Gulf View Square, Port Richey, Florida
Cumberland Mall, Atlanta, Georgia
Northlake Mall, Atlanta, Georgia
Phipps Plaza, Atlanta, Georgia
Gwinnett Place Mall, Duluth, Georgia
Town Center at Cobb, Kennesaw, Georgia
Fayette Mall, Lexington, Kentucky
The Mall at Cortana, Baton Rouge, Louisiana
Lakeside Shopping Center, Metairie, Louisiana
Lane Avenue Shopping Center, Columbus, Ohio
Summit Mall Shopping Center, Akron, Ohio
Worthington Mall, Worthington, Ohio
The Mall at Fairfield Commons, Beavercreek, Ohio
Haywood Mall, Greenville, South Carolina
2100 Hamilton Place Blvd., Chattanooga, Tennessee
Cool Springs Galleria, Franklin, Tennessee
Regency Square Mall, Richmond, Virginia
The Company's corporate headquarters is located at 4264 Winters Chapel
Road, Building B, Atlanta, Georgia 30360.
The Company's leases tend to be in locations that are considered mid- to
upper-end shopping malls and would also be characterized as both destination
and convenience driven. A majority of the Company's leases have a term of 10
years. The Company believes that its current corporate facilities are adequate
for the foreseeable future and that alternate facilities are readily available.
Franchise Regulation
The Company as a franchisor is also subject to federal and state
regulation in the states in which it offers franchises or where franchised
stores are currently operating. Federal regulations require that the Company
provide each prospective franchisee with a disclosure document that provides
information regarding the Company and the relevant provisions of the franchise
agreement and other ancillary contracts. In addition, certain state regulations
require that the franchisor be registered or be exempt from the applicable
registration requirements. Federal and state franchising laws prohibit certain
deceptive trade practices and, in some cases, impose fairness and
anti-discrimination standards on the Company.
Trademarks
The Company has been granted registered trademarks for each of "The
Cookstore" and "Rolling Pin Kitchen Emporium" with the United States Patent and
Trademark Office.
Employees
As of November 25, 1998, the Company had approximately 188 part-time
employees and approximately 34 full-time employees, of whom 34 were in
managerial positions and 188 were in sales positions. The Company believes that
the success of its business will depend, in part, on its ability to attract and
retain qualified personnel. The Company's employees are not covered by a
collective bargaining agreement, and the Company considers its relations with
its employees to be good.
Legal Proceedings
The Company is involved in various legal actions arising in the ordinary
course of business. The Company believes that none of these actions will have a
material adverse effect on its business, financial condition or results of
operations. The Predecessor Entity emerged from bankruptcy on August 12, 1998.
30
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth information concerning the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position Since
- ---------------------------------- ----- -------------------------------------------- ------
<S> <C> <C> <C>
John D. Critser .................. 43 President, Chief Executive Officer 1998
and Director
Gerald M. Czarnecki(1) ........... 58 Chairman of the Board of Directors 1998
Greg E. Dukoff ................... 34 Secretary, Interim Chief Financial Officer 1998
and Director
David E. Danovitch(2) ............ 36 Director 1998
George P. Lucaci ................. 47 Director 1998
Thomas L. Tuttle (2) ............. 31 Director 1998
Daniel T. Guilfoile (2) .......... 39 Director 1998
</TABLE>
- ------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
John D. Critser was appointed President, Chief Executive Officer and
director of the Company on November 4, 1998. Prior to that he had been the Vice
President of Operations of the Company since September 1998. Between July 1994
and August 1998, Mr. Critser was a director, President and Chief Operating
Officer of the Gaylord Companies, Inc. and was President and Chief Operating
Officer of each of the Gaylord subsidiaries since November 1993. Prior to
joining Gaylord in July 1993, Mr. Critser held various positions including Vice
President of Store Operations with Eckerd Vision Group, a division of the
Eckerd Corporation.
Gerald M. Czarnecki has been Chairman of the Board of Directors of the
Company since August 1998. Since December 1995, Mr. Czarnecki has been the
Chairman and Chief Executive Officer of the Deltennium Group, Inc., a private
investment and management company. From September 1994 to November 1995, Mr.
Czarnecki was President and Chief Operating Officer of UNC Incorporated, an
aviation manufacturing and services company. From April 1993 to May 1994, he
was Senior Vice President of International Business Machines Corporation. From
1988 to April 1993, Mr. Czarnecki was part of an investor group headed by
former Treasury Secretary William E. Simon, with specific responsibility for
overseeing the affairs of HonFed Savings Bank, a bank located in Hawaii.
Greg E. Dukoff has been the Secretary and interim Chief Financial Officer
of the Company since May 1998. Since May 1998, he has also been the
Administrator of the Predecessor Entity, The Cookstore, Inc., and The Cookstore
Worthington, Inc. From 1996 to 1997, Mr. Dukoff was Vice President and Head of
Managed Funds with ABN AMRO Bank N.V., an investment bank. From 1994 to 1996,
Mr. Dukoff was a First Vice President and Director of Managed Funds with
Prudential Securities Incorporated, an investment bank. Mr. Dukoff was an
officer of Home Retail Acquisition Corp. from its inception until it was merged
into the Predecessor Entity.
David E. Danovitch has been a director of the Company since May 1998.
Since June 1998, Mr. Danovitch has been a Managing Director of DDG Management
Services Corp. an investment firm. From October 1997 to October 1998, Mr.
Danovitch was a Managing Director of Cambridge Holdings, L.L.C. From 1994 to
1997, he was a principal of Snowden Capital, Inc., a New York City-based
investment banking and direct investment firm. From 1993 to 1994, he served as
the chief of staff to the Senior Vice President at International Business
Machines Corporation. Between 1990 and 1993, Mr. Danovitch was an attorney with
the law firm of Jones, Day, Reavis & Pogue.
George P. Lucaci has been a director of the Company since August 1998. Mr.
Lucaci has been a Managing Director of DDG Management Services Corp. since June
1998. From June 1997 to October 1998, Mr. Lucaci was the Vice Chairman of
Cambridge Holdings, L.L.C. responsible for all capital market transactions.
From June 1995 to June 1997, he was the Chief Executive Officer of RiverBank
Securities, a small broker-dealer firm. From October 1992 to June 1995, he was
the Managing Director of Normandy Asset Management, a private international
investor group. Mr. Lucaci spent most of his career in domestic and
international capital markets.
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<PAGE>
Thomas L. Tuttle has been a director of the Company since August 1998.
Since 1995, he has been the President of GEM Investment Advisors, Inc., an
investment advisory firm. Prior to 1995, Mr. Tuttle held various positions with
Morgan Stanley & Co., an investment banking firm, and McKinsey & Co., a
management consulting firm.
Daniel T. Guilfoile has been a director nominee and the director designee
of Nutmeg Securities, Ltd. since November 1998. Since January 1997, Mr.
Guilfoile has been the Director of Investment Banking, in the Capital Markets
Group of Nutmeg Securities, Ltd. From 1992 to December 1996, Mr. Guilfoile
served as Vice President of Syndicate and Corporate Finance. Mr. Guilfoile has
been employed with Nutmeg Securities, Ltd. since 1990. From 1988 to 1990 Mr.
Guilfoile was President of Access Systems, Inc., a communication company. From
August of 1982 to September of 1987 Mr. Guilfoile was trader and floor
supervisor on the floor of the New York Futures Exchange for Walter N. Frank &
Co., a New York Stock Exchange specialist firm.
Following the Offering, the Company intends to retain a Chief Financial
Officer with public company experience. The Company is actively seeking to fill
the position.
On August 4, 1998, NASD Regulation, Inc. ("NASD") accepted a Letter of
Acceptance, Waiver and Consent submitted by Donald Jackson and George Lucaci,
in which Messrs. Jackson and Lucaci consented to a finding by NASD that they
had solicited and sold securities prior to the time that a company that they
controlled (which company ultimately became a NASD member), and which was
involved in the sale of the securities involved in that transaction, was
approved for NASD membership, and received investor checks for delivery to the
issuer of the securities in a manner that did not comply with regulatory
guidelines. Messrs. Jackson and Lucaci agreed to pay a fine of $101,775 in the
aggregate to NASD in connection with this matter. The violations were
identified during a routine audit subsequent to the company's admission to
membership by NASD.
Board of Directors
Upon consummation of the Offering, directors who are not employees of the
Company will receive $1,000 per year for services rendered as a director and
$500 for attending each meeting of the Board of Directors or one of its
Committees. Directors who provide active, continuous support for the Company's
goals and objectives in addition to serving as directors will also be
compensated with stock options. In addition, directors may be reimbursed for
certain expenses incurred in connection with attendance at any meeting of the
Board of Directors or Committees. Other than reimbursement of expenses,
directors who are employees of the Company receive no additional compensation
for service as a director.
The Company's Board of Directors is staggered so that following the
consummation of the Offering Messrs. Critser and Guilfoile serve until the first
annual meeting, Messrs. Dukoff and Lucaci serve until the second annual meeting
and Messrs. Danovitch, Czarnecki and Tuttle serve until the third annual
meeting. Officers are elected by the Board of Directors and serve until their
successors are appointed by the Board of Directors.
<PAGE>
Executive Compensation
The following table sets forth total compensation for the Chief Executive
Officer of the Company for each of the last three fiscal years. John D. Critser
was appointed Chief Executive Officer on November 4, 1998, and will receive a
salary of $105,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------------- -----------------------------
Awards
Name and Other Securities All Other
Principal Annual Underlying Compensation
Position Year Salary($) Bonus($) Compensation Options (#) ($)
- --------------------- ------ ----------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D. Critser, 1997 134,623 -- -- -- --
President and Chief 1996 125,000 -- -- -- --
Executive Officer 1995 102,885 -- -- -- --
</TABLE>
- ------------
(1) Reflects compensation paid by the Predecessor Entity.
32
<PAGE>
Stock Option Grants
The following table sets forth information concerning the grant of stock
options made during 1998 to the former Chief Executive Officer:
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options Granted to
Underlying Options Employees in
Name Granted Fiscal Year Price Per Share Expiration Date
- ----------------------- -------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Glenn Kaas(1) ......... 5,000 100% $ 6.00 August 20, 2000
</TABLE>
- ------------
(1) The options were granted as part of the purchase price for the acquisition
of Aropi. The options are exercisable immediately.
1998 Equity Incentive Plan
The Company adopted the Incentive Plan on July 10, 1998, in connection
with the Reorganization.
The Incentive Plan is designed to advance the interests of the Company by
enhancing its ability to attract and retain employees and others in a position
to make significant contributions to the success of the Company through
ownership of Common Stock. The Incentive Plan provides for the grant of
incentive stock options ("ISOs"), non-qualified stock options ("NQSOs"), stock
appreciation rights ("SARs"), restricted stock, unrestricted stock, deferred
stock grants, and performance awards, loans to participants in connection with
awards, supplemental grants and combinations of the above. A total of 180,000
shares of Common Stock are reserved for issuance under the Incentive Plan. The
maximum number of shares as to which options or SARs may be granted to any
participant in any one calendar year is 80,000. The shares of Common Stock
issuable under the Incentive Plan are subject to adjustment for stock dividends
and similar events. Awards under the Incentive Plan may also include provision
for payment of dividend equivalents with respect to the shares subject to the
award.
The Incentive Plan is administered by the Option Committee of the Board of
Directors (the "Option Committee"). The Option Committee shall consist of at
least two directors. If the Common Stock is registered under the Exchange Act,
all members of the Option Committee shall be "outside directors" as defined.
Each employee of the Company or any of its subsidiaries and other persons or
entities (including non-employee directors of the Company or any of its
subsidiaries) who, in the opinion of the Option Committee, are in a position to
make a significant contribution to the success of the Company or any of its
subsidiaries are eligible to participate in the Incentive Plan.
No determination has been made (i) as to which individuals may in the
future receive options or rights under the Incentive Plan, (ii) as to the
number of shares to be covered by any such options or rights granted to any
single individual, or (iii) as to the number of individuals to whom such
options or rights will be granted. The proceeds received by the Company from
the sale of stock pursuant to the Incentive Plan will be used for its general
purposes, or in the case of the receipt of payment in shares of Common Stock,
as the Board of Directors may determine, including redelivery of the shares
received upon exercise of options.
Stock Options. The exercise price of an ISO granted under the Incentive
Plan may not be less than 100% (110% in the case of an ISO granted to a 10%
stockholder) of the fair market value of the Common Stock at the time of grant.
The term of each option may be set by the Option Committee but cannot exceed
ten years from the date of grant (five years from the date of grant in the case
of an ISO granted to a 10% shareholder), and each option will be exercisable at
such time or times as the Option Committee specifies.
Stock Appreciation Rights. SARs may be granted in tandem with, or
independently of, stock options. Each SAR entitles the participant, in general,
to receive upon exercise the excess of the fair market value of the shares in
cash or Common Stock at the date of exercise over the fair market value of the
shares on the date the SAR was granted. The Option Committee may grant SARs
which provide that following a change in control of the Company, as determined
by the Option Committee, the holder of such right will be entitled to receive
an amount measured by specified values or averages of values prior to the
change in control. If an SAR is granted in tandem with an option, the SAR will
be exercisable only to the extent the option is exercisable. To the extent the
33
<PAGE>
option or the SAR is exercised, the accompanying option or SAR, as the case may
be, will cease to be exercisable. An SAR granted in tandem with an ISO may be
exercised only when the market price of Common Stock subject to the option
exceeds the exercise price of such option. SARs not granted in tandem shall be
exercisable at such time, and on such conditions, as the Option Committee may
specify.
Restricted Stock. The Incentive Plan provides for awards of
nontransferable shares of restricted Common Stock subject to forfeiture. Awards
may provide for acquisition of restricted and unrestricted Common Stock for a
purchase price specified by the Option Committee, but in no event less than par
value. Restricted Common Stock is subject to repurchase at the original
purchase price, or to forfeiture if no cash was paid by the participant, if the
participant ceases to be an employee of the Company before the restrictions
lapse. Restricted securities shall become freely transferable upon the passage
of any applicable period of time and satisfaction of any conditions to vesting.
The Option Committee, in its sole discretion, may waive all or part of the
restrictions and conditions at any time.
The Incentive Plan also provides for deferred grants entitling the
recipient to receive shares of Common Stock in the future at such times, and on
such conditions, as the Option Committee may specify. Performance awards
entitling the recipient to receive cash or Common Stock following the
attainment of performance goals determined by the Option Committee may also be
granted. Performance conditions and provisions for deferred stock may also be
attached to other awards under the Incentive Plan.
A loan may be made under the Incentive Plan either in connection with the
purchase of Common Stock under an award or with the payment of any federal,
state and local tax with respect to income recognized as a result of an award.
The Option Committee will determine the terms of any loan, including the
interest rate (which may be zero). No loan may have a term exceeding ten years
in duration. In connection with any award, the Option Committee may also
provide for and grant a cash award to offset federal, state and local income
taxes or to make a participant whole for certain taxes.
Except as otherwise provided by the Option Committee, if a participant
dies, options and SARs held by such participant immediately prior to death, to
the extent then exercisable, may be exercised by the participant's executor,
administrator or transferee for a period of one year following such death (or
for the remainder of their original term, if less). Except as otherwise
determined by the Option Committee, options and SARs not exercisable at a
participant's death terminate at death. Outstanding awards of restricted Common
Stock must be transferred to the Company upon a participant's death and,
similarly, deferred Common Stock grants, performance awards and supplemental
awards to which a participant was not irrevocably entitled prior to death will
be forfeited, except as otherwise determined by the Option Committee.
In the case of termination of a participant's association with the Company
for reasons other than death, the following will apply: (i) options and SARs
remain exercisable, to the extent they were exercisable immediately prior to
termination, for three months (or for the remainder of their original term, if
less); (ii) shares of restricted Common Stock must be resold to the Company;
and (iii) other awards to which the participant was not irrevocably entitled
prior to termination will be forfeited, unless otherwise determined by the
Option Committee. If any such association is terminated due to the
participant's discharge for cause which, in the opinion of the Option
Committee, casts such discredit on the participant as to justify immediate
termination of any award under the Incentive Plan, such participant's options
and SARs may be terminated immediately.
In the event of a consolidation or merger in which the Company is not the
surviving corporation or which results in the acquisition of substantially all
of the Company's outstanding Common Stock by a single person or entity or by a
group of persons and/or entities acting in concert or in the event of the sale
or transfer of substantially all of the Company's assets, the Option Committee
may determine that (i) each outstanding option and SAR will become immediately
exercisable unless otherwise provided at the time of grant, (ii) each
outstanding share of restricted Common Stock will immediately become free of
all restrictions and conditions, (iii) all conditions on deferred grants,
performance awards and supplemental grants which relate only to the passage of
time and continued employment will be removed, and (iv) all loans under the
Incentive Plan will be forgiven. The Option Committee may also arrange to have
the surviving or acquiring corporation or affiliate assume any award held by a
participant or grant a replacement award. If the optionee is terminated after a
change in control without cause, or in the case of certain officers designated
from time to time by the Option Committee resigns under
34
<PAGE>
certain circumstances, within two years following the change in control, all
unvested options will immediately become fully vested, all options will be
exercisable for the shorter of four years or their original duration, and all
other awards will immediately become fully vested. If the Option Committee
makes no such determination, outstanding awards to the extent not fully vested
will be forfeited.
Employment Agreements
Mr. Critser, the President and Chief Executive Officer of the Company, has
entered into a one year employment agreement with the Company. Mr. Critser
receives an annual salary of $105,000 a year and a $700 monthly car allowance.
Mr. Kaas, the former Chief Executive Officer of the Company, had entered
into the Employment Agreement. The Board of Directors terminated Mr. Kaas'
position with the Company effective November 4, 1998. Mr. Kaas was terminated
without Cause (as defined in the Employment Agreement), and under the terms of
the Employment Agreement, he is entitled to receive within 30 days of such
termination, a lump sum equal to his base salary for 12 months plus all amounts
owed to him by the Company with respect to a $125,000 signing bonus which was
part of the Employment Agreement. The Company has paid Mr. Kaas the amounts
specified under the Employment Agreement.
Indemnification of Officers and Directors
The Company, to the fullest extent permitted by the provisions of Section
145 of the General Corporation Law of the State of Delaware, indemnifies, and
advances expenses to, any and all persons who is or was a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, proceeding or claim, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was or has agreed
to be a director or officer of the Company or while a director or officer is or
was serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of any corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, from and against any and all of the expenses, liabilities, or other
matters referred to in or covered by said section (including without limitation
attorneys fees and expenses). The indemnification provided by the Company is
not exclusive of any other rights to which those indemnified may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person. Any
person seeking indemnification by the Company is deemed to have met the
standard of conduct required for such indemnification unless the contrary shall
be established by a court of competent jurisdiction.
If the Delaware General Corporation Law is amended to authorize action
further eliminating or limiting the personal liability of directors, then the
liability of our directors will be eliminated or limited to the fullest extent
permitted by such statutes, as so amended. Any amendment, repeal or
modification of such provision shall be prospective only and shall not
adversely affect any right or protection of any of our directors existing at
the time of such amendment, repeal or modification.
Additionally, it is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act") is against public policy and
unenforceable pursuant to Section 14 of the Securities Act.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company believes that the transactions set forth below were made on
terms no less favorable to it than could have been obtained from unaffiliated
third parties. All future transactions, including any loans between the Company
and any of its officers, directors, principal stockholders and their affiliates
will be approved by a majority of the Board of Directors, including a majority
of the disinterested outside directors, and will continue to be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
The Home Retail Acquisition Corp. Junior Participation; The Merger
In March 1998, the Company and Cambridge Holdings, L.L.C. ("Cambridge")
entered into a Term Sheet that provided for the sale of the Company and its
subsidiaries as going concerns to Cambridge or its designee. Greenfield had
provided financing to the Company during the reorganization and the Term Sheet
originally envisioned that Greenfield would remain a lender to the Company
through the Effective Date and that Cambridge or its designee would provide
advisory services to the Company pursuant to an Advisory Agreement. However, it
became apparent to the Company and to Cambridge that it was in the best
interests of the Company for Greenfield to be paid out of its loan facility
with respect to the Company prior to the Effective Date and for Home Retail
Acquisition Corp. ("HRAC"), the designee of Cambridge, to assume a more active
advisory role in the business and perform in place of Cambridge under the
advisory agreement. As a result, HRAC arranged for Fremont to provide a loan
facility, the proceeds of which were used to repay Greenfield. The Advisory
Agreement was amended pursuant to a Stipulation and Order entered by the Court
on April 27, 1998. In order to ensure that the Fremont financing was sufficient
in amount to (i) repay Greenfield in full, and (ii) provide the Company with
sufficient working capital, the Court authorized HRAC to purchase participation
interests in the Fremont financing. As a result, HRAC purchased the HRAC Junior
Tranche, in the amount of $310,000.
Pursuant to the Plan of Reorganization, on the Effective Date, HRAC merged
with and into the Predecessor Entity with the Predecessor Entity being the
surviving corporation and simultaneously changing its name to Home Retail
Holdings, Inc. In consideration for the contribution of HRAC and the merger of
HRAC with the Company, and in complete satisfaction of the HRAC Junior Tranche,
and any amounts owed to HRAC prior to the confirmation date under the HRAC
Advisory Agreement, on the Effective Date the stockholders of HRAC received
1,383,691 shares of Common Stock. In addition, the Company assumed all of the
liabilities of HRAC.
The Reorganization
Pursuant to the Plan of Reorganization, the Company issued: (i) 1,522,041
shares of Common Stock, of which 1,383,691 shares were issued to the
shareholders of HRAC and 138,350 were issued to creditors with unsecured claims
against the Predecessor Entity; (ii) 85,777 shares of Class B Common Stock to
the holders of the Predecessor Entity's common stock; (iii) 69,174 shares of
Class B Common Stock to the holders of the Predecessor Entity's preferred
stock; (iv) 52,573 New Warrants; (v) 92,595 Bidco Warrants; and (vi) 29,261
Individual Warrants. These shares and warrants were issued pursuant to Section
1145(a) of the Bankruptcy Code which exempts the offer and sale of securities
under a plan of reorganization from registration under the Securities Act and
state laws if: (i) the securities are offered and sold under a plan of
reorganization; (ii) the securities offered are these of the debtor or an
affiliate of the debtor participating in a joint plan or of a successor to the
debtor under the plan; and (iii) the recipients of the securities must hold a
prepetition or administrative expense claim against the debtor or an interest
in the debtor, or principally in such exchange and partly for cash or property.
The Company believes that it satisfied all of the requirements of Section
1145(a) and as a result the securities and warrants issued pursuant to the Plan
of Reorganization were exempt from registration under the Securities Act and
state securities laws.
Other Transactions
Greg E. Dukoff is currently the Secretary, interim Chief Financial Officer
and a director of the Company. Mr. Dukoff is being compensated at a rate of
$8,333 per month for financial and administrative services rendered as an
independent consultant. Mr. Dukoff was President and a director of HRAC.
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<PAGE>
In connection with the acquisition of Aropi, the Company granted Mr. Kaas
an option to purchase 5,000 shares of Common Stock at the price per share equal
to the public offering price. This option vested immediately. As a signing
bonus, Mr. Kaas was entitled to receive $125,000 paid in equal monthly payments
of approximately $10,417 per month for a period of 12 months commencing 60 days
after the closing of the acquisition. In addition, pursuant to a letter
agreement between the Company and Mr. Kaas, the Company agreed to pay Mr. Kaas
the aggregate amount of $100,000 on a monthly basis over a period of 12 months
commencing 60 days after the closing of the acquisition. The entire amount
remaining under the letter agreement will be accelerated and become due and
payable upon the consummation of the Offering. The Company also agreed to make
a good faith effort to deliver to Mr. Kaas a letter of credit in the amount of
$150,000 to secure a convertible promissory note in the amount of $250,000.
In August 1998, the Company entered into an agreement to lease its
executive offices from Glenn Kaas, formerly the President, Chief Executive
Officer and director of the Company. The annual rental to be paid by the
Company will equal $65,000 per year for the first 18 months of the lease, at
which time the base rent will be adjusted by calculating the change in the
Revised Consumer Price Index for All Urban Consumers published by the Bureau of
Labor Statistics of the United States Department of Labor for the United States
City Average, All Items ("CPI"), from the commencement date of the lease and as
of the twelfth month of the lease and adding that percentage to the percentage
arrived at by calculating the change in the CPI from the thirteenth month and
as of the eighteenth month of the lease. The base rent for the remaining term
of the lease will be adjusted by the sum of these two percentages. The lease
commences on September 1, 1998 and terminates two and one half years from the
commencement date.
Pursuant to a demand note, Amelar Investments, L.L.C., TJQL Investments,
LLC, Deltennium Group, Inc., and Sina Kinay, collectively, loaned $30,000 to
the HRAC on June 12, 1998 with an annual interest rate of 10.5%. This demand
note was later amended to be held by Tri-Family Investment Co., LLC. on behalf
of the aforementioned parties.
Control by Certain Directors
Certain related persons currently own an aggregate of approximately 40% of
the Common Stock, 20% after this Offering, and all but two of the Company's
directors are affiliated. As a result, Messrs. Danovitch, Lucaci, Dukoff and
Czarnecki will be in a position to exercise significant influence over the
Company and the election of its directors and otherwise essentially control the
outcome of all matters requiring stockholder approval.
In August 1998, the Company entered into a management agreement with
Deltennium Consulting, Inc., a Delaware corporation ("Deltennium Consulting"),
to provide services in connection with the operations of the Company for the
lesser of three years from the Effective Date or until the Company has
sustained a market capitalization of at least $150 million for at least three
months. Under the management agreement Deltennium Consulting receives $60,000
per year for such services. Gerald Czarnecki, the Chairman of the Board of
Directors of the Company, is also the Chairman and Chief Executive Officer of
Deltennium Consulting.
Global Strategic Holdings, Ltd. currently owns an aggregate of
approximately 40% of the Common Stock, 20% after this Offering. Thomas Tuttle,
a director of the Company, is the investment advisor to Global Strategic
Holdings, Ltd. and as such will be in a position to exercise significant
influence over the Company and the election of its directors and otherwise
essentially control the outcome of all matters requiring stockholder approval.
Advisory Agreement
Pursuant to the Plan of Reorganization, HRAC entered into an advisory
agreement with the Company which terminated on the Effective Date of the
Reorganization. DDG Management Services Corp. currently has an advisory
agreement with the Company to provide advisory and related services for the
lesser of three years from the Effective Date or until the Company has
sustained a market capitalization of at least $150 million for at least three
months. Under the advisory agreement, DDG Management Services Corp. receives
$20,000 per month, with payments to accrue until such time as the Company
raises $4 million in a public or private equity offering, after which all
amounts that have accrued including any interest thereon shall be paid and
future payments shall be made monthly. See "The Reorganization."
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<PAGE>
PRINCIPAL STOCKHOLDERS
As of November 25, 1998, the Company has outstanding 1,522,041 shares of
Common Stock held by 343 holders of record. The following table sets forth
certain information regarding the beneficial ownership of shares of Common
Stock as of November 25, 1998, by (i) each of the Company's directors and
executive officers, (ii) each person who beneficially owns more than 5% of the
outstanding shares of Common Stock, and (iii) all of the Company's directors
and executive officers as a group.
<TABLE>
<CAPTION>
Percentage Owned
----------------------
Name and Address Before After
of Beneficial Owner(1) Shares Offering Offering
- ----------------------------------------------- ------------ ---------- ---------
<S> <C> <C> <C>
Gerald M. Czarnecki(2) ........................ 124,679 8.2% 4.1%
Greg E. Dukoff(3) ............................. 73,813 4.8% 2.4%
John D. Critser ............................... 8,937 * *
David E. Danovitch(4) ......................... 124,679 8.2% 4.1%
George P. Lucaci(5) ........................... 211,159 13.8% 7.0%
Thomas L. Tuttle(6) ........................... 605,362 39.7% 20.0%
Daniel T. Guilfoile ........................... 0 * *
Global Strategic Holdings, Ltd.(6)............. 605,362 39.7% 20.0%
Amelar Investments, LLC (4).................... 124,679 8.2% 4.1%
Alemer Productions, LLC (5).................... 211,159 13.8% 7.0%
TJQL Investments, LLC(7) ...................... 211,159 13.8% 7.0%
Deltennium Group, Inc.(2)...................... 124,679 8.2% 4.1%
Jamberry Lake Partners (3)..................... 73,813 4.8% 2.4%
All Directors and Executive Officers as a Group
(7 Persons) .................................. 1,148,629 74.7% 37.6%
</TABLE>
- ------------
* Less than one percent.
(1) Unless indicated otherwise, the address of the beneficial owners is,
Rolling Pin Kitchen Emporium, Inc., 4264 Winters Chapel Road, Building B,
Atlanta, Georgia 30360.
(2) Includes 124,679 shares held by Deltennium Group, Inc. Mr. Czarnecki is the
Chairman and Chief Executive Officer of Deltennium Group, Inc.
(3) Includes 72,063 shares held by Jamberry Lake Partners and 1,750 shares
which may be acquired upon the exercise of warrants. Mr. Dukoff is a
managing partner of Jamberry Lake Partners.
(4) Includes 124,679 shares held by Amelar Investments, LLC. Mr. Danovitch is a
manager of Amelar Investments, LLC.
(5) Includes 211,159 shares held by Alemer Productions, LLC. Mr. Lucaci is a
member of Alemer Productions, LLC.
(6) Includes 605,362 shares held by Global Strategic Holdings, Ltd. Thomas
Tuttle is the investment advisor to Global Strategic Holdings, Ltd. Mr.
Tuttle's address is 712 5th Avenue, 7th Floor, New York, New York 10019.
(7) Mr. Donald Jackson is a manager of TJQL Investments, LLC. Mr. Jackson was a
director of the Company until he resigned in November 1998.
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<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares
of Class A Common Stock, par value $0.01 per share (referred to as "Common
Stock"), 154,951 shares of Class B Restricted Common Stock, par value $0.01 per
share (the "Class B Common Stock"), and 1,000,000 shares of Preferred Stock,
par value $0.01 per share ("Preferred Stock").
The following summary of certain terms of Company's capital stock
describes material provisions of, but does not purport to be complete and is
subject to and qualified in its entirety by, our Restated and Amended
Certificate of Incorporation, Bylaws and the Delaware General Corporation Law.
Common Equity Securities
The Common Stock and Class B Common Stock have the same rights, privileges
and preferences except that the Class B Common Stock (i) has no dividend or
liquidation rights except as required under the Delaware General Corporation
Law, and (ii) may not be transferable except by operation of law in the event
of the death, bankruptcy, or liquidation of the holder thereof. Subject to
prior dividend rights and sinking fund or redemption or purchase rights which
may be applicable to any outstanding preferred stock, the holders of Common
Stock are entitled to share ratably in such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion out of
funds legally available therefor. The holders of Common Stock are entitled to
share ratably in any assets remaining after satisfaction of all prior claims
upon liquidation of Company, including prior claims of any outstanding
preferred stock.
Each share of Class B Common Stock shall be automatically converted into
one share of Common Stock (the "Conversion Rate") if any one of the following
events occurs (each, a "Trigger Event"): (i) the closing sale price of the
Common Stock for twenty (20) consecutive trading days as quoted on the Nasdaq
SmallCap Market or, if such shares are not trading on the Nasdaq SmallCap
Market, then on the principal market on which such shares shall then be trading
for twenty (20) consecutive trading days exceeds $11.57 per share of Common
Stock (the "Trigger Price"); or (ii) of a sale of all or substantially all the
assets of Company, a sale of all the equity interests of Company or a merger or
consolidation of Company with or into another entity in which Company is not
the surviving entity pursuant to which the holders of Common Stock would
receive, on a fully diluted basis after giving effect to the conversion of the
Class B Common Stock and any other convertible securities, consideration which
exceeds the Trigger Price, in each case subject to adjustment in the event of
any stock splits or other similar events. As soon as practicable after a
Trigger Event, Company shall give or cause notice to be given to each holder of
Class B Common Stock that the Class B Common Stock has been converted into
Common Stock, and such conversion shall be deemed to have occurred on the
sooner of the date of such notice and the date of such a merger or
consolidation, if any, constituting a Trigger Event. Each holder of shares of
Class B Common Stock outstanding immediately prior to the date of the Trigger
Event, upon surrender of the certificate or certificates representing such
shares to Company, shall receive in exchange therefor a certificate or
certificates representing the number of whole shares of Common Stock which such
holder shall be entitled to receive as provided herein. After the Trigger
Event, each certificate which represented outstanding shares of Class B Common
Stock, prior to such date, shall be deemed for all corporate purposes to
evidence the ownership of the shares of Common Stock as provided herein. No
dividend or other distribution payable with respect to the Common Stock shall
be paid to any holder of any certificate representing shares of Class B Common
Stock issued and outstanding immediately prior to such date until such holder
surrenders such certificate for exchange. All shares of Common Stock for and
into which shares of Class B Common Stock shall have been exchanged and
converted shall be deemed to have been issued in full satisfaction of all
rights pertaining to such exchanged and converted shares. Except for such
rights, the holder of certificate(s) representing shares of Class B Common
Stock issued and outstanding immediately prior to such date shall have no
rights with respect to such shares after such date other than to surrender such
certificate for conversion. The Company shall at all times reserve a sufficient
number of shares of authorized but unissued Common Stock for issuance upon
conversion of the Class B Common Stock. No share of Class B Common Stock may be
issued after a Trigger Event.
There are 1,522,041 shares of Common Stock and 154,951 shares of Class B
Common Stock issued and outstanding.
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<PAGE>
The holders of Common Stock and Class B Common Stock are entitled to one
vote per share on all matters to be submitted to a vote of the stock and are
not entitled to cumulative voting in the election of directors, which means
that the holders of the majority of the shares voting for the election of
directors can elect all of the directors then standing for election by the
holders of Common Stock. The holders of Common Stock and Class B Common Stock
have no preemptive or other subscription rights, and shares of Common Stock and
Class B Common Stock are not redeemable at the option of the holders, do not
have any conversion rights, and are not subject to call. The rights,
preferences and privileges of holders of Common Stock and Class B Common Stock
are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock that the Company may designate and
issue in the future or which is currently outstanding.
Preferred Stock
The authorized but undesignated Preferred Stock may be issued from time to
time in one or more designated series or classes. The Board of Directors,
without approval of the stockholders, is authorized to establish the voting,
dividend, redemption, conversion, liquidation and other relevant provisions
that may be provided with respect to a particular series or class. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Common Stock and Class B Common Stock
and, under certain circumstances, make it more difficult for a third party to
acquire, or discourage a third party from acquiring, a majority of the
outstanding voting stock of the Company.
There are 320 shares of Convertible Series A Preferred Stock issued and
outstanding.
The holders of the Convertible Series A Preferred Stock have the right to
receive dividends of 6% per annum, payable in stock or cash at the Company's
discretion at the time of conversion. The holders have the right to convert
each share of Preferred Stock into Shares of Common Stock (based on $1,000 per
share of Preferred Stock) equal to the lesser of (a) 80% of the five day
average closing bid price for the Common Stock for the five trading days
immediately preceding the shares are converted, or (b) 150% of the five day
average closing bid price, as reported by Bloomberg, LP, for the Company's
Common Stock for the five trading day period following the Company's completion
of a secondary offering. The holders of the Convertible Series A Preferred
Stock have demand registration rights. As a result, the Company will exercise
its redemption rights and redeem 275 shares of Convertible Series A Preferred
Stock held by the Delacroix Foundation, Ltd. at the time of the Offering for a
redemption premium of 25% over the $1,000 par value of such shares.
Registration Rights
Registration rights were granted in connection with the issuance of the
Preferred Stock, Individual Warrants, Other Financing Warrants, Greenfield
Warrants, New Bidco Warrants and Bidco Warrants. The holders of the Individual
Warrants, Other Financing Warrants, Greenfield Warrants, New Bidco Warrants and
Bidco Warrants, or the shares of Common Stock issued on conversion of the such
warrants, have the right to unlimited incidental registrations for a period of
three years from the commencement of this Offering.
Warrants
New Warrants. Pursuant to the Plan of Reorganization, the Company granted
the New Warrants for the purchase of 52,573 shares of Common Stock, exercisable
at a price of $11.57 per share, to the holders of all of the outstanding
warrants of the Predecessor Entity. The New Warrants are exercisable for a
period of 14 months, commencing August 12, 1998 and terminating on October 30,
1999. The New Warrants contain anti-dilution provisions providing for
adjustments of the exercise price and the number of shares underlying the New
Warrants upon the occurrence of certain events, including any recapitalization,
reclassification, stock dividend, stock split, stock combination or similar
transactions. Commencing on February 1999, the Company may redeem all of the
New Warrants at $0.05 per warrant, provided, that before the Company can call
for redemption of the New Warrants the closing sale price of the Common Stock
as quoted on the Nasdaq SmallCap Market, or if such shares are not quoted on
the Nasdaq SmallCap Market, on the principal market on which such shares shall
then be trading, shall have, for each of the twenty (20) consecutive trading
days ending on the tenth (10th) day prior to the date on which the notice is
given, equaled or exceeded $12.00 per share.
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<PAGE>
Individual Warrants. Pursuant to the Plan of Reorganization, the Company
granted the Individual Warrants for the purchase of 29,261 shares of Common
Stock, exercisable at a price of 80% of the public offering price, to the
holders of all of the individual junior tranche of the Predecessor Entity. The
Individual Warrants are exercisable for a period of five-years, commencing on
August 20, 1998 and terminating on June 30, 2003. The Individual Warrants
contain anti-dilution provisions providing for adjustments of the exercise
price and the number of shares underlying the Individual Warrants upon the
occurrence of certain events, including any recapitalization, reclassification,
stock dividend, stock split, stock combination or similar transactions. For a
period of three years from the commencement of this Offering, the Individual
Warrants grant to the holder thereof certain registration rights with respect
to the Common Stock issuable upon the exercise of the Individual Warrants.
Bidco Warrants. The Company has granted warrants to Bidco for the purchase
92,595 shares of Common Stock. The Bidco Warrants are exercisable at a price of
$0.01 per share for a five-year period, commencing on August 12, 1998 and
terminating on August 12, 2003.
New Bidco Warrants. The Company has granted warrants to Bidco for the
purchase 40,602 shares of Common Stock. The New Bidco Warrants are exercisable
at a price per share equal to 165% of the public offering price for a five-year
period, commencing on the effective date of this Offering and terminating on
June 30, 2003. The New Bidco Warrants contain anti-dilution provisions
providing for adjustments of the exercise price and the number of shares
underlying the New Bidco Warrants upon the occurrence of certain events,
including any recapitalization, reclassification, stock dividend, stock split,
stock combination or similar transactions. For a period of three years from the
commencement of this Offering, the New Bidco Warrants grant to the holder
thereof certain registration rights with respect to the Common Stock issuable
upon the exercise of the New Bidco Warrants.
Greenfield Warrants. The Company has granted warrants to Greenfield for
the purchase 40,602 shares of Common Stock. The Greenfield Warrants are
exercisable at a price per share equal to 165% of the public offering price for
a five-year period, commencing on the effective date of this Offering and
terminating on June 30, 2003. The Greenfield Warrants contain anti-dilution
provisions providing for adjustments of the exercise price and the number of
shares underlying the Greenfield Warrants upon the occurrence of certain
events, including any recapitalization, reclassification, stock dividend, stock
split, stock combination or similar transactions. For a period of three years
from the commencement of this Offering, the Greenfield Warrants grant to the
holder thereof certain incidental registration rights with respect to the
Common Stock issuable upon the exercise of the Greenfield Warrants.
Underwriters' Warrants. The Company granted warrants to the Underwriters
to purchase 150,000 shares of Common Stock. The Underwriters' Warrants are
exercisable at a price per share equal to 165% of the public offering price for
a four-year period, commencing one year from the effective date of this
Offering. The Underwriters' Warrants contain anti-dilution provisions providing
for adjustments of the exercise price and the number of shares underlying the
Underwriters' Warrants upon the occurrence of certain events, including any
recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction. The Underwriters' Warrants grant to the
holders thereof certain demand and "piggyback" registration rights with respect
to the Common Stock issuable upon the exercise of the Underwriters' Warrants.
See "Underwriting."
Other Financing Warrants. The Company has granted two warrants to JRP
Consulting Corp. and two warrants to Laux, Holmes & Company for the purchase of
104,246 shares of Common Stock in the aggregate. The Other Financing Warrants
are exercisable at a price per share of 165% of the public offering price.
Certain of the Other Financing Warrants representing warrants to purchase
98,246 shares of Common Stock are exercisable for a period of five years,
commencing on August 20, 1998 and the remaining Other Financing Warrants to
purchase 6,000 shares of Common Stock become exercisable on November 25, 1999
and the aggregate of such warrants terminate on August 31, 2003. The Other
Financing Warrants contain anti-dilution provisions providing for adjustments
of the exercise price and the number of shares underlying the Other Financing
Warrants upon the occurrence of certain events, including any recapitalization,
reclassification, stock dividend, stock split, stock combination or similar
transactions. For a period of three years from the commencement of this
Offering, the Other Financing Warrants grant to the holder thereof certain
registration rights with respect to the Common Stock issuable upon the exercise
of the Other Financing Warrants.
Financing Warrants. The Company has granted warrants to DLM Asset
Management and Spinnernet Financial Services, Ltd. for the purchase of 8,875
shares of Common Stock in the aggregate. The Financing
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<PAGE>
Warrants are exercisable at a price per share of 165% of the public offering
price. The Financing Warrants are exercisable for a period of three years,
commencing on the effective date of the Offering and terminating on August 31,
2003. The Financing Warrants contain anti-dilution provisions providing for
adjustments of the exercise price and the number of shares underlying the
Financing Warrants upon the occurrence of certain events, including any
recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transactions. For a period of three years from the
commencement of this Offering, the Financing Warrants grant to the holder
thereof certain registration rights with respect to the Common Stock issuable
upon the exercise of the Financing Warrants.
Transfer Agent and Registrar
Continental Stock Transfer and Trust Company is acting as transfer agent
and registrar for the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,022,041
outstanding shares of Common Stock (assuming no exercise of outstanding
options, warrants or Underwriters' over-allotment option). Of these shares, the
1,500,000 shares sold to the public in this Offering will be freely tradable
without restrictions or further registration under the Securities Act, except
for any shares purchased by "affiliates" within the meaning of the Securities
Act, which will be subject to the resale limitations of Rule 144. The remaining
1,394,378 shares held by certain existing stockholders were issued by the
Company in private transactions in reliance upon one or more exemptions under
the Securities Act, are "restricted securities" as that term is defined in Rule
144 promulgated under the Securities Act. Such restricted securities may be
sold in compliance with such Rule, pursuant to registration under the
Securities Act or pursuant to an exemption therefrom. Generally, under Rule
144, each person holding restricted securities for a period of one year may,
every three months after such one year holding period, sell in ordinary
brokerage transactions or to market makers an amount of shares equal to the
greater of one percent of the Company's then outstanding Common Stock or the
average weekly trading volume during the four weeks prior to the proposed sale.
In addition, sales under Rule 144 may be made only through unsolicited
"broker's transactions" or to a "market maker" and are subject to various other
conditions. The limitation on the number of shares which may be sold under Rule
144 and the "broker's transaction" requirement do not apply to restricted
securities sold for the account of a person who is not and has not been an
"affiliate" (as that term is defined in the Securities Act) of the Company
during the three months prior to the proposed sale and who has beneficially
owned the securities for at least two years.
Prior to the Offering, there has been no market for the Common Stock, and
no predictions can be made as to the effect, if any, that sales of shares under
Rule 144 or the availability of shares for sale will have on the market prices
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market following this Offering could lower the market price of the
Common Stock. Of the 3,022,041 shares of Common Stock to be outstanding after
this Offering (assuming no exercise of outstanding options, warrants or the
over-allotment option), 1,500,000 shares will be freely tradable without
restriction. Upon expiration of the lock-up agreements entered into by the
officers, directors and certain existing stockholders of the Company, an
additional 1,394,378 shares will become eligible for sale 13 months from the
close of this Offering, subject to the provisions of Rule 144. In addition,
138,350 shares of Common Stock are held by stockholders that acquired the
shares as creditors pursuant to the Plan of Reorganization. These stockholders
have certain registration rights as provided by the Plan of Reorganization.
In addition, the Company intends to file a registration statement on Form
S-8 with respect to the shares of Common Stock issuable upon exercise of
options under the Incentive Plan. The Incentive Plan authorizes the issuance of
options relating to up to 180,000 shares of Common Stock. Currently, no options
have been issued under the Incentive Plan. See "Management--1998 Equity
Incentive Plan." Upon filing of such registration statement, the holders of
such options may, subject to vesting requirements, exercise and sell their
shares immediately without restriction, except affiliates who are subject to
certain volume limitations and manner of sale requirements of Rule 144. Holders
of warrants to purchase 466,181 shares of Common Stock are entitled to certain
registration rights with respect to such shares. Upon registration, such shares
may be sold in the market
42
<PAGE>
without limitation. See "Description of Securities--Registration Rights." Sales
of such shares may decrease the recapitalization, reclassification, stock
dividend, stock split, stock combination or similar transaction. The
Underwriters' Warrants grant to the holders thereof certain demand and
"piggyback" registration rights with respect to the Common Stock issuable upon
the exercise of the Underwriters' Warrants. See "Underwriting."
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement"), the Company has agreed to sell to
each of the underwriters named below (the "Underwriters"), and each of the
Underwriters, for whom Nutmeg Securities, Ltd. is acting as representative (the
"Representative"), has agreed to purchase, the number of shares of Common Stock
set forth opposite its name below. Under certain circumstances, the commitments
of nondefaulting Underwriters may be increased as set forth in the Agreement
Among Underwriters.
Underwriter Number of Shares
- ------------------------- -----------------
Nutmeg Securities, Ltd.
----------
TOTAL
==========
The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations are such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased. The Underwriters propose to
offer the shares of Common Stock directly to the public at the public offering
price set forth on the cover page of this Prospectus.
The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 225,000 additional shares of Common Stock at the public offering
price less the underwriting discount. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby.
The Company has also agreed to sell to the Underwriters, for nominal
consideration, warrants to purchase the number of shares of Common Stock equal
to 10% of the total number of shares of Common Stock sold in this Offering at a
price per share equal to 165% of the public offering price. The Underwriters'
Warrants will be exercisable for a period of four years commencing one year
from the effective date of this Offering and will contain certain demand and
"piggyback" registration rights with respect to the Common Stock issuable upon
the exercise of the Underwriters' Warrants. The Underwriters' Warrants are not
transferable (except to members of the syndicate and their affiliates). The
exercise price and the number of shares issuable upon exercise may, under
certain circumstances, be subject to adjustment pursuant to antidilution
provisions.
The Company has agreed to allow the Underwriters a commission of ten
percent (10%) of the public offering price of the shares of Common Stock.
Additionally, the Company will be paying the Underwriters, following the
closing of this Offering, a nonaccountable expense allowance equal to three
percent (3%) of the aggregate public offering price of the shares of Common
Stock, less any applicable deposits.
The Company has further agreed to indemnify the Underwriters against
certain liabilities, losses and expenses, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof. The Company also has agreed to reimburse
the Underwriters for certain out-of-pocket expenses incurred in connection with
the Offering.
The Underwriters have advised the Company that they do not intend to make
sales to discretionary accounts.
The Company's officers, directors and certain existing stockholders have
agreed not to, directly or indirectly, sell, offer, contract to sell, make any
short sale, pledge or otherwise dispose of any of the Company's equity
securities for a period of 13 months after the date of the closing of this
Offering.
In connection with this Offering certain underwriters may engage in
passive market making transactions in the shares in accordance with Rule 103 of
Regulation M. Further, the Underwriters' selling group members and
43
<PAGE>
their respective affiliates may engage in transactions that stabilize, maintain
or otherwise affect the market price of the Shares. These transactions may
include stabilization transactions permitted by Rule 104 of Regulation M, under
which persons may bid for or purchase shares to stabilize the market price. The
Underwriters may also create a "short position" for their own account by
selling more shares in the Offering than they are committed to purchase, and in
that case they may purchase shares in the open market after this Offering is
completed to cover all or a part of their short position. The Representative
may also cover all or a portion of their short position, up to 225,000 shares,
by exercising their over-allotment option described above and on the cover of
this Prospectus.
Prior to the Offering, there has not been an active trading market for the
Common Stock. Consequently, the public offering price of the Common Stock and
the terms of the Underwriters' Warrants (including the exercise price) have
been determined by negotiation between the Company and the Representative.
Among the factors considered in such negotiations were the history of, and the
prospect for, the Company's business, and assessment of the Company's
management, its past and present operations, the Company's development and the
general condition of the securities market at the time of the Offering. The
public offering price does not necessarily bear any relationship to the
Company's assets, book value, earnings or other established criteria of value.
Such price is subject to change as a result of market conditions and other
factors, and no assurance can be given that a public market for the Common
Stock will develop after the close of the Offering, or if a public market in
fact develops, that such public market will be sustained, or that the Common
Stock can be resold at any time at the offering or any other price.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon by Brown & Wood LLP, Washington, D.C. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Gersten, Savage, Kaplowitz & Fredericks, LLP, New York, New
York.
EXPERTS
The audited consolidated financial statements included elsewhere in this
Prospectus and in the Registration Statement have been audited by Feldman Sherb
Ehrlich & Co., P.C., certified public accountants, and Smith & Radigan,
certified public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firms
as experts in giving said reports.
ADDITIONAL INFORMATION
The Company will be subject to the information requirements of the
Exchange Act, and, in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials can be obtained from the Commission at Judiciary Plaza, 450
Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the Commission. The address of that site is http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports
containing financial statements audited and reported upon by its independent
public accountants.
44
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Rolling Pin Kitchen Emporium, Inc.: -----
<S> <C>
Independent Auditors' Report ............................................................. F-2
Consolidated Balance Sheet at August 12, 1998 ............................................ F-3
Notes to Consolidated Financial Statements ............................................... F-4
Gaylord Companies, Inc.:
Independent Auditors' Report ............................................................. F-9
Consolidated Balance Sheet at December 31, 1997 .......................................... F-10
Consolidated Statement of Operations for the years ended December 31, 1997 and 1996 ...... F-11
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997 and
1996 ................................................................................... F-12
Consolidated Statement of Cash Flows for the years ended December 31, 1997 and 1996 ...... F-13
Notes to Consolidated Financial Statements ............................................... F-14
(Unaudited) Interim Financial Statements:
Consolidated Balance Sheet at September 30, 1998 (Unaudited) ............................. F-19
Consolidated Statements of Operations (Unaudited) of Rolling Pin Kitchen Emporium, Inc.
for the period August 12, 1998 to September 30, 1998 and of Gaylord Companies, Inc.
for the period January 1, 1998 to August 12, 1998 and the nine months ended
September 30, 1997 .................................................................... F-20
Consolidated Statements of Cash Flows (Unaudited) of Rolling Pin Kitchen Emporium, Inc.
for the period August 12, 1998 to September 30, 1998 and of Gaylord Companies, Inc.
for the period January 1, 1998 to August 12, 1998 and the nine months ended
September 30, 1997 .................................................................... F-21
Notes to Unaudited Financial Statements .................................................. F-22
Aropi Incorporated:
Independent Auditors' Report ............................................................. F-23
Balance Sheet at June 30, 1998 and 1997 .................................................. F-24
Statement of Income for the years ended June 30, 1998 and 1997 ........................... F-26
Statement of Stockholders' Equity for the years ended June 30, 1998 and 1997 ............. F-27
Statement of Cash Flows for the years ended June 30, 1998 and 1997 ....................... F-28
Notes to Financial Statements ............................................................ F-29
(Unaudited) Pro-forma Financial Statements:
Description of (Unaudited) Pro-forma Financial Statements ................................ F-33
(Unaudited) Pro-forma Condensed Consolidated Statement of Operations for the nine months
ended September 30, 1998 .............................................................. F-34
(Unaudited) Pro-forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1997 ..................................................................... F-35
Notes to (Unaudited) Pro-forma Financial Statements ...................................... F-36
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Rolling Pin Kitchen Emporium, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Rolling Pin
Kitchen Emporium, Inc. and subsidiaries as of August 12, 1998. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement 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 statement is 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, the financial statement referred to above presents fairly,
in all material respects, the financial position of Rolling Pin Kitchen
Emporium, Inc. as of August 12, 1998 in conformity with generally accepted
accounting principles.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
October 30, 1998
F-2
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 12, 1998
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 144,006
Accounts receivable - trade ......................... 5,183
Inventories ......................................... 777,991
Prepaid expenses and other current assets ........... 15,427
-----------
TOTAL CURRENT ASSETS ............................. 942,607
PROPERTY AND EQUIPMENT ............................... 299,323
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS ................................. 148,388
OTHER ASSETS ......................................... 174,103
-----------
$ 1,564,421
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses ................................... $ 247,651
Note payable ............................................................ 750,000
-----------
TOTAL CURRENT LIABILITIES ............................................ 997,651
PUT OPTION ON WARRANTS ................................................... 550,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par, 1,000,000 shares authorized, none issued...... --
Common stock, $.01 par, authorized: Class A-20,000,000,
Class B-155,000; issued and outstanding :
Class A-1,522,041, Class B-154,951 .................................... 16,770
-----------
TOTAL STOCKHOLDERS' EQUITY ............................................ 16,770
-----------
$ 1,564,421
===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AUGUST 12, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The financial statements of Rolling Pin Kitchen Emporium, Inc. (the
"Company") include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements. The Company is a specialty retailer of
quality cookware and serving equipment, with operations in Ohio, Indiana and
Kentucky.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the retail method and the FIFO method.
(d) Property and Equipment
Property and equipment are stated at cost. Property and equipment held
under capital leases are stated at the lower of the present value of minimum
lease payments at the beginning of the lease term or fair value at the
inception of the lease.
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets. Property
and equipment held under capital leases and leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
estimated useful life of the asset.
(e) Net Earnings (Loss) Per Share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which became effective for financial
statements with fiscal years ending after December 15, 1997. Basic earnings
(loss) per share is computed based on the weighted average number of common
shares outstanding after giving effect to preferred stock dividends.
(f) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, receivables,
accounts payable and accrued expenses approximate fair value based on the
short-term maturity of these instruments.
(g) Stock Based Compensation
The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." In accordance with
Statement of Financial Accounting Standards No. 123, "Accounting For
Stock-Based Compensation," the Company has adopted the pro forma disclosure
requirements of Statement No. 123 in fiscal 1996.'
(h) Revenue Recognition
Revenue is recorded at the point of sale. Returns are estimated and
accrued.
(i) Cash Equivalents
The Company considers all highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents.
F-4
<PAGE>
(j) Recently Issued Accounting Pronouncements
Upon its emergence from bankruptcy, the Company has or will adopt the
provisions of recently issued accounting pronouncements, which consist of the
following:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which requires separate reporting for items of other
comprehensive income, which are not normally reported in the statement of
operations, but rather as a direct adjustment to equity. This statement is
effective for fiscal years beginning after December 15, 1997. The Company does
presently have any which are characterized as other comprehensive income and it
is not presently expected that adoption of this standard will have a material
impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which requires disclosure
about reportable operating segments. This statement is effective for fiscal
years beginning after December 15, 1997. The Company does not presently have
any reportable operating segments, as defined under this standard, and it is
not expected that adoption of this standard will have a material impact on the
Company's financial statements.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. The Company expect
that adoption of this standard will have a material impact on the Company's
financial statements.
2. REORGANIZATION
On November 14, 1997, the Company filed a voluntary petition under Chapter
11 of the United States Bankruptcy code.
At the outset, the bankruptcy petition was organized to consolidate the
cases of the entities that comprised the bookstore operations in distinction
from those that comprised the cookstore operations.
The bookstore operations were disposed of under their own separate plan of
reorganization on July 1, 1998 and were accounted for as discontinued
operations.
On June 24, 1998, the entities comprising the cookstores filed a plan of
reorganization, which was confirmed by the Bankruptcy Court on July 10, 1998
and declared effective on August 12, 1998.
Under the plan, Home Retail Acquisition Corp. ("HRAC") (which is a secured
creditor of the cookstores by virtue of the its purchase of a junior
participation in the Company's debt from Fremont Financial), was merged into
the Company. On the effective date, all previous equity interests were
extinguished and the reorganized company issued a total of 1,522,041 shares of
Class A common stock, 154,951 shares of Class B common stock and a total of
174,429 warrants. HRAC received a total of 1,383,691 of the newly issued Class
A shares, thereby controlling the reorganized entity. Unsecured creditors of
the predecessor entity were issued 138,350 Class A common shares. Holders of
the predecessor's common stock were issued 85,777 shares of Class B common
stock and holders of the predecessor entity's preferred stock were issued
69,174 shares of Class B common stock.
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code, the Company was required to adopt fresh-start
accounting as of August 12, 1998, after all material conditions required by the
Plan were satisfied. The Company was required to adopt fresh-start reporting
because the holders of the existing voting shares immediately prior to filing
and confirmation of the Plan received less than 50% of the voting shares of the
emerging entity, and its reorganization value was less than the total of its
post-petition liabilities and allowed claims. Under fresh-start accounting, all
assets and liabilities are restated to reflect their reorganization value,
which approximates fair value at the date of reorganization. The liabilities of
the reorganized Company consist
F-5
<PAGE>
of post-petition current liabilities, notes payable to Liberty-Bidco in the
amount of $1,300,000, reduced by a discount of $400,000 and a put option of
$400,000 related to 92,595 warrants issued to Liberty-Bidco. In accordance with
fresh-start accounting, the gain on forgiveness of debt resulting from the
bankruptcy proceedings was reflected on the predecessor Company's statement of
operations for the period January 1, 1998 to August 12, 1998. In addition, the
accumulated deficit of the predecessor Company at August 12, 1998 totaling
$3,114,406 was eliminated, and at August 12, 1998, the reorganized Company's
financial statements reflect no beginning retained earnings or deficit.
Liabilities discharged in bankruptcy totaled $1,472,215. This amount was
recorded as an extraordinary gain on debt forgiveness on the predecessor
company's final statement of operations for the period January 1, 1998 to
August 12, 1998.
The reorganization value of the reorganized Company was determined in
consideration of several factors. Management believes the estimated fair value
of the emerging entity before considering liabilities approximates the amount a
willing buyer would pay for the assets of the entity immediately after the
restructuring. The Company determined that the fair value of the assets at
August 12, 1998 approximated carrying value. The excess of post-emergence
liabilities over the fair value of the assets, which totaled $148,388, is
recorded as "Reorganization Value in Excess of Amounts Allocable to
Identifiable Assets," which will be amortized as a charge to income over its
estimated life of 3 years.
F-6
<PAGE>
The effect of the reorganization on the Company's consolidated balance
sheet at August 12, 1998, is as follows:
<TABLE>
<CAPTION>
Pre-Confirmation Reorganized
Balance Sheet Balance Sheet
August 12, 1998 Adjustments August 12, 1998
------------------ --------------- ----------------
<S> <C> <C> <C>
Cash ............................................... $ 144,006 $ 144,006
Accounts receivable ................................ 5,183 5,183
Inventory .......................................... 777,991 777,991
Prepaids ........................................... 15,427 15,427
Fixed assets ....................................... 299,323 299,323
Reorganization value in excess of amounts .......... 148,888 148,388
Other assets ....................................... 174,103 174,103
------------ -----------
Total Assets ....................................... $ 1,416,033 $ 1,564,421
============ ===========
Accounts payable and accrued expenses .............. $ 247,651 $ 247,651
Line of credit ..................................... 900,000 900,000
Put option on warrants ............................. 400,000 400,000
------------ -----------
Total Liabilities .................................. 1,547,651 1,547,651
Stockholders' Equity:
Preferred stock .................................... 300,000 (300,000) 0
Common stock ....................................... 40,950 (40,950) 0
Common stock - Class A ............................. 0 15,220 15,220
Common stock - Class B ............................. 0 1,550 1,550
Paid in capital .................................... 2,641,838 (2,641,838) 0
Retained earnings .................................. (3,114,406) 3,114,406 0
------------ -----------
Total Stockholders' Equity ......................... (131,618) 16,770
------------ -----------
Total Liabilities and Stockholders' Equity ......... $ 1,416,033 $ 1,564,421
============ ===========
</TABLE>
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at August 12, 1998:
Depreciable
Life
-------------
Computers and equipment ......... 5 years $ 88,722
Leasehold improvements .......... (A) 103,023
Furniture and fixtures .......... 7 years 107,578
---------
$ 299,323
=========
(A) The lessor of useful life (on average 10 years) or over the lease term.
4. LOAN AGREEMENT
In April 1998, the Company obtained debtor-in-possession financing from
Fremont Financial Corporation which was repaid on August 12, 1998 with a
refinancing from Liberty-Bidco. The Liberty-Bidco financing totaled $1,300,000,
of which amount $1,053,000 was used to pay off Fremont, $160,000 was used to
pay financing costs and attorney fees and the $87,000 balance went to the
Company. The maturity date of the loan is January 1, 1999, and the loan bears
interest at three percent over prime. The loan contains a prepayment penalty of
20%, and is secured by substantially all the assets of the Company. The loan
contains a number of negative covenants of which the principal financial
covenants are to maintain a ratio of current assets to current liabilities (as
defined by agreement) of 1.25 to 1.00, and minimum net worth (as defined by
agreement) of negative $150,000 through September 30, 1998, positive $100,000
through November 30, 1998 and positive $500,000 by December 1, 1998 and beyond.
F-7
<PAGE>
In connection with the loan agreement, Liberty-Bidco received warrants to
purchase 92,595 shares of the Company's common stock for $.01 per share through
August 12, 2003. The warrants contain a put option which can require the
Company to repurchase the warrants, or the stock obtained on exercise, for the
greater of $400,000 or the market value of the stock. The Company has recorded
$400,000 as a liability for the put option and a corresponding discount to the
note payable. The put option is not exercisable until January 31, 2000.
The note discount is being amortized over the term of the debt using the
effective interest method and the financing costs are being amortized
straight-line over the debt term.
5. COMMITMENTS
Leases
In connection with the Bankruptcy Court's approval of the Company's plans
of reorganization, all previous future lease commitments were voided by the
court, and the Company selectively entered into new lease commitments for the
cookstore operations.
Future minimum lease payments under such noncancelable operating leases
are as follows:
Operating
Year ending December 31, leases
- ------------------------------------------ ----------
1998 .............................. $174,670
1999 .............................. 386,926
2000 .............................. 389,988
2001 .............................. 393,881
2002 .............................. 402,073
Later years, through 2006 ......... 617,042
6. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109.
The Company had deferred tax assets total $1,735,000, with $1,635,000
representing the tax effects of net operating loss carryforwards and the effect
of book depreciation in excess of tax depreciation of approximately $100,000 at
August 12, 1998. The Company has a full valuation allowance as a reserve
against such deferred tax assets. The net operating loss carryforwards totaling
approximately $4,087,000, expire in the years 2009 through 2013. Annual
utilization of the net operating loss carryforwards is restricted due to the
ownership change in the plan of reorganization.
7. WARRANTS
On August 20, 1998, the Company granted the following warrants: (i) Bidco
received a five year warrant to purchase 92,595 shares of the Common Stock,
exercisable at $0.01 per share, in connection with the Loan Agreement: (ii)
Bidco also received a five year warrant to purchase 40,602 shares of Common
Stock, exercisable at 165% of the public offering price, in connection with the
First Amendment to the Loan Agreement: (iii) Greenfield received a five year
warrant to purchase 40,602 shares of Common Stock, exercisable at 165% of the
public offering price; (iv) DLM Asset Management, Inc. and Spinnernet Financial
Systems, Ltd. received three year warrants to purchase in the aggregate 8,875
shares of Common Stock each exercisable at 165% of the public offering price;
and (v) JRP Consulting Corp. and Laux, Holmes & Company received five year
warrants to purchase in the aggregate 98,246 shares of Common Stock each
exercisable at 165% of the public offering price. The warrants were issued as
part of the financing agreements with Bidco and Greenfield.
Pursuant to the Plan of Reorganization, 52,573 warrants were issued to
previous warrant holders, exercisable for $11.57 until January 1, 1999 and
$14.40 until October 30, 1999. Also, 29,261 five year warrants were granted to
Junior Tranche participants, exercisable at 80% of the public offering price.
F-8
<PAGE>
8. ACQUISITION OF AROPI
On August 21, 1998, the Company acquired Aropi, Incorporated, an Atlanta,
Georgia based chain retailer of kitchen products. The purchase price was
$2,651,725, of which $1,290,317 went to the seller, composed of $790,317 in
cash and two convertible promissory notes of $250,000 each. The remaining
$1,361,408 was used to pay off certain indebtedness of the seller. Acquisition
costs were approximately $75,000. The convertible promissory notes bear
interest at the rate of 8% and are mandatorily convertible into Common Stock
having a fair market value of $500,000 as of the conversion date. Such shares
shall not represent less than 2% of all of the issued and outstanding Common
Stock on a fully diluted basis. The convertible promissory notes are
mandatorily convertible if the Company completes an offering of its Common
Stock prior to August 20, 1999 in which it receives proceeds of at least
$5,000,000 and the Company has a specified capital structure as of the
conversion date. The fair value of assets and liabilities acquired approximated
book value. Goodwill recorded on the acquisition was $1,004,877, and is
computed as follows:
Fair Value of Assets Acquired:
Cash ....................................... $ 101,487
Accounts receivable ........................ 48,932
Inventory .................................. 1,897,451
Fixed assets ............................... 352,891
-----------
2,400,761
Fair Value of Liabilities Assumed:
Accounts payable and accrued expenses ...... 678,913
-----------
Net Assets Acquired .......................... 1,721,848
Purchase Price, including acquisition costs and
repayment of seller's indebtedness ........... 2,726,725
-----------
Goodwill ................................... $ 1,004,877
===========
The goodwill will be amortized over its estimated useful life of ten
years.
Upon the acquisition, the selling shareholder entered into an employment
agreement to serve as chief executive officer of the combined company. The
employment agreement is for a period of three years for base annual salary of
$105,000, $115,500 and $127,050. The selling shareholder will also receive a
bonus totalling $125,000, payable at the rate of $10,417 over the first twelve
months and has received 5,000 options to purchase common stock for $6.00 per
share expiring in August 2000. Additionally, the Company entered into a
two-and-a-half year lease for the rental of administrative offices from the
seller for base annual rent of $65,000. Upon consummation of the acquisition,
the administrative offices of the combined company were moved to this location.
The acquisition was financed with a second financing from Liberty-Bidco in
the amount of $700,000, under an amendment to the original $1,300,000 note, and
the balance under a new $2,000,000 loan facility with Greenfield Commercial
Credit, L.L.C., $500,000 of which is due on December 31, 1998 and $1,500,000
due on January 29, 1999. The Liberty-Bidco debt matures on January 1, 1999. The
interest rate on all the above debt is three percent over prime, except for the
$500,000 due on December 31, 1998, which bears interest at the rate of 15% per
annum.
9. STOCK OPTION PLAN
On July 10, 1998, in connection with the Plan of Reorganization, the
Company adopted the 1998 Equity Incentive Plan, to issue up to 180,000 options
or stock appreciation rights ("SAR's") to participants. No options or SARs have
been issued as of August 12, 1998.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Gaylord Companies, Inc. (Debtor-in-possession)
We have audited the accompanying consolidated balance sheet of Gaylord
Companies, Inc. and subsidiaries (Debtor-in-possession) as of December 31,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1997 and 1996. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Gaylord Companies, Inc.
(Debtor-in-possession) as of December 31, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 2, the Company and all of its subsidiaries filed for
reorganization under Chapter 11 of the United States Bankruptcy Code on
November 14, 1997 emerging from bankruptcy and adopting "fresh start" reporting
on August 12, 1998. The accompanying consolidated financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such financial statements do not purport to show
(a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to liabilities subject to
compromise, the amounts that may be allowed for claims or contingencies, or the
status and priority thereof; (c) as to stockholder accounts, the effect of any
changes that may be made in the capitalization of the Company; or (d) as to
operations, the effect of any changes that may be made in its business.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
August 12, 1998
F-10
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................................................ $ 1,070,503
Accounts receivable - trade ......................................................... 15,118
Inventories ......................................................................... 889,996
Prepaid expenses and other current assets ........................................... 56,681
------------
TOTAL CURRENT ASSETS .............................................................. 2,032,298
PROPERTY AND EQUIPMENT ............................................................... 349,750
OTHER ASSETS ......................................................................... 8,700
------------
$ 2,390,748
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Liabilities Not Subject to Compromise:
Accounts payable and accrued expenses ............................................. $ 175,318
Liabilities Subject to Compromise:
Accounts payable and accrued expenses ............................................. 1,112,858
Sales and other taxes payable ..................................................... 89,357
Line of credit .................................................................... 1,297,547
Notes payable ..................................................................... 348,675
------------
3,023,755
Net liabilities of discontinued operations .......................................... 658,697
------------
Total current liabilities ........................................................... 3,682,452
STOCKHOLDERS' DEFICIT:
Cumulative preferred stock, par value $.01 per share; 1,500,000 shares authorized,
60,000 shares issued and outstanding ................................................ 300,000
Common stock, par value $.01 per share; 10,000,000 shares authorized, 4,095,000 shares
issued and outstanding .............................................................. 40,950
Additional paid-in-capital ........................................................... 2,641,838
Accumulated deficit .................................................................. (4,274,492)
------------
TOTAL STOCKHOLDERS' DEFICIT ....................................................... (1,291,704)
------------
$ 2,390,748
============
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
NET SALES ................................................ $ 3,724,157 $ 3,497,940
COST OF GOODS SOLD, including store occupancy and delivery
costs ................................................... 3,508,874 2,899,932
--------- ------------
GROSS PROFIT ............................................. 215,283 598,008
--------- ------------
OPERATING EXPENSES:
Selling, general and administrative ..................... 838,081 390,123
Non-cash imputed stock compensation ..................... 469,255 --
Depreciation and amortization ........................... 107,640 68,334
--------- ------------
1,414,976 458,457
--------- ------------
OPERATING INCOME (LOSS) .................................. (1,199,693) 139,551
---------- ------------
OTHER INCOME (EXPENSE):
Interest expense, net ................................... (79,710) (64,817)
Amortization of debt issue costs and discounts .......... (74,000) (149,986)
Other - net ............................................. (37,977) 37,409
---------- ------------
(191,687) (177,394)
---------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ............................................. (1,391,380) (37,843)
PROVISION FOR INCOME TAXES ............................... (400,649) --
---------- ------------
LOSS FROM CONTINUING OPERATIONS .......................... (1,792,029) (37,843)
REORGANIZATION - PROFESSIONAL FEES ....................... (234,625) --
---------- ------------
LOSS BEFORE DISCONTINUED OPERATIONS ...................... (2,026,654) (37,843)
LOSS FROM DISCONTINUED OPERATIONS ........................ (1,224,845) (949,966)
---------- ------------
NET LOSS ................................................. (3,251,499) (987,809)
Preferred stock dividends ............................... (23,789) (36,000)
---------- ------------
NET LOSS TO COMMON SHAREHOLDERS .......................... $ (3,275,288) $ (1,023,809)
============ ============
BASIC LOSS PER COMMON SHARE:
Continuing .............................................. $ (0.53) $ (0.02)
Discontinued ............................................ (0.32) (0.31)
------------ ------------
$ (0.85) $ (0.33)
============ ============
WEIGHTED AVERAGE COMMON SHARES USED ...................... 3,870,000 3,103,957
============ ============
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- -----------------------
Shares Amount Shares Amount
-------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE -- DECEMBER 31, 1995.... 60,000 $300,000 2,750,000 $27,500
Sale of stock to consultant -- -- 300,000 3,000
Shares issued with note
payable ....................... -- -- 180,000 1,800
Shares issued for services . -- -- 170,000 1,700
Conversion of notes, net of
deferred debt issue costs -- -- 235,000 2,350
Dividends on preferred
stock ......................... -- -- -- --
Amortization of unearned
stock compensation ............ -- -- -- --
Net loss ....................... -- -- -- --
------ -------- --------- -------
BALANCE -- DECEMBER 31, 1996 .... 60,000 300,000 3,635,000 36,350
Sale of stock to consultant -- -- 160,000 1,600
Stock issuance to
consultant .................... -- -- 300,000 3,000
Amortization and write off
of unearned stock
compensation .................. -- -- -- --
Dividends on preferred
stock ......................... -- -- -- --
Write off of stock
receivable .................... -- -- -- --
Net loss ....................... -- -- -- --
------ -------- --------- -------
BALANCE -- DECEMBER 31, 1997 .... 60,000 $300,000 4,095,000 $40,950
====== ======== ========= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unearned Retained
Additional Stock Receivable Earnings
Paid-in Capital Compensation for Stock (deficit) Totals
----------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE -- DECEMBER 31, 1995 .... $1,600,817 $ -- $ -- $ 24,591 $ 1,952,908
Sale of stock to consultant 297,000 -- (168,571) -- 131,429
Shares issued with note
payable ....................... 94,200 -- -- -- 96,000
Shares issued for services . 112,050 (110,000) -- -- 3,750
Conversion of notes, net of
deferred debt issue costs 234,871 -- -- -- 237,221
Dividends on preferred
stock ......................... -- -- -- (36,000) (36,000)
Amortization of unearned
stock compensation ............ -- 13,333 -- -- 13,333
Net loss ....................... -- -- -- (987,809) (987,809)
---------- ---------- ---------- ------------ ------------
BALANCE -- DECEMBER 31, 1996 .... 2,338,938 (96,667) (168,571) (999,218) 1,410,832
Sale of stock to consultant 155,900 (143,750) -- -- 13,750
Stock issuance to
consultant .................... 147,000 -- -- -- 150,000
Amortization and write off
of unearned stock
compensation .................. -- 240,417 -- -- 240,417
Dividends on preferred
stock ......................... -- -- -- (23,775) (23,775)
Write off of stock
receivable .................... -- -- 168,571 -- 168,571
Net loss ....................... -- -- -- (3,251,499) (3,251,499)
---------- ---------- ---------- ------------ ------------
BALANCE -- DECEMBER 31, 1997 .... $2,641,838 $ -- $ -- $ (4,274,492) $ (1,291,704)
========== ========== ========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $ (3,251,499) $ (987,809)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Loss from discontinued operations ..................................... 1,224,845 949,966
Reorganization items .................................................. 234,625 --
Depreciation and amortization ......................................... 107,640 193,208
Non cash imputed compensation expense ................................. 469,255 57,012
Amortization of discount on notes payable ............................. 74,000 10,667
Write off of goodwill ................................................. 114,933 --
Write off of investment ............................................... 125,000 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ........................... 65,211 (38,232)
Decrease (increase) in other receivables ............................. 177,217 16,490
Decrease (increase) in inventory ..................................... 1,320,244 (399,788)
Decrease (increase) in prepaid expenses and other assets ............. 153,858 (96,668)
Decrease (increase) in other assets .................................. 18,277 11,136
Decrease (increase) in deferred income taxes ......................... 398,196 --
Increase (decrease) in accounts payable .............................. (1,008,331) 551,627
Increase (decrease) in sales and other taxes payable ................. (101,117) 11,171
Increase in net liabilities of discontinued operations ............... 489,776 --
------------ -----------
Net cash provided (used) by continuing operations .................. 612,130 278,780
Cash used for reorganization items .................................... (234,625) --
Net cash provided by discontinued operations .......................... (668,377) (949,966)
------------ -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (290,872) (671,186)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................................... (34,915) (204,551)
Proceeds from sale of property and equipment ............................ -- 3,785
------------ -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (34,915) (200,766)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................................. -- 69,721
Dividends paid .......................................................... (23,789) (36,000)
Proceeds (repayments) from notes payable ................................ (300,986) 204,000
Proceeds from bank debt ................................................. 1,297,547 395,000
Repayments of bank debt ................................................. (395,000) (463,770)
Proceeds from issuance of convertible notes ............................. -- 622,500
(Increase) decrease in restricted cash .................................. -- 250,000
------------ -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 577,772 1,041,451
------------ -----------
NET INCREASE (DECREASE) IN CASH .......................................... 251,985 169,499
CASH AT BEGINNING OF YEAR ................................................ 818,518 649,019
------------ -----------
CASH AT END OF YEAR ...................................................... $ 1,070,503 $ 818,518
============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest .............................................................. $ 434,170 $ 318,612
============ ===========
Income taxes .......................................................... $ -- $ --
============ ===========
Non cash financing and investing activity:
Conversion of notes payable to common stock .......................... $ -- $ 352,500
============ ===========
Common stock issued for future services .............................. $ -- $ 112,500
============ ===========
Receivable for common stock .......................................... $ -- $ 168,571
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The financial statements of Gaylord Companies, Inc. (the "Company")
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements. The Company is a specialty retailer of quality cookware
and serving equipment, with operations in Ohio, Indiana and Kentucky.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the retail method and the FIFO method.
(d) Property and Equipment
Property and equipment are stated at cost. Property and equipment held
under capital leases are stated at the lower of the present value of minimum
lease payments at the beginning of the lease term or fair value at the
inception of the lease.
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets. Property
and equipment held under capital leases and leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
estimated useful life of the asset.
(e) Net Earnings (Loss) Per Share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which became effective for financial
statements with fiscal years ending after December 15, 1997. Basic earnings
(loss) per share is computed based on the weighted average number of common
shares outstanding after giving effect to preferred stock dividends.
(f) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, receivables,
accounts payable and accrued expenses approximate fair value based on the
short-term maturity of these instruments.
(g) Stock Based Compensation
The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." In accordance with
Statement of Financial Accounting Standards No. 123, "Accounting For
Stock-Based Compensation," the Company has adopted the pro forma disclosure
requirements of Statement No. 123 in fiscal 1996.
(h) Revenue Recognition
Revenue is recorded at the point of sale. Returns are estimated and
accrued.
(i) Cash Equivalents
The Company considers all highly liquid, temporary cash investments with
an original maturity of three months or less to be cash equivalents.
F-15
<PAGE>
2. PLAN OF REORGANIZATION
On November 14, 1997, the Company filed a voluntary petition under Chapter
11 of the United States Bankruptcy code.
At the outset, the bankruptcy petition was organized to consolidate the
cases of the entities that comprised the bookstore operations in distinction
from those that comprised the cookstore operations.
The bookstore operations were disposed of under their own separate plan of
reorganization on July 1, 1998 and are being accounted for as discontinued
operations.
On June 24, 1998, the entities comprising the cookstores filed a plan of
reorganization, which was confirmed by the Bankruptcy Court on July 10, 1998
and the Company emerged from bankruptcy on August 12, 1998.
Under the plan, Home Retail Acquisition Corp. ("HRAC") (which is a secured
creditor of the cookstores by virtue of the its purchase of a junior
participation in the Company's debt from Fremont Financial), will be merged
into the Company. On the effective date, all previous equity interests were
extinguished and the reorganized company issued a total of 1,522,041 shares of
Class A common stock, 154,951 shares of Class B common stock and a total of
174,429 warrants. HRAC will receive a total of 1,383,691 of the newly issued
Class A shares, thereby controlling the reorganized entity.
3. DISCONTINUED OPERATIONS
Shortly after its November 1997 bankruptcy filing, in connection with its
plans to return to financial viability, the Company reached a decision to
dispose of its bookstore operations.
In February 1998, certain principal managing shareholders proposed a plan
of reorganization for the bookstores whereby they would assume the bookstore
business, and proposed a formula for settlement of the liabilities.
In April 1998, United Magazine Corporation ("Unimag") a major creditor of
the bookstores put forth a competing plan, which was ultimately accepted by the
creditors and the Bankruptcy Court. The plan was finalized on July 1, 1998,
with all assets and liabilities of the bookstore business assumed by Unimag.
Under the terms of the plan, certain unimpaired claims, totaling approximately
$800,000 were paid by Unimag, impaired claims, totaling approximately
$1,700,000, were settled for a pro rata allocation of $110,000, and
approximately $187,000 which was due to Unimag, was waived by Unimag.
Upon sale to Unimag, the Company realized a gain on disposal of $556,473
representing an excess of liabilities over assets assumed of $1,216,893 (with
includes the assumption of the $387,547 balance on the Greenfield term loan)
and losses through to the disposal date of $660,420.
The following table presents the composition of the net liabilities of the
discontinued business at December 31, 1997.
Cash .............................................. $ 11,123
Accounts Receivable -- trade ...................... 48,787
Other Receivables ................................. 208,932
Inventories ....................................... 795,055
Prepaid expenses and other current assets ......... 414,762
Net property and equipment ........................ 220,573
Investment ........................................ 125,000
Goodwill .......................................... 114,933
Other ............................................. 3,801
-----------
Total Assets ......................................... 1,942,966
-----------
Liabilities not subject to compromise:
Accounts payable and accrued expenses .......... 117,369
Liabilities subject to compromise
Accounts payable and accrued expenses .......... 2,484,294
-----------
Total Payables ..................... ......... 2,601,663
-----------
Net liabilities of discontinued business ............. $ (658,697)
===========
F-16
<PAGE>
The revenues of the discontinued business were $8,790,813 for the year
ended December 31, 1997 and $9,804,454 for the year ended December 31, 1996.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 1997:
<TABLE>
<CAPTION>
Depreciable
Life
------------
<S> <C> <C>
Computers and equipment ........................... 5 years $ 211,732
Leasehold improvements ............................ 10 years 239,776
Furniture and fixtures ............................ 7 years 232,861
---------
684,369
Accumulated depreciation and amortization ......... 334,619
---------
$ 349,750
=========
</TABLE>
5. LOAN AGREEMENT
In April 1997, the Company entered into a loan and security agreement (the
"Agreement") with Greenfield Commercial Credit, L.L.C. (The "Lender"). Pursuant
to the agreement, the Lender established a revolving credit loan facility for
the Company in an amount of up to $1,000,000 (the "Revolving Credit Loan") and
advanced $350,000 at closing as a term loan (the "Term Loan"). The Term Loan
and Revolving Credit Loan are referred to as the "Loans".
The Revolving Credit Loan bore interest at the prime rate plus eight
percent per annum. The Term Loan bore interest at the prime rate plus five and
eight-five hundredths percent per annum the loans was due no later than October
20, 1997. The Loans were secured by a lien on substantially all of the
Company's assets. The Loans were guaranteed by the Company's Chairman of the
Board and Chief Executive Officer and such guarantee is secured by a third
mortgage on his principal residence. The proceeds of the loans were used
primarily to repay amounts owed to Bank One Columbus, N.A. and for working
capital purposes.
Upon the loans not being repaid on the due date, they went into default.
The balance on the revolving credit loan was $910,000 at December 31, 1997 and
$387,547 on the term loan (including interest). In April 1998, the Company
obtained debtor-in-possession financing form Fremont Financial Corporation
which was used to repay the revolving credit loan. The term loan was assumed
and settled by Unimag under its plan of reorganization for the bookstores in
May 1998.
<PAGE>
6. COMMITMENTS
Leases
In connection with the Bankruptcy Court's approval of the Company's plans
of reorganization, all previous future lease commitments were voided by the
court, and the Company selectively entered into new lease commitments for the
cookstore operations.
Future minimum lease payments under such noncancelable operating leases
are as follows:
Operating
Year ending December 31, leases
- ---------------------------------------------- ------------
1998 ....................................... $ 174,670
1999 ....................................... 386,926
2000 ....................................... 389,988
2001 ....................................... 393,881
2002 ....................................... 402,073
Later years, through 2006 .................. 617,042
Total rental expense for operating leases was $703,231 and $487,640 in
1997 and 1996, respectively.
F-17
<PAGE>
7. INCOME TAX EXPENSE (BENEFIT)
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109.
The differences between income taxes computed by applying the statutory
federal income tax rate (35%) and income tax expense (benefit) in the
consolidated financial statements are:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1996
----------------- ---------------
<S> <C> <C>
Tax benefit computed at statutory rate ......... $ (1,138,000) $ (346,000)
Change in valuation allowance .................. 398,196 --
Effect of permanent differences ................ 175,000 29,000
Other, net ..................................... 2,453 3,000
Tax benefit not recognized ..................... 963,000 314,000
------------- -----------
$ 400,649 $ --
============= ===========
</TABLE>
The Company had deferred tax assets total $1,610,000, with $1,510,000
representing the tax effects of net operating loss carryforwards and the effect
of, book depreciation in excess of tax depreciation of approximately $100,000
as of December 31, 1997. The Company has a full valuation allowance as a
reserve against such deferred tax assets. The net operating loss carryforwards
totaling approximately $3,774,000, expire in the years 2009 through 2013.
Annual utilization of the net operating loss carryforwards will be restricted
due to the ownership change in the plan of reorganization.
8. STOCKHOLDERS' EQUITY
The Company completed an Initial Public Offering in November 1995, selling
a total of 750,000 shares of common stock for $3.00 per share, and 1,725,000
warrants at $0.10 per warrant. Net proceeds to the Company after underwriter
discounts and other expenses were approximately $1.4 million.
In April 1996, a consultant was issued options to purchase 300,000 shares
for $1.00 per share. These were subsequently exercised for cash of $89,000,
services valued at $42,429 and a non-interest bearing receivable totaling
$168,571. Such receivable has been written off as an expense during 1997, as
management deemed such amount to be uncollectible after many attempts to
collect.
In November 1996, a consultant was issued 100,000 shares in exchange for a
fifteen month service agreement. Such shares were valued at $1.00 per share
(the fair market value), with the resulting charge being amortized over the
fifteen month term of the agreement, and the balance written off during 1997.
During 1996, an aggregate of 70,000 other shares were issued for services
to various parties, which were valued at their aggregate fair value of $15,000.
In February 1997, 150,000 shares were issued to a consultant, which were
valued at $1.00 per share, with the resulting charge expensed during 1997.
In March 1997, a consultant was issued 10,000 options exercisable at $.01
per share, which resulted in a $10,000 expense charge.
In September 1997, the Company issued 300,000 shares of common stock to a
consultant. The Company recorded a charge of $150,000 for the fair value of the
stock.
9. INITIAL PUBLIC OFFERING
The Company completed an Initial Public Offering in November 1995, selling
a total of 750,000 shares of common stock for $3.00 per share, and 1,725,000
warrants at $0.10 per warrant. The warrants initially entitled the holder to
purchase one share of Company common stock at $3.00 per share through October
30, 2000. At December 31, 1996, the total number of shares issuable upon the
exercise of such warrants has been increased to 2,756,917 and the exercise
price has been adjusted to $2.53 per share pursuant to anti-dilution
provisions. The warrants are redeemable by the Company at $0.05 per warrant,
generally, upon the common stock achieving
F-18
<PAGE>
certain price levels. Net proceeds to the Company after underwriter discounts
and other expenses were approximately $1.4 million. In connection with the
public offering, the underwriter received warrants which allow for the purchase
of (after adjustment for anti-dilution provisions) an aggregate 269,103 shares
at $3.01 per share at December 31, 1997.
10. CONVERTIBLE NOTES
In June 1996, the Company issued six month, unsecured, convertible notes
with an aggregate face of amount of $622,500, which bear interest at the rate
of 5% per annum, and are convertible into common stock at the rate of $1.50 per
share. Through December 31, 1996, $352,500 in principal was converted into
235,000 shares of common stock. Another $150,000 in principal was repaid in
January 1997, $60,000 was extended through June 1997 at an interest rate of
17.5% and $60,000 was presented for payment in March 1997 and became in default
upon not being repaid by the Company on March 27, 1997.
Costs associated with this financing, consisting of professional fees,
aggregated approximately $252,000. Such costs were amortized to expense over
the original term, with a pro rata amount of unamortized costs charged to paid
in capital upon conversions to stock.
11. NOTE PAYABLE
In November 1996, the Company borrowed $300,000 under an 18 month note
payable bearing interest at 8% per annum. The note is secured by the personal
guarantees of certain of the Companies principal shareholders, and will be
secured by all the assets of the Company upon the satisfaction of the Company's
bank debt and release of the associated security interest. In connection with
this borrowing, the Company issued 180,000 shares of common stock to the
lender. In accordance with Accounting Principles Board Opinion No. 14, the
proceeds were allocated between the debt and equity securities based on their
relative fair value, resulting in a note discount of $96,000, which is being
amortized to expense over the term of the note. The unamortized balance of the
discount is $21,325 at December 31, 1997.
F-19
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
SEPTEMBER 30, 1998
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................................................. $ 146,171
Accounts receivable -- trade ..................................................... 70,854
Inventories ...................................................................... 3,008,646
Prepaid expenses and other current assets ........................................ 45,427
------------
TOTAL CURRENT ASSETS ........................................................... 3,271,098
PROPERTY AND EQUIPMENT .............................................................. 623,900
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDEN-
TIFIABLE ASSETS .................................................................... 145,721
GOODWILL ............................................................................ 988,129
OTHER ASSETS ........................................................................ 249,134
------------
$ 5,277,982
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses ............................................ $ 1,586,588
Notes payable .................................................................... 4,020,000
------------
TOTAL CURRENT LIABILITIES ..................................................... 5,606,588
PUT OPTION ON WARRANTS .............................................................. 550,000
STOCKHOLDERS' DEFICIT:
Cumulative preferred stock, par value $.01 per share; 1,000,000 shares authorized,
320 shares redeemable, convertible and bearing a liquidation preference of
$1,000 per share (net of discount of $80,000).................................... 240,000
Common stock, par value $.01 per share, authorized: Class A-20,000,000 shares,
Class B-155,000; issued and outstanding:
Class A-1,522,041, Class B-154,951 .............................................. 16,770
Additional paid-in-capital ....................................................... 80,000
Accumulated earnings (deficit) ................................................... (1,215,376)
------------
TOTAL STOCKHOLDERS' DEFICIT .................................................... (878,606)
------------
$ 5,277,982
============
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
<TABLE>
<CAPTION>
ROLLING PIN KITCHEN EMPORIUM, INC. GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) (UNAUDITED)
For the Period For the Period For the Nine
August 12, 1998 through January 1, 1998 through Months ended
September 30, 1998 August 12, 1998 September 30, 1997
------------------------- ------------------------- -------------------
<S> <C> <C> <C>
NET SALES .................................... $ 728,767 $ 1,454,274 $ 2,475,892
COST OF GOODS SOLD, including store occupancy
and delivery costs .......................... 436,628 1,191,423 2,228,303
------------- ----------- -------------
GROSS PROFIT ................................. 292,139 262,851 247,589
------------- ----------- -------------
OPERATING EXPENSES:
Selling, general and administrative ......... 1,076,415 733,272 1,029,935
Depreciation and amortization ............... 47,227 47,382 80,730
------------- ----------- -------------
1,123,642 780,654 1,110,665
------------- ----------- -------------
OPERATING INCOME (LOSS) ...................... (831,503) (517,803) (863,076)
------------- ----------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net ....................... (184,842) (150,190) (115,534)
----------- -------------
Amortization of debt discount ............... (220,000)
Franchise fees .............................. 20,969
-------------
(383,873)
-------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS .................................. (1,215,376) (667,993) (978,610)
REORGANIZATION ITEM - PROFESSIONAL FEES -- (200,609) --
------------- ----------- -------------
LOSS BEFORE DISCONTINUED OPERATIONS .......... (1,215,376) (868,602) (978,610)
LOSS FROM DISCONTINUED OPERATIONS ............ -- (660,420) (1,495,820)
GAIN ON DISPOSAL OF DISCONTINUED
OPERATIONS .................................. -- 1,216,893 --
------------- ----------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY
GAIN ........................................ (1,215,376) (312,129) (2,474,430)
-------------
EXTRAORDINARY GAIN ON DEBT DISCHARGE . -- 1,472,215 --
------------- ----------- -------------
NET INCOME (LOSS) ............................ (1,215,376) 1,160,086 (2,474,430)
Preferred stock dividends ................... -- -- (27,000)
------------- ----------- -------------
NET INCOME (LOSS) TO COMMON SHARE-
HOLDERS ..................................... $ (1,215,376) $ 1,160,086 $ (2,501,430)
============= =========== =============
BASIC LOSS PER COMMON SHARE:
Continuing .................................. $ (0.72) $ (0.22) $ (0.26)
Discontinued ................................ -- ( 0.14) ( 0.40)
Extraordinary ............................... -- .38 --
$ (0.72) $ (0.30) $ (0.66)
============= =========== =============
WEIGHTED AVERAGE COMMON SHARES USED 1,676,992 3,870,000 3,735,000
============= =========== =============
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
<TABLE>
<CAPTION>
ROLLING PIN KITCHEN EMPORIUM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Period
August 12, 1998 through
September 30, 1998
-------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ (1,215,376)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities, net of
effects of acquisition:
(Gain) loss from discontinued operations ............. --
Reorganization items ................................. --
Amortization of note discount ........................ 220,000
Extraordinary gain on debt discharge ................. --
Depreciation and amortization ........................ 47,227
Non cash imputed compensation expense ................ --
Preferred shares issued to settle payables ........... 320,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable .......... (65,671)
Decrease (increase) in other receivables ............ --
Decrease (increase) in inventory .................... (333,204)
Decrease (increase) in prepaid expenses and
other assets ...................................... (30,000)
Decrease (increase) in other assets ................. (74,836)
Decrease (increase) in deferred income taxes ........ --
Increase (decrease) in accounts payable ............. 799,263
Increase (decrease) in sales and other taxes pay-
able .............................................. --
Increase (decrease) in other current liabilities .... --
------------
Net cash provided (used) by continuing
operations ....................................... (332,597)
Cash used for reorganization items ................... --
Net cash provided by discontinued operations ......... --
------------
NET CASH PROVIDED (USED) BY
CONTINUING OPERATIONS ........................... (332,597)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for acquisition, net of cash acquired ....... (2,125,238)
Purchase of property and equipment .................... --
------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ............................ (2,125,238)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ........................................ --
Proceeds from notes payable ........................... 2,460,000
Repayments of bank debt ............................... --
------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ............................ 2,460,000
------------
NET INCREASE (DECREASE) IN CASH ........................ 2,165
CASH AT BEGINNING OF PERIOD ............................ 144,006
------------
CASH AT END OF PERIOD .................................. $ 146,171
============
<PAGE>
<CAPTION>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Period For the Nine
January 1, 1998 through Months ended
August 12, 1998 September 30, 1997
------------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ 1,160,086 $ (2,474,430)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities, net of
effects of acquisition:
(Gain) loss from discontinued operations ............. (556,473) 1,495,820
Reorganization items ................................. 200,609 --
Amortization of note discount ........................ -- --
Extraordinary gain on debt discharge ................. (1,472,215) --
Depreciation and amortization ........................ 80,730 141,967
Non cash imputed compensation expense ................ -- 82,724
Preferred shares issued to settle payables ........... -- --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable .......... 9,935 305
Decrease (increase) in other receivables ............ -- (27,851)
Decrease (increase) in inventory .................... 112,005 163,347
Decrease (increase) in prepaid expenses and
other assets ...................................... 41,254 (307,639)
Decrease (increase) in other assets ................. (165,403) --
Decrease (increase) in deferred income taxes ........ -- 398,196
Increase (decrease) in accounts payable ............. (27,667) 628,865
Increase (decrease) in sales and other taxes pay-
able .............................................. -- (106,480)
Increase (decrease) in other current liabilities .... -- 246,274
------------- ------------
Net cash provided (used) by continuing
operations ....................................... (617,139) 241,098
Cash used for reorganization items ................... (200,609) --
Net cash provided by discontinued operations ......... (376,610) (1,495,820)
------------- ------------
NET CASH PROVIDED (USED) BY
CONTINUING OPERATIONS ........................... (1,194,358) (1,254,722)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for acquisition, net of cash acquired ....... -- --
Purchase of property and equipment .................... -- (15,225)
------------- ------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ............................ -- (15,225)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ........................................ -- (27,000)
Proceeds from notes payable ........................... 1,321,235 932,131
Repayments of bank debt ............................... (1,053,374) (434,994)
------------- ------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ............................ 267,861 470,137
------------- ------------
NET INCREASE (DECREASE) IN CASH ........................ (926,497) (799,810)
CASH AT BEGINNING OF PERIOD ............................ 1,070,503 818,518
------------- ------------
CASH AT END OF PERIOD .................................. $ 144,006 $ 18,708
============= ============
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
The accompanying financial statements are unaudited, but in the opinion of
management include all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of financial position and results of
operations and cash flows. The results of operations for any interim period are
not necessarily indicative of results to be achieved for a full fiscal year.
1. Preferred Stock:
During the period August 12, 1998 through September 30, 1998, the Company
issued 320 shares of preferred stock in exchange for certain liabilities
aggregating $320,000. The preferred stock pays no dividends and is
redeemable at the Company's option under certain conditions. The
preferred stock is convertible into common stock at 80% of the market
value of the common stock, but only upon the Company completing a public
offering. The Company has recorded a discount totaling $80,000 in
connection with this beneficial conversion feature. This discount will be
charged as a dividend at the time that the preferred stock first becomes
convertible.
The holders of the Convertible Series A Preferred Stock have the right to
receive dividends of 6% per annum, payable in stock or cash at the Company's
discretion at the time of conversion. The holders have the right to convert
each share of Preferred Stock into Shares of Common Stock (based on $1,000 per
share of Preferred Stock) equal to the lesser of (a) 80% of the five day
average closing bid price for the Common Stock for the five trading days
immediately preceding the shares are converted, or (b) 150% of the five day
average closing bid price, as reported by Bloomberg, LP, for the Company's
Common Stock for the five trading day period following the Company's completion
of a secondary offering. The holders of the Convertible Series A Preferred
Stock have demand registration rights.
The Corporation reserves the right, at its sole option, to call a
mandatory redemption of any percentage of the balance on the Shares during the
one hundred eighty (180) day period following August 14, 1998. In the event the
Corporation exercises such right of redemption up to and including the one
hundred twentieth (120th) day following August 14, 1998 it shall pay the
stockholder, in U.S. currency, One Hundred Twenty-Five Percent (125%) of the
face amount of the Shares being redeemed. In the event the Corporation
exercises such right of redemption between the one hundred twenty-first (121st)
day and the one hundred eightieth (180th) day following August 14, 1998 it
shall pay the stockholder, in U.S. currency, One Hundred Thirty Percent (130%)
of the face amount of the Shares being redeemed.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AROPI, Incorporated
We have audited the balance sheets of AROPI, Incorporated (an S
corporation) as of June 30, 1998 and 1997, and the related statements of
income, stockholders equity and cash flows for the years then ended. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of AROPI, Incorporated as of
June 30, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Smith & Radigan
- ------------------
Atlanta, Georgia
August 24, 1998
F-24
<PAGE>
AROPI, INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30
--------------------------------------
1998 1997
-------------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash ....................................................... $ 17,448 $ 24,592
Accounts receivable, less allowance for doubtful accounts of
$15,000 in 1998 and $5,616 in 1997 ....................... 49,845 78,319
Prepaid expenses ........................................... 3,650 4,800
Inventories ................................................ 1,665,833 1,422,578
-------------- ------------
TOTAL CURRENT ASSETS ..................................... 1,736,776 1,530,289
PROPERTY AND EQUIPMENT
Fixtures, equipment and leasehold improvements ............. l,599,612 1,582,953
Less allowance for depreciation ............................ (1,323,195) (1,167,841)
-------------- ------------
276,417 415,112
OTHER ASSETS
Deposits ................................................... 785 785
Non-competition agreement, net of accumulated amortization
of $33,250 in 1998 and $23,750 in 1997 ................... 61,750 71,250
Loan acquisition cost, net of accumulated amortization of
$2,906 in 1998 and $224 in 1997 .......................... 15,868 18,550
-------------- ------------
78,403 90,585
-------------- ------------
$ 2,091,596 $ 2,035,986
============== ============
</TABLE>
F-25
<PAGE>
LIABILITIES AND STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
June 30
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Line of credit ...................................... $ 50,000 $ 50,000
Accounts payable .................................... 430,804 211,282
Accrued expenses .................................... 120,905 93,395
Current portion of long-term debt ................... 176,313 165,632
---------- ----------
TOTAL CURRENT LIABILITIES ......................... 778,022 520,309
LONG-TERM DEBT
Notes payable - bank ................................ 283,903 360,000
Notes payable - others .............................. 50,000 50,000
Notes payable - former stockholder .................. 512,912 568,518
---------- ----------
846,815 978,518
Less current maturities ............................. 176,313 165,632
---------- ----------
670,502 812,886
STOCKHOLDERS' EQUITY:
Common stock - no par value ......................... 485,502 485,502
Authorized - 10,000 shares
Issued and outstanding - 372 shares
Preferred stock, non-voting - no par value: ......... 0 0
Authorized - 10,000 shares
Issued and outstanding - -0- shares
Additional paid-in capital .......................... 78,600 78,600
Retained earnings ................................... 578,970 638,689
---------- ----------
1,143,072 1,202,791
Less: Treasury stock ................................ (500,000) (500,000)
---------- ----------
643,072 702,791
---------- ----------
$2,091,596 $2,035,986
========== ==========
</TABLE>
See notes to financial statements.
F-26
<PAGE>
AROPI, INCORPORATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
June 30
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
NET SALES ...................................... $6,310,362 $6,572,905
COST OF SALES .................................. 3,134,668 3,407,466
---------- ----------
3,175,694 3,165,439
OPERATING EXPENSES
Selling expenses .............................. 1,577,796 1,580,177
General and administrative expenses ........... 1,522,491 1,607,936
---------- ----------
3,100,287 3,188,113
---------- ----------
OPERATING INCOME (LOSS) ........................ 75,407 (22,674)
OTHER INCOME (EXPENSE)
Franchise fees ................................ 466,519 587,469
Franchise expenses ............................ (610,644) (547,677)
Other income .................................. 53,999 40,662
Net loss on disposal of fixed assets .......... -0- (14,486)
---------- ----------
(90,126) 65,968
---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES ......... (14,719) 43,294
INCOME TAXES .................................. -0- 2,952
---------- ----------
NET INCOME (LOSS) ............................. $ (14,719) $ 40,342
========== ==========
</TABLE>
See notes to financial statements.
F-27
<PAGE>
AROPI, INCORPORATED
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
----------- --------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Stockholder's equity at June 30, 1996 ......... $485,502 $78,600 $ 598,347 $ (500,000) $ 662,449
Net income for the year ended
June 30, 1997 ................................ -0- -0- 40,342 -0- 40,342
-------- ------- --------- ---------- ---------
Stockholder's equity at June 30, 1997 ......... 485,502 78,600 638,689 (500,000) 702,791
Distributions ................................. -0- -0- (45,000) -0- (45,000)
Net loss for the year ended
June 30, 1998 ................................ -0- -0- (14,719) -0- (14,719)
-------- ------- --------- ---------- ---------
Stockholder's equity at June 30, 1998 ......... $485,502 $78,600 $ 578,970 $ (500,000) $ 643,072
======== ======= ========= ========== =========
</TABLE>
See notes to financial statements.
F-28
<PAGE>
AROPI, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (14,719) $ 40,342
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization .................................. 167,536 215,763
Loss on sale of fixed assets ................................... -0- 14,486
Decrease (increase) in:
Accounts receivable ........................................... 28,474 35,595
Inventory ..................................................... (243,255) 269,911
Deposits ...................................................... -0- 250
Prepaid expenses .............................................. 1,150 (4,800)
Increase (decrease) in:
Accounts payable and accrued expenses ......................... 247,032 (133,048)
---------- ----------
Total adjustments ............................................. 200,937 398,157
---------- ----------
Net cash provided by operating activities ................... 186,218 438,499
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of corporate fixed assets ............................... (16,659) (28,618)
Receipts from sale of fixed assets ............................... -0- 14,201
---------- ----------
Net cash used by investing activities ....................... (16,659) (14,417)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in obligations in excess of cash ............. -0- (13,581)
Proceeds from long-term borrowing ................................ -0- 75,358
Repayments of long-term borrowing ................................ (131,703) (427,979)
Payment of loan acquisition costs ................................ -0- (18,774)
Repayments on line of credit-net ................................. -0- (50,000)
Distribution to stockholders ..................................... (45,000) -0-
---------- ----------
Net cash used by financing activities ....................... (176,703) (434,976)
---------- ----------
INCREASE (DECREASE) IN CASH ....................................... (7,144) (10,894)
CASH BALANCE AT BEGINNING OF YEAR ................................. 24,592 35,486
---------- ----------
CASH BALANCE AT END OF YEAR ....................................... $ 17,448 $ 24,592
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ..................................................... $ 89,065 $ 107,638
========== ==========
Income taxes paid ................................................. -0- $ 2,593
========== ==========
</TABLE>
See notes to financial statements.
F-29
<PAGE>
AROPI, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
Note A -- Organization and Summary of Significant Accounting Policies
Organization
AROPI, Incorporated ("the Company") was incorporated in Iowa in July,
1981. The Company operates thirteen retail stores in the eastern United States
under the trade name of Rolling Pin Kitchen Emporium. These stores sell high
quality kitchen utensils. There were also twenty-one franchised stores at June
30, 1998.
Income Taxes
Effective July 1, 1994, the Company elected, with the unanimous consent of
its stockholders, to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company is not subject to
federal and certain state corporate income taxes. Instead, the stockholder
includes the Company's taxable income in his individual income tax return.
Based on its financial position at July 1, 1994, the Company does not
anticipate any significant liability for built-in-gains taxes.
Income tax expense is recognized in the accompanying financial statements
for taxes paid to states in which the Company conducts business that do not
recognize S corporation status.
Revenue Recognition and Deferred Franchise Fees
Revenue from sales of individual franchises is recognized when
substantially all significant services to be provided by the Company have been
performed. Generally these services include assistance in site selection,
financing, advertising, training of personnel and provision of certain
inventory and equipment to provide a turnkey operation. Fees received in
advance of these services are recorded as deferred franchise fees. In addition
to the initial fees for the above services, the Company receives continuing
franchise fees based on a percentage of the franchise's gross revenues.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Expenditures for new equipment
and replacements or betterments are capitalized while expenditures for normal
maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts, and any gain or loss is credited or charged to
income.
Depreciation for leasehold improvements is computed using the
straight-line method over a period of ten years. Depreciation for fixtures and
equipment is computed using the straight-line method and accelerated methods
over the useful lives of the assets which range from three to seven years.
Depreciation expense was $155,354 and $206,039 for the years ended June 30,
1998 and 1997, respectively.
Intangible Assets
The Company is amortizing a non-competition agreement obtained from a
former stockholder (Note B) over the ten-year term of the agreement using the
straight-line method. Amortization expense was $9,500 for each of the years
ended June 30, 1998 and 1997.
The Company is amortizing loan acquisition costs over a seven-year term.
Amortization expense was $2,682 for the year ended June 30, 1998 and $224 for
the year ended June 30, 1997.
F-30
<PAGE>
AROPI, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
June 30, 1998
Note A -- Organization and Summary of Significant Accounting Policies
-- (Continued)
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
disclosure 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.
Note B -- Line of Credit and Long-Term Debt
The Company has obtained a credit commitment from a bank in the amount of
$250,000 to be used for working capital. At June 30, 1998, $50,000 had been
drawn against the line of credit. The line of credit is secured by accounts
receivable, fixed assets and inventory and guaranteed by the stockholder.
Interest accrues on the working capital line at the prime rate plus one
percent. The prime rate was eight and one-half percent at June 30, 1998. The
line of credit is cross-collateralized with a note payable to the Small
Business Administration, as described below.
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Notes Payable - Banks
Note payable to the Small Business Administration through a bank
as agent. The note is secured by accounts receivable and inventory
and guaranteed by the stockholder. Principal and interest pay-
ments of $7,430, including interest at 8.75%, are due monthly
through May 2002. The note is cross-collateralized with the line
of credit. ..................................................... $283,903 $360,000
-------- --------
Notes Payable - Others
Note payable to an individual bearing interest at 8% and payable
in 1998. ....................................................... 50,000 50,000
-------- --------
Notes Payable - Former Stockholders
Note payable to a former stockholder, bearing interest at 9%, pay-
able in monthly principal and interest installments of $6,334
through December 31, 2004. ..................................... 372,998 413,435
69,045 76,530
Noncompetition agreement obligation to a former stockholder, evi-
denced by a note payable, bearing interest at 9%, payable in
monthly principal and interest installments of $1,203 through
December 31, 2004. ............................................. 70,869 78,553
-------- --------
Note payable to a former stockholder, bearing interest at 9%, pay-
able in monthly principal and interest installments of $1,172
through December 31, 2004. ..................................... 512,912 568,518
-------- --------
846,815 978,518
Less current portion ................................................ 176,313 165,632
-------- --------
$670,502 $812,886
======== ========
</TABLE>
F-31
<PAGE>
AROPI, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
June 30, 1998
Note B -- Line of Credit and Long-Term Debt -- (Continued)
Effective December 31, 1994, the Company repurchased one-hundred and
seventy-four shares of its common stock, representing all holdings of the
Company's stock by that individual, at a cost of $500,000. In connection
therewith, the company executed a $500,000 note payable to the former
stockholder and secured by the repurchased shares. Pursuant to the repurchase
agreement, the repurchased shares will be held in escrow and will be released
to the Company on a pro rata basis through December 2004 as payments are made
on the note payable.
Concurrent with the stock repurchase, the Company obtained the former
stockholder's agreement not to compete with the Company for a period of ten
years ending on December 31, 2004. In consideration for the former
stockholder's noncompetition agreement, the Company executed a $95,000 note
payable to the former stockholder. Also, concurrent with the stock repurchase,
certain existing obligations payable to the former stockholder on or before
June 30, 1998 were recast into a nine percent note payable in monthly
installments through 2004. These obligations are also secured by the
repurchased and escrowed shares.
The Company incurred interest expense of $87,388 and $111,315 for the
years ended June 30, 1998 and 1997, respectively, of which $48,908 and $49,661,
respectively, was paid to the former stockholder.
Future maturities of long-term debt are as follows:
Year Ending Former
June 30, Stockholder Others Total
- -------------- ------------- ----------- -----------
1999 $ 60,823 $115,490 $176,313
2000 66,526 71,456 137,982
2001 72,768 77,965 150,733
2002 79,595 68,992 148,587
2003 87,060 -0- 87,060
Thereafter 146,140 -0- 146,140
-------- -------- --------
$512,912 $333,903 $846,815
======== ======== ========
Note C -- Commitments
The Company has entered into lease agreements for retail mall space for
all of its company owned stores and for three of its franchised stores. The
leases for the franchised stores have been assigned or subleased to the
franchisees. The Company also leases space for its main office from the
stockholder of the Company on a month-to-month basis with the monthly rental
varying based on the prime rate. All leases for retail spaces provide for
annual base rent plus additional charges for selected services and percentage
rent based upon annual sales. The rent expense for office space and Company
owned stores was $1,064,075 for the year ended June 30, 1998 and $1,108,633 for
the year ended June 30, 1997. Rent paid to the stockholder was $43,650 for the
year ended June 30, 1998 and $36,500 for the year ended June 30, 1997.
The Company's future lease obligations for base rent for its company owned
stores is as follows:
Year Ending June 30, Stores
- ---------------------- -------------
1999 $ 644,261
2000 612,129
2001 605,033
2002 567,220
2003 393,691
Thereafter 265,787
----------
$3,088,121
==========
F-32
<PAGE>
AROPI, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
June 30, 1998
Note D -- Employee Benefit Plans
The Company sponsors a 401(k) plan which covers all eligible employees who
work one thousand hours or more during the year. Under the plan, each
participant has the right to defer up to fifteen percent of his or her
compensation, not to exceed certain annual limits set by the Internal Revenue
Service, by making a voluntary contribution to the plan. The Company's minimum
required matching contribution is one-half of the first six percent of
compensation deferred by the employee. Additional Company contributions are at
the discretion of management. The Company made matching contributions of
$16,687 and $19,894 and incurred additional plan expenses of $2,636 and $2,400
for the years ended June 30, 1998 and 1997, respectively.
Note E -- Subsequent Events
Subsequent to year-end, the stockholder of the Company sold all
outstanding shares of stock to a public company. Concurrent with the sale of
stock, all outstanding notes payable were repaid.
F-33
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
UNAUDITED PRO-FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro-forma condensed consolidated statements of
operations present the pro-forma operating results of Rolling Pin Kitchen
Emporium, Inc. (the "Company") and Aropi, Inc. "(Aropi") as if the acquisition
of Aropi, which occurred on August 20, 1998 and is accounted for as a purchase
business acquisition, had occurred on January 1, 1997. Additionally, the pro
forma statements of operations include the operating results of the Company's
predecessor, the Gaylord Companies, Inc. for the year ended December 31, 1997
and for the period from January 1, 1998 through to the date of its emergence
from bankruptcy on August 12, 1998. Furthermore, the pro forma financial
statements include adjustments to reflect the effects of fresh start
accounting, which the Company adopted upon its emergence from bankruptcy, as if
such accounting had been adopted on January 1, 1997. The financial statements
of Aropi, which has a June 30 fiscal year end, have been recast for purposes of
these pro formas to place them on common basis with those of the Company.
The unaudited pro-forma condensed consolidated statements of operations do
not necessarily represent actual results that would have been achieved had the
companies been together from January 1, 1997 and fresh start accounting been
adopted as of that date, nor may they be indicative of future operations. These
unaudited pro-forma condensed consolidated financial statements should be read
in conjunction with the historical financial statements and notes thereto of
the respective companies.
F-34
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Rolling Pin The Gaylord
Kitchen Emporium, Inc. Companies, Inc.
(August 12, 1998 (January 1, 1998
to to
September 30, 1998) August 12, 1998)
------------------------ ------------------
<S> <C> <C>
NET SALES .................................. $ 728,767 $ 1,454,274
COST OF GOODS SOLD ......................... 436,628 1,191,423
------------ --------------
GROSS PROFIT ............................... 292,139 262,851
------------ --------------
OPERATING EXPENSES:
Selling, general and administrative ....... 1,076,415 733,272
Depreciation and amortization ............. 47,227 47,382
1,123,642 780,654
------------ --------------
OPERATING INCOME (LOSS) .................... (831,503) (517,803)
------------ --------------
OTHER INCOME (EXPENSE):
Interest expense, net ..................... (184,842) (150,190)
Amortization of debt issue costs and
discounts ................................ (220,000) --
Franchise fees ............................ 20,969 --
Franchise expenses ........................ -- --
------------ --------------
(383,873) (150,190)
------------ --------------
LOSS FROM CONTINUING
OPERATIONS ................................ (1,215,376) (667,993)
REORGANIZATION -- PROFESSIONAL
FEES ...................................... -- (200,609)
------------ --------------
LOSS BEFORE DISCONTINUED
OPERATIONS ................................ $ (1,215,376) $ (868,602)
============ ==============
NET LOSS PER SHARE ......................... $ (0.72)
============
WEIGHTED AVERAGE SHARES .................... 1,676,985
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aropi, Inc.
(January 1, 1998
Pro-Forma Adjustments
to --------------------------
August 20, 1998) Dr. Cr. Total
-------------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
NET SALES .................................. $ 3,250,304 $ $ $ 5,433,345
COST OF GOODS SOLD ......................... 1,497,606 3,125,657
-------------- ------------
GROSS PROFIT ............................... 1,752,698 2,307,688
-------------- ------------
OPERATING EXPENSES:
Selling, general and administrative ....... 1,819,357 3,629,044
Depreciation and amortization ............. 66,956(1) 38,000
(2) 68,000 267,565
--------------- ------------
1,886,313 3,896,609
-------------- ------------
OPERATING INCOME (LOSS) .................... (133,615) (1,588,921)
-------------- ------------
OTHER INCOME (EXPENSE):
Interest expense, net ..................... (41,133)(3) 195,000 (571,165)
Amortization of debt issue costs and
discounts ................................ -- (4) 330,000 (560,000)
Franchise fees ............................ 203,979 224,948
Franchise expenses ........................ (610,644) (610,644)
-------------- ------------
(447,798) (1,516,861)
-------------- ------------
LOSS FROM CONTINUING
OPERATIONS ................................ (581,413) (3,105,782)
REORGANIZATION -- PROFESSIONAL
FEES ...................................... -- (5) 200,609 --
-------------- ------------
LOSS BEFORE DISCONTINUED
OPERATIONS ................................ $ (581,413) $ (3,105,782)
============== ============
NET LOSS PER SHARE ......................... $ (1.85)
============
WEIGHTED AVERAGE SHARES .................... 1,676,985
============
</TABLE>
See notes to pro-forma financial statements.
F-35
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
The Gaylord
Companies, Inc. Aropi, Inc.
(historical) (historical)
----------------- -----------------
<S> <C> <C>
NET SALES .......................................... $ 3,724,157 $ 6,397,922
COST OF GOODS SOLD ................................. 3,508,874 3,231,302
------------- -----------
GROSS PROFIT ....................................... 215,283 3,166,620
------------- -----------
OPERATING EXPENSES:
Selling, general and administrative ............... 838,081 3,153,074
Non-cash imputed stock compensation ............... 469,255 --
Depreciation and amortization ..................... 107,640 (1)
--(2)
------------
1,414,976 3,153,074
------------- ------------
OPERATING INCOME (LOSS) ............................ (1,199,693) 13,546
------------- ------------
OTHER INCOME (EXPENSE):
Interest expense, net ............................. (79,710) --(3)
Amortization of debt issue costs and discounts .... (74,000) --(4)
Franchise fees .................................... -- 502,423
Franchise expenses ................................ -- (542,787)
Other - net ....................................... (37,977) 45,534
------------- ------------
(191,687) 5,170
------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES .................. (1,391,380) 18,716
PROVISION FOR INCOME TAXES ........................ (400,649) --
------------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ....................................... (1,792,029) 18,716
REORGANIZATION - PROFESSIONAL FEES (234,625) --
------------- ------------
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS ....................................... (2,026,654) 18,716
PREFERRED STOCK DIVIDENDS ......................... (23,789) --
------------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS TO TO COMMON SHARE-
HOLDERS .................................. $ (2,050,443) $ 18,716
============= ============
NET LOSS PER SHARE ................................
WEIGHTED AVERAGE SHARES ...........................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro-Forma Adjustments
--------------------------
Dr. Cr. Total
------------- ----------- -----------------
<S> <C> <C> <C>
NET SALES .......................................... $ $ $ 10,122,079
COST OF GOODS SOLD ................................. 6,740,176
-------------
GROSS PROFIT ....................................... 3,381,903
-------------
OPERATING EXPENSES:
Selling, general and administrative ............... 3,991,155
Non-cash imputed stock compensation ............... 469,255
Depreciation and amortization ..................... 50,000
100,000 257,640
-------------
4,718,050
-------------
OPERATING INCOME (LOSS) ............................ (1,336,147)
-------------
OTHER INCOME (EXPENSE):
Interest expense, net ............................. 312,000 (391,710)
Amortization of debt issue costs and discounts .... 710,000 (784,000)
Franchise fees .................................... 502,423
Franchise expenses ................................ (542,787)
Other - net ....................................... 7,557
-------------
(1,208,517)
-------------
INCOME (LOSS) BEFORE INCOME TAXES .................. (2,544,664)
PROVISION FOR INCOME TAXES ........................ (400,649)
-------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ....................................... -- (2,945,313)
REORGANIZATION - PROFESSIONAL FEES (5) 234,625 --
-------------
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS ....................................... (2,945,313)
PREFERRED STOCK DIVIDENDS ......................... (23,789)
-------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS TO TO COMMON SHARE-
HOLDERS .................................. $ (2,969,102)
=============
NET LOSS PER SHARE ................................ $ (1.77)
WEIGHTED AVERAGE SHARES ........................... =============
WEIGHTED AVERAGE SHARES ........................... 1,676,985
=============
</TABLE>
See notes to pro-forma financial statements.
F-36
<PAGE>
ROLLING PIN KITCHEN EMPORIUM, INC.
NOTES TO UNAUDITED PRO-FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
On August 21, 1998, the Company acquired Aropi, Inc., an Atlanta, Georgia
based chain retailer of kitchen products, in a purchase business acquisition.
The purchase price was $2,651,725, of which $1,290,317 went to the seller,
composed of $790,317 in cash and two convertible promissory notes of $250,000
each. The remaining $1,361,408 was used to pay off certain indebtedness of the
seller. Acquisition costs were approximately $75,000. The fair value of assets
acquired was approximately $2,400,000 and the fair value of liabilities assumed
was approximately $679,000. Goodwill recorded on the acquisition was
$1,004,877, and is amortized over ten years.
The acquisition was financed with a second financing from Liberty-Bidco in
the amount of $700,000, under an amendment to the original $1,300,000 note, and
the balance under a new $2,000,000 loan facility with Greenfield Financial
Corp., $500,000 of which is due on December 31, 1998 and $1,500,000 due on
January 29, 1999. The Liberty-Bidco debt matures on January 1, 1999. All the
above debt bears interest and three percentage points over prime.
The following pro-forma adjustments are included in the accompanying
unaudited pro-forma condensed consolidated statements of operations for the
year ended December 31, 1997 and the nine months ended September 30, 1998:
(1) To record amortization of the reorganization value in excess of
amounts allocable to identifiable assets over a 3 year term for the
respective periods.
(2) To record amortization of the goodwill resulting from the Aropi
acquisition over a 10 year term for the respective periods.
(3) To record interest expense on the approximately $2,600,000 of
additional debt arising from the acquisition for the respective
periods.
(4) To amortize the $550,000 debt discount and $160,000 in financing
fees recorded on the initial Liberty-Bidco financing.
(5) To eliminate reorganization related expenses.
F-37
<PAGE>
[Photographs of various store locations]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company has not authorized any dealer, salesperson or any other
person to give any information or to represent anything not contained in this
Prospectus. You must not rely on any unauthorized information. This Prospectus
does not offer to sell or buy any shares in any jurisdiction where it is
unlawful. The information in this Prospectus is current as of the date hereof.
-----------------------------------
TABLE OF CONTENTS
PROSPECTUS
Page
---------
Summary .................................. 3
Risk Factors ............................. 7
The Company .............................. 13
Use of Proceeds .......................... 14
Dividend Policy .......................... 14
Capitalization ........................... 15
Dilution ................................. 16
Price Range of Common Stock .............. 17
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................ 18
Business ................................. 26
Management ............................... 31
Certain Relationships and Related Party
Transactions .......................... 36
Principal Stockholders ................... 38
Description of Securities ................ 39
Shares Eligible for Future Sale .......... 42
Underwriting ............................. 43
Legal Matters ............................ 44
Experts .................................. 44
Additional Information ................... 44
Index to Financial Statements ............ F-1
-----------------------------------
Until ------------ , 1998, (25 days after the date of this Prospectus)
all dealers that buy, sell or trade these securities, whether or not
participating in this Offering, may be required to deliver a Prospectus. This
is in addition to the dealers' obligation to deliver a Prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,500,000 Shares
Rolling Pin
Kitchen Emporium, Inc.
[GRAPHIC OMITTED]
Common Stock
----------------------------------------
PROSPECTUS
----------------------------------------
Nutmeg Securities, Ltd.
495 Post Road East
Westport, CT 06880
Telephone: 203-226-1857
Fax: 203-226-5343
----------------- , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company, to the fullest extent permitted by the provisions of Section
145 of the General Corporation Law of the State of Delaware, indemnifies, and
advances expenses to, any and all persons who is or was a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, proceeding or claim, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was or has agreed
to be a director or officer of the Company or while a director or officer is or
was serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of any corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, from and against any and all of the expenses, liabilities, or other
matters referred to in or covered by said section (including without limitation
attorneys fees and expenses). The indemnification provided by the Company is
not exclusive of any other rights to which those indemnified may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person. Any
person seeking indemnification by the Company is deemed to have met the
standard of conduct required for such indemnification unless the contrary shall
be established by a court of competent jurisdiction.
If the Delaware General Corporation Law is amended to authorize action
further eliminating or limiting the personal liability of directors, then the
liability of our directors will be eliminated or limited to the fullest extent
permitted by such statutes, as so amended. Any amendment, repeal or
modification of such provision shall be prospective only and shall not
adversely affect any right or protection of any of our directors existing at
the time of such amendment, repeal or modification.
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL") empowers a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification may be
made in respect of any claim, issue or matter as to which such person shall
have been made to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
Section 145 in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification
provided for by Section 145 shall not be deemed exclusive of any other rights
to which the indemnified party may be entitled; that indemnification provided
for by Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall
II-1
<PAGE>
inure to the benefit of such person's heirs, executors and administrators; and
empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not
eliminate or limit the liability of a director: (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve international misconduct
or a knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for
any transaction from which the director derived an improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with this
Registration Statement. All of such expenses are estimates, other than the
filing fees payable to the Securities and Exchange Commission.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission ......... 4,074
Nasdaq Listing Fee .................................... 7,800
Fees and Expenses of Accountants ...................... 75,000
Fees and Expenses of Counsel .......................... 250,000
Printing Expenses ..................................... 80,000
Miscellaneous Expenses ................................ 33,126
-------
Total .................................................... $450,000
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company within the past three years that were not registered under the
Securities Act:
(i) Reorganization.
Pursuant to the Plan of Reorganization, on August 12, 1998 the Company
issued: (i) 1,522,041 shares of Common Stock, of which 1,383,691 shares were
issued to the shareholders of HRAC and 138,350 were issued to other creditors
with unsecured claims against the Predecessor Entity; (ii) 85,777 shares of
Class B Common Stock to the holders of the Predecessor Entity's common stock;
(iii) 69,174 shares of Class B Common Stock to the holders of the Predecessor
Entity's preferred stock; (iv) 52,573 New Warrants; (v) 92,595 Bidco Warrants;
and (vi) 29,261 Individual Warrants. These shares and warrants were issued
pursuant to Section 1145(a) of the Bankruptcy Code which exempts the offer and
sale of securities under a plan of reorganization from registration under the
Securities Act and state laws if: (i) the securities are offered and sold under
a plan of reorganization; (ii) the securities offered are these of the debtor
or an affiliate of the debtor participating in a joint plan or of a successor
to the debtor under the plan; and (iii) the recipients of the securities must
hold a prepetition or administrative expense claim against the debtor or an
interest in the debtor, or principally in such exchange and partly for cash or
property. The Company believes that it satisfied all of the requirements of
Section 1145(a) and as a result the securities and warrants issued pursuant to
the Plan of Reorganization were exempt from registration under the Securities
Act and state securities laws.
<PAGE>
(ii) Private Placement.
On August 14, 1998, certain debt instruments issued to Tom Pittarese and
Christine Pittarese Guardians FBO Jennifer Pittarese under DTD June 18, 1998,
Mark Quinn, Mike Snow and the Delacroix Foundation, Ltd. in a private placement
while the Predecessor Entity was in bankruptcy were converted into 320 shares
of Convertible Series A Preferred Stock of the Company that are immediately
convertible into shares of Common Stock. Each share of the Convertible Series A
Preferred Stock may be converted into shares of the Company's Common Stock
(based on $1,000 per share of Preferred Stock) equal to the lessor of (a) 80%
of the five day average closing bid price for the Common Stock for the five
trading days immediately preceding the date the shares are converted, or (b)
150% of the five day average closing bid price, as reported by Bloomberg, LP,
for the Company's Common Stock for the five trading day period following the
Company's completion of a secondary offering. The Company did not receive
compensation pursuant to the conversion of the debt instruments into the shares
of Convertible Series A Preferred Stock. The holders of the Convertible Series
A Preferred Stock have piggyback registration rights. As a result, the Company
will redeem the 275 shares of Convertible Series A Preferred Stock held by the
Delacroix Foundation, Ltd. at the time of the Offering for a redemption premium
of 25% over the $1,000 par value of such shares. The offer and sale of the
securities were exempt from registration under the Securities Act in reliance
on Section 4(2) thereof because the offers and sales were made to sophisticated
investors who had access to information about the Company and were able to bear
the risk of loss of their investment.
II-2
<PAGE>
(iii) Warrants.
In August, 1998, the Company granted the following warrants; (i) Bidco
received a warrant to purchase 92,595 shares of Common Stock, exercisable at
$0.01 per share, in connection with the Loan Agreement; (ii) Bidco also
received a warrant to purchase 40,602 shares of Common Stock, exercisable at
165% of the public offering price, in connection with the First Amendment;
(iii) Greenfield received a warrant to purchase 40,602 shares of Common Stock,
exercisable at 165% of the public offering price in connection with the Loan
and Security Agreement; (iv) JRP Consulting Corp. ("JRP") received a warrant to
purchase 23,737 shares of Common Stock and a second warrant to purchase 25,386
shares of Common Stock each exercisable at 165% of the public offering price;
(v) DLM Asset Management and Spinnernet Financial Services, Ltd. received
warrants to purchase an aggregate of 8,875 shares of Common Stock, exercisable
at 165% of the public offering price; and (vi) Laux, Holmes & Company ("Laux")
received a warrant to purchase 23,737 shares of Common Stock and a second
warrant to purchase 25,386 shares of Common Stock each exercisable at 165% of
the public offering price. These warrants were issued as part of the financing
arrangements with Bidco and Greenfield and, as such, did not involve additional
compensation to the Company. In November 1998, the Company granted Laux and JRP
warrants to purchase an aggregate of 6,000 shares of Common Stock, exercisable
at 165% of the public offering price, as consideration for the termination of
the redemption provisions in the warrants that each of those entities received
in August 1998. The Company did not receive any compensation for such warrants.
The offer and sale of the securities were exempt from registration under the
Securities Act in reliance on Section 4(2) thereof because the offers and sales
were made to sophisticated investors who had access to information about the
Company and were able to bear the risk of loss of their investment.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
<S> <C>
** 1.1 Form of Underwriting Agreement.
*** 2.1 Stock Purchase Agreement, dated as of August 20, 1998, among Home Retail Holdings, Inc., Glenn
Kaas and Aropi, Incorporated.
** 2.2 Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore, Inc., and The Cookstore
Worthington, Inc., dated June 24, 1998.
** 2.3 Disclosure Statement to the Amended Plan of Reorganization.
*** 3.1 Amended and Restated Certificate of Incorporation of the Company.
*** 3.2 Amended and Restated Bylaws of the Company.
* 4.1 Specimen of Stock Certificate.
** 4.2 Form of Underwriters' Warrant.
** 4.3 Bidco Warrant, dated August 12, 1998.
*** 4.4 New Bidco Warrant, dated August 20, 1998.
*** 4.5 Greenfield Warrant dated August 20, 1998.
* 4.6 Form of Redeemable Warrant Agreement, dated November __, 1998, by and between Rolling Pin
Kitchen Emporium, Inc. and Continental Stock Transfer & Title.
*** 4.7 Form of Individual Warrants.
** 4.8 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 23,737 shares of
Common Stock.
** 4.9 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 25,386 shares of
Common Stock.
** 4.10 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 23,737 shares
of Common Stock.
** 4.11 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 25,386 shares
of Common Stock.
* 4.12 Amendment to Common Stock Warrant, dated August 20, 1998.
* 4.13 Form of Second Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between
Home Retail Holdings, Inc. and Liberty Bidco Investment Corporation.
* 4.14 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and JRP Consulting Corp.
* 4.15 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and JRP Consulting Corp.
* 4.16 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and Laux, Holmes & Company.
* 4.17 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and Laux, Holmes & Company.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
<S> <C>
* 4.18 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and Liberty Bidco Investment Corporation.
* 4.19 Form of Amendment to Common Stock Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc.
and Greenfield Commercial Credit, L.L.C.
* 4.20 Form of Warrant to be issued to JRP Consulting Corp. for the purchase of 3,000 shares of Common
Stock.
* 4.21 Form of Warrant to be issued to Laux, Holmes & Company for the purchase of 3,000 shares of
Common Stock.
4.22 Form of Warrant to be issued to DLM Asset Management for the purchase of 4,375 shares of
Common Stock.
4.23 Form of Warrant to be issued to Spinnernet Financial Services, Ltd. for the purchase of 4,500 shares of
Common Stock.
* 5.1 Opinion of Brown & Wood LLP, as to the legality of the securities being registered.
*** 10.1 Form of 1998 Equity Incentive Plan.
*** 10.2 Business Loan Agreement With Covenants, dated August 12, 1998, among Home Retail Holdings, Inc.,
The Cookstore Worthington, Inc. and Liberty Bidco Investment Corporation.
*** 10.3 First Amendment to Loan Agreement, dated August 20, 1998, among Liberty Bidco Investment
Corporation, Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and
Aropi, Incorporated.
*** 10.4 Loan and Security Agreement, dated August 20, 1998, among Greenfield Commercial Credit, L.L.C.,
Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi,
Incorporated.
*** 10.5 Employment Agreement, entered into as of August 20, 1998, between Home Retail Holdings, Inc. and
Glenn Kaas.
* 10.6 Second Amendment to Business Loan Agreement with Covenants, dated November 1, 1998, by and
among Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc. and Liberty
Bidco Investment Corporation. and Glenn Kaas.
* 10.7 Promissory Note, dated September 30, 1998 by Rolling Pin Kitchen Emporium, Inc. to Gabledon, Ltd.
in the amount of $300,000.
* 10.8 Promissory Note, dated September 30, 1998 by Rolling Pin Kitchen Emporium, Inc. to Baraja, Inc. in
the amount of $200,000.
10.9 First Amendment to Loan and Security Agreement, dated as of November 25, 1998, by and among
Rolling Pin Kitchen Emporium, Inc., Guarantors listed on the signature page and Greenfield Commercial
Credit, L.L.C.
*** 21 List of Subsidiaries.
23.1 Consent of Feldman Sherb Ehrlich & Co., P.C., as certified public accountants.
23.2 Consent of Smith & Radigan, as certified public accountants.
* 23.3 Consent of Counsel (filed under Exhibit 5.1).
*** 24 Power of Attorney (included in signature page).
27.1 Financial Data Schedule (December 31, 1997).
27.2 Financial Data Schedule (September 30, 1998).
</TABLE>
- ------------
* Previously filed on December 1, 1998.
** Previously filed on November 4, 1998.
*** Previously filed on September 16, 1998.
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act.
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the plan
of distribution.
(2) That, for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
II-4
<PAGE>
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the 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 small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer 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 small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(c) The undersigned registrant also hereby undertakes that, for determining any
liability under the Securities Act, the small business issuer will treat 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 small business issuer under Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this amendment to the registration statement to be signed on its behalf by the
undersigned, in the City of Atlanta, State of Georgia, on December 4, 1998.
ROLLING PIN KITCHEN EMPORIUM, INC.
By: /s/ JOHN D. CRITSER
-------------------------------------
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------------------------- ---------------------------------------- ------------------
<S> <C> <C>
/s/ JOHN D. CRITSER President, Chief Executive Officer and December 4, 1998
- ------------------------------- Director
John D. Critser
/s/ GERALD M. CZARNECKI Chairman of the Board and Director December 4, 1998
- -------------------------------
Gerald M. Czarnecki
/s/ GREG E. DUKOFF Secretary, Interim Chief Financial December 4, 1998
- ------------------------------- Officer and Director
Greg E. Dukoff (Principal Accounting Officer)
/s/ DAVID E. DANOVITCH Director December 4, 1998
- -------------------------------
David E. Danovitch
/s/ DANIEL T. GUILFOILE Director December 4, 1998
- -------------------------------
Daniel T. Guilfoile
/s/ GEORGE P. LUCACI Director December 4, 1998
- -------------------------------
George P. Lucaci
/s/ THOMAS L. TUTTLE Director December 4, 1998
- -------------------------------
Thomas L. Tuttle
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------- ----------------------------------------------------------------------------------------------------
<S> <C>
** 1.1 Form of Underwriting Agreement.
*** 2.1 Stock Purchase Agreement, dated as of August 20, 1998, among Home Retail Holdings, Inc., Glenn
Kaas and Aropi, Incorporated.
** 2.2 Amended Plan of Reorganization of Gaylord Companies, Inc., The Cookstore, Inc., and The Cookstore
Worthington, Inc., dated June 24, 1998.
** 2.3 Disclosure Statement to the Amended Plan of Reorganization.
*** 3.1 Amended and Restated Certificate of Incorporation of the Company.
*** 3.2 Amended and Restated Bylaws of the Company.
* 4.1 Specimen of Stock Certificate.
** 4.2 Form of Underwriters' Warrant.
** 4.3 Bidco Warrant, dated August 12, 1998.
*** 4.4 New Bidco Warrant, dated August 20, 1998.
*** 4.5 Greenfield Warrant dated August 20, 1998.
* 4.6 Form of Redeemable Warrant Agreement, dated November __, 1998, by and between Rolling Pin
Kitchen Emporium, Inc. and Continental Stock Transfer & Title.
*** 4.7 Form of Individual Warrants.
** 4.8 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 23,737 shares of
Common Stock.
** 4.9 Warrant, dated August 20, 1998, issued to JRP Consulting Corp. for the purchase of 25,386 shares of
Common Stock.
** 4.10 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 23,737 shares
of Common Stock.
** 4.11 Warrant, dated August 20, 1998, issued to Laux, Holmes & Company for the purchase of 25,386 shares
of Common Stock.
* 4.12 Amendment to Common Stock Warrant, dated August 20, 1998.
* 4.13 Form of Second Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between
Home Retail Holdings, Inc. and Liberty Bidco Investment Corporation.
* 4.14 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and JRP Consulting Corp.
* 4.15 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and JRP Consulting Corp.
* 4.16 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and Laux, Holmes & Company.
* 4.17 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and Laux, Holmes & Company.
* 4.18 Form of Amendment to Common Stock Purchase Warrant, dated as of November 25, 1998, between Home
Retail Holdings, Inc. and Liberty Bidco Investment Corporation.
* 4.19 Form of Amendment to Common Stock Warrant, dated as of November 25, 1998, between Home Retail Holdings, Inc.
and Greenfield Commercial Credit, L.L.C.
* 4.20 Form of Warrant to be issued to JRP Consulting Corp. for the purchase of 3,000 shares of Common
Stock.
* 4.21 Form of Warrant to be issued to Laux, Holmes & Company for the purchase of 3,000 shares of
Common Stock.
4.22 Form of Warrant to be issued to DLM Asset Management for the purchase of 4,375 shares of
Common Stock.
4.23 Form of Warrant to be issued to Spinnernet Financial Services, Ltd. for the purchase of 4,500 shares of
Common Stock.
* 5.1 Opinion of Brown & Wood LLP, as to the legality of the securities being registered.
*** 10.1 Form of 1998 Equity Incentive Plan.
*** 10.2 Business Loan Agreement With Covenants, dated August 12, 1998, among Home Retail Holdings, Inc.,
The Cookstore Worthington, Inc. and Liberty Bidco Investment Corporation.
*** 10.3 First Amendment to Loan Agreement, dated August 20, 1998, among Liberty Bidco Investment
Corporation, Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and
Aropi, Incorporated.
*** 10.4 Loan and Security Agreement, dated August 20, 1998, among Greenfield Commercial Credit, L.L.C.,
Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc., and Aropi,
Incorporated.
*** 10.5 Employment Agreement, entered into as of August 20, 1998, between Home Retail Holdings, Inc. and
Glenn Kaas.
* 10.6 Second Amendment to Business Loan Agreement with Covenants, dated November 1, 1998, by and
among Home Retail Holdings, Inc., The Cookstore, Inc., The Cookstore Worthington, Inc. and Liberty
Bidco Investment Corporation. and Glenn Kaas.
* 10.7 Promissory Note, dated September 30, 1998 by Rolling Pin Kitchen Emporium, Inc. to Gabledon, Ltd.
in the amount of $300,000.
* 10.8 Promissory Note, dated September 30, 1998 by Rolling Pin Kitchen Emporium, Inc. to Baraja, Inc. in
the amount of $200,000.
10.9 First Amendment to Loan and Security Agreement, dated as of November 25, 1998, by and among
Rolling Pin Kitchen Emporium, Inc., Guarantors listed on the signature page and Greenfield
Commercial Credit, L.L.C.
*** 21 List of Subsidiaries.
23.1 Consent of Feldman Sherb Ehrlich & Co., P.C., as certified public accountants.
23.2 Consent of Smith & Radigan, as certified public accountants.
*23.3 Consent of Counsel (filed under Exhibit 5.1).
*** 24 Power of Attorney (included in signature page).
27.1 Financial Data Schedule (December 31, 1997).
27.2 Financial Data Schedule (September 30, 1998).
</TABLE>
- ------------
* Previously filed on December 1, 1998.
** Previously filed on November 4, 1998.
*** Previously filed on September 16, 1998.
<PAGE>
Void after August 31, 2003
This Warrant and any shares acquired upon the exercise of this Warrant
have not been registered under the Securities Act of 1933. This Warrant and such
shares may not be sold or transferred in the absence of such registration or an
exemption therefrom under said Act and no transfer of this Warrant or such
shares shall be valid or effective unless and until such conditions shall have
been complied with.
ROLLING PIN KITCHEN EMPORIUM, INC.
COMMON STOCK PURCHASE WARRANT
ROLLING PIN KITCHEN EMPORIUM, INC. (the "Company"), having its
principal office at 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360
hereby certifies that, for value received, DLM Asset Management ("DLM") or
assigns, is entitled, subject to the terms set forth below, to purchase from the
Company at any time on or from time to time after the effective date of the
Company's initial public offering and before 5:00 P.M., New York City time, on
August 31, 2003 (the "Expiration Date") 4,375 fully paid and non-assessable
shares of Common Stock of the Company, at the price per share of the Purchase
Price. The number and character of such shares of Common Stock and the Purchase
Price as hereinafter defined are subject to adjustment as provided herein.
This Warrant is one of the Common Stock Purchase Warrants (the
"Warrants") originally issued as of the Original Issue Date (as defined below)
and evidencing the right to purchase an aggregate of 4,375 shares of Common
Stock of the Company, subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Company" includes any corporation which shall
succeed to or assume the obligations of the Company hereunder.
(b) The term "Common Stock" means the Class A Common Stock,
$.01 par value, of the Company and its successors.
(c) The "Original Issue Date" is August 12, 1998, the date as
of which the Warrant was first issued.
(d) The term "Other Securities" refers to any stock (other
than Common Stock) and other securities of the Company or any other person
(corporate or otherwise) which the holder of the Warrant at any time shall be
entitled to receive, or shall have received, upon the exercise of the Warrant,
in lieu of or in addition to Common Stock, or which at any time shall be
issuable or shall have been issued in exchange for or in replacement of Common
Stock or Other Securities pursuant to Section 6 or otherwise.
1
<PAGE>
(e) The term "Purchase Price" shall be 165% of the initial
price to the public pursuant to which the Company first sells $1 million or more
of Common Stock (taking into account gross proceeds, not net proceeds), as set
forth on the cover page of the prospectus contained in the registration
statement pertaining to such offering, as such price may be adjusted pursuant to
the terms hereof.
(f) The terms "registered" and "registration" refer to a
registration effected by filing a registration statement in compliance with the
Securities Act, to permit the disposition of Common Stock (or Other Securities)
issued or issuable upon the exercise of Warrants, and any post-effective
amendments and supplements filed or required to be filed to permit any such
disposition.
(g) The term "Registrable Securities" shall mean the shares of
Common Stock or Other Securities issuable upon exercise of the Warrants,
excluding Common Stock or other Securities that (a) have been registered under
the Securities Act pursuant to an effective registration statement filed
thereunder and disposed of in accordance with such registration statement or (b)
are eligible for sale under Rule 144(k) under the Securities Act, or have been
sold pursuant to Rule 144 under the Securities Act.
(h) The term "Registration Period" shall mean the period
commencing concurrently with the closing of the Company's first public offering
of $1 million or more of securities registered under the Securities Act that
takes place after the Original Issue Date and ending on the earlier of the
second anniversary thereof and the Expiration Date.
(i) The term "Securities Act" means the Securities Act of 1933
as the same shall be in effect at the time.
1. Registration Rights.
1.1. Incidental Registration. During the Registration Period,
each holder of Registrable Securities will have a right to have its Registrable
Securities included in registration statements filed by the Company on general
registration forms under the Securities Act, except as otherwise provided
herein. The Company will notify each such holder in writing (the "Company
Notice") promptly after making the decision to file a registration statement
under the Securities Act with respect to the proposed sale of the Company's
equity securities (except with respect to registration statements filed on Forms
S-4 or S-8 or such others in similar form then in effect under the Securities
Act), specifying in the Company Notice the form of registration statement, the
number of shares of securities the Company proposes to register, the name of the
managing underwriter or underwriters (if any) and the general terms and
2
<PAGE>
conditions of the proposed registration and sale. Subject to Section 1.6 and the
remainder of this Section 1.1, if requested by any holder of Registrable
Securities in a writing (the "Investor Notice"), delivered to the Company not
later than 30 days after the Company gives the Company Notice, to include in
such registration statement Registrable Securities (the "Requested Shares"), the
Company will, unless prohibited by the Underwriter, include the Requested Shares
in the registration statement, and, if the proposed sale is to be underwritten,
to cause the underwriters of securities to be sold by the Company in such
registration statement to purchase such Requested Shares. In the event that any
registration pursuant to this Section 1.1 shall be an underwritten offering of
securities of the Company, any request by such holders pursuant to this Section
1.1 to register the Requested Shares, may, but need not, specify that such
shares are to be included in the underwriting on the same terms and conditions
as the securities, if any, otherwise being sold through underwriters under such
registration. In the event of an underwritten offering of securities of the
Company, such notice shall also specify as to whether such holder of Registrable
Securities desires that any of such Requested Shares to be included in any such
registration statement be subject to any over-allotment option granted the
underwriters of such offering. No holder shall be required to have its Requested
Shares be part of any underwritten offering and/or subject to any over-allotment
option granted any underwriter by the Company. Notwithstanding the foregoing, if
the managing underwriter or underwriters shall inform the Company of its
opinion, at least 15 days prior to the date that the registration statement
becomes effective, that part or all of the Requested Shares be excluded from the
registration statement on the ground that the inclusion of such Requested Shares
will adversely affect the orderly sales and distribution of the Common Stock
being sold, the Company shall include all securities to be sold by holders,
including the Company, which have the right to require that their securities be
included in the registration on a pro rata basis. If the underwriters agree to
purchase any of the Requested Shares beneficially owned by any holder who has
agreed that such Requested Shares shall be sold pursuant to the underwritten
offering or pursuant to the exercise of any over-allotment option as described
above, such holders will enter into a reasonably customary underwriting
agreement with the underwriters and will sell such Requested Shares to the
underwriters unless, and except to the extent that, upon written notice to the
Company and the managing underwriter or underwriters at least two days prior to
the effective date of the registration statement, any such holder withdraws any
portion of such Requested Shares. If the underwriters elect to purchase less
than all the Requested Shares beneficially owned by holders who have agreed that
such Requested Shares shall be sold pursuant to the underwritten offering or
pursuant to the exercise of any over-allotment option, the underwriters shall
purchase such Requested Shares on a pro rata basis among the Requested Shares
that were included in the timely requests from holders of Registrable Securities
under this subsection and the Requested Shares requested to be included in the
registration statement by other stockholders holding registration rights and who
have requested that such shares be sold pursuant to the underwritten offering or
pursuant to the exercise of an over-allotment option. Notwithstanding the
foregoing, the Company may withdraw any registration statement referred to in
this Section 1 without any liability to the holders of Registrable Securities.
1.2. Market Standoff. Each holder of Registrable Securities agrees that
if the managing underwriter or underwriters of the offering contemplated by
Section 1.1 so request, such holder shall not effect any public sale or
3
<PAGE>
distribution of any Registrable Securities being registered thereunder or of any
securities convertible into or exchangeable or exercisable for such Registrable
Securities being registered thereunder for a period equal to the lesser of (x)
the period management of the Company has agreed to lockup and (y) 90 days after
the effective date of the registration statement filed in connection with the
public offering.
1.3. Obligations of the Company. When required under Section 1.1 effect
the registration of any Registrable Securities, the Company shall, as
expeditiously as is reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to exercise the Company's best efforts to cause such
registration statement to become effective at the earliest practicable date and
to remain effective for a period of 90 days or until the holders and any
underwriter purchasing such Registrable Securities have sold or otherwise
disposed of the Registrable Securities registered in such registration
statement, whichever is earlier.
(b) Furnish to each holder selling Registrable Securities such
number of copies of conformed copies of such registration statement and of each
such amendment and supplement thereto (with all exhibits) and such number of
copies of the prospectus, including a preliminary prospectus, in conformity with
the requirements of the Securities Act, and such other documents as such holder
may reasonably request in order to facilitate the disposition of Registrable
Securities to be sold by such holder pursuant to such registration statement.
(c) Exercise the Company's best efforts to register and
qualify the Registrable Securities covered by such registration statement under
other securities laws or State Securities Laws of such states or jurisdictions
where a self-executing exemption is not available and as any seller of such
Registrable Securities shall reasonably request; provided, however, 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.
(d) Cause all securities covered by such registration
statement to be registered with or approved by such other federal or state
governmental agencies or authorities as may be necessary in the opinion of
counsel to the Company and counsel to the seller or sellers of securities to
enable the seller or sellers thereof to consummate the disposition of such
securities.
(e) Notify each seller of securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
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 any material fact required to be stated therein
or necessary to make the statements therein not misleading, in the light of the
4
<PAGE>
circumstances under which they were made, and at the request of any such seller
promptly prepare and furnish to it a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statement therein not
misleading in the light of the circumstances under which they were made.
(f) Comply with all applicable rules and regulations of the
SEC, make timely filing of all reports pursuant to the Securities Exchange Act
of 1934, as amended ("Exchange Act") at such time as the Company's securities
are registered under the Exchange Act, and make available to its securities
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first full calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly
furnish to each such seller of securities a copy of such earnings statement.
(g) Use its best efforts to list all securities covered by
such registration statement on any national securities exchange on which
securities of the same class and, if applicable, series, covered by such
registration statement are then listed or on the Nasdaq Stock Market ("Nasdaq")
if the securities are reported on Nasdaq.
1.4. Information to be Furnished. It shall be a condition precedent to
the obligation of the Company to take any action pursuant to this Section 1 that
the holders of Registrable Securities promptly furnish to the Company such
information regarding them, the securities of the Company held by them and the
intended method of disposition of such securities as the Company shall
reasonably request and as shall be required in connection with the Company's
obligations under this Section 1.
1.5. Underwritten Offerings.
(a) Incidental Underwritten Offerings. If the Company proposes
to register any of its securities under the Securities Act as contemplated by
Section 1.1 and such securities are to be distributed by or through one or more
underwriters, the Company will, if requested by any holder of Registrable
Securities, use its best efforts to arrange for such underwriters to include all
the securities to be offered and sold by such requesting holder among the
securities of the Company to be distributed by such underwriters. The holders of
Registrable Securities to be distributed by such underwriters shall be parties
to the underwriting agreement between the Company and such underwriters and may,
at their option, require that any or all of the representations and warranties
by, and the other agreements on the part of, the Company to and for the benefit
of such underwriters shall also be made to and for the benefit of such holders
of Registrable Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of such holders of Registrable Securities. Any such
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requesting holder of Registrable Securities shall not be required to make any
representations or warranties to or agreements with the Company other than
representations, warranties or agreements regarding such holder, such holder's
securities and such holder's intended method of distribution or any other
representations required by applicable law.
1.6. Notice. In connection with the preparation and filing of
each registration statement under the Securities Act pursuant to this Agreement,
the Company shall promptly notify the holders of Registrable Securities included
in the Registration Statement and their respective counsel of any stop order
issued or threatened by the SEC and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered.
1.7. Registration Expenses. All expenses incurred by the
Company and the holders of Registrable Securities in complying with this Section
1, including, without limitation, all registration, NASD and filing fees,
duplication and printing expenses, travel expenses, fees and disbursements of
counsel for the Company or its independent public accountants, reasonable fees
and disbursements of counsel for holders of securities included in a Company
registration statement and the expense of any special audits incident to or
required by any such registration shall be paid by the Company, except that each
holder of Registrable Securities shall pay underwriting discounts and
commissions attributable to such holder's shares, and transfer taxes on shares
held by such holder.
1.8. Indemnification. In the event any of the Common Stock of
a holder of Registrable Securities is included in a registration statement
pursuant to this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each holder of Registrable Securities (and its
officers, directors, employees, partners and affiliates) selling Registrable
Securities, any underwriter (as defined in the Securities Act) with respect to
the Registrable Securities, and each person, if any, who controls such holder or
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, to which they may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue or allegedly untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or allegedly necessary to make the statements
therein not misleading; and will reimburse each such holder of Registrable
Securities (and its officers, directors, employees, partners and affiliates),
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 1.8(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 written consent of the Company, which shall
not be unreasonably withheld, nor shall the Company be liable under this Section
1.8(a) to such a holder, underwriter or controlling person for any such loss,
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claim, damage, liability or action to the extent that it arises out of, or is
based upon, an untrue statement or allegedly untrue statement or omission or
alleged omission made in connection with such registration statement,
preliminary prospectus, final prospectus, or amendments or supplements thereto,
in reliance upon and in conformity with information furnished in writing
expressly for use in connection with such registration by such holder, the
Company will reimburse each such holder for any legal or other expenses
reasonably incurred by each such holder in connection with investigating or
defending any such loss, claim, damage, liability or action.
(b) To the extent permitted by law, each holder
selling Registrable Securities pursuant to this Section 1 will indemnify and
hold harmless the Company, each of its directors, officers and employees, each
person, if any, who controls the Company within the meaning of the Securities
Act, and any underwriter for the Company (within the meaning of the Securities
Act) against any losses, claims, damages or liabilities to which the Company or
any such person or underwriter may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of, or are based upon, any untrue or allegedly untrue
statement of any material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or allegedly necessary to make the statements therein not
misleading, in each case to the extent that such untrue statement or allegedly
untrue statement or omission or alleged omission was made in such registration
statement, preliminary prospectus, or amendments or supplements thereto in
reliance upon and in conformity with information furnished in writing by such
holder expressly for use in connection with such registration; provided,
however, that the indemnity agreement contained in this Section 1.8(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 written consent of such
holder, which shall not be unreasonably withheld; and each such holder will
reimburse the Company or any such person or underwriter for any legal or other
expenses reasonably incurred by the Company or any such person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party
under this Section 1.8 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 1.8, notify the indemnifying party in
writing of the commencement thereof and generally summarize such action. The
indemnifying party shall have the right to participate in and to assume the
defense thereof with counsel mutually satisfactory to the parties; provided that
each indemnified party shall have the right to employ its own counsel in any
such case, but the fees and expense of such counsel shall be at the expense of
such indemnified party unless the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action or the indemnifying party shall not have employed counsel to have
charge of the defense of such action or such indemnified party or the
indemnified parties shall have reasonably concluded that there may be defenses
available to it or them that are different from or additional to those available
to the indemnifying party (in which case the indemnifying party shall not have
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the right to direct the defense of such action on behalf of the indemnified
party or parties) in any of which events the fees and expenses of such counsel
shall be borne by the indemnifying parties. The failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under this Section 1.8, except to the extent that the
indemnifying party is actually and materially prejudiced by such failure to give
notice.
2. Sale or Exercise Without Registration. If, at the time of any
exercise, transfer or surrender for exchange of a Warrant or Common Stock (or
Other Securities) previously issued upon the exercise of Warrants, such Warrant
or Common Stock (or Other Securities) shall not be registered under the
Securities Act, the Company may require, as a condition of allowing such
exercise, transfer or exchange, that the holder or transferee of such Warrant or
Common Stock (or Other Securities), as the case may be, furnish to the Company a
satisfactory opinion of counsel to the effect that such exercise, transfer or
exchange may be made without registration under the Securities Act, provided
that nothing contained in this Section 2 shall relieve the Company from
complying with any request for registration pursuant to Section 1 hereof.
3. Exercise of Warrant; Partial Exercise; Cashless Exercise.
3.1. Exercise in Full. Subject to the provisions hereof, this
Warrant may be exercised in full one year after the date hereof by the holder
hereof by surrender of this Warrant, with the form of subscription attached
hereto as Schedule I ("Subscription Form") duly executed by such holder, to the
Company at its principal office accompanied by payment, in cash or by certified
or official bank check payable to the order of the Company, in the amount
obtained by multiplying the number of shares of Common Stock called for on the
face of this Warrant, as adjusted herein, by the Purchase Price.
3.2. Partial Exercise. Subject to the provisions hereof, this
Warrant may be exercised in part one year after the date hereof by the holder
hereof by surrender of this Warrant in the manner and at the place provided in
Section 3.1 except that the amount payable by the holder upon any partial
exercise shall be the amount obtained by multiplying (a) the number of shares of
Common Stock, as adjusted herein, designated by the holder in the Subscription
Form, by (b) the Purchase Price. Upon any such partial exercise, the Company at
its expense will forthwith issue and deliver to or upon the order of the holder
hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof
or as such holder (upon payment by such holder of any applicable transfer taxes)
may request, calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock equal (without giving effect to any adjustment
therein) to the number of such shares called for on the face of this Warrant
minus the number of such shares designated by the holder in the Subscription
Form.
3.3. Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Sections 3.1 and 3.2 and in lieu of any cash
payment required thereunder, the holder of the Warrant shall have the right at
any time (one year after the date hereof) and from time to time to exercise the
Warrants in full or in part by surrendering the Warrant Certificate in the
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manner and at the place specified in Section 3.1 as payment of the aggregate
Purchase Price. The number of shares subject to the portion of the Warrant to be
surrendered in payment of the aggregate Exercise Price for the shares to be
purchased shall be determined by multiplying the number of shares to be
purchased by the Purchase Price, and then dividing the product thereof by an
amount equal to the Market Price (as defined below). Upon any such partial
exercise, the Company, at its expense will forthwith issue and deliver to or
upon the order of the holder hereof a new Warrant of like tenor, in the name of
such holder or as such holder may designate (upon payment by such holder of any
applicable transfer taxes), calling in the aggregate on the face thereof for the
number of shares of Common Stock equal (without giving effect to any adjustment
therein) to (A) the number of shares called for on the face of this Warrant
minus (B) the sum of (i) the number of shares so surrendered by the holder
pursuant to this Section plus (ii) the number of shares issued in the exchange.
Solely for the purposes of this paragraph, Market Price shall be calculated as
the average of the Market Prices for each of the ten (10) trading days preceding
the date which the form of election attached hereto is deemed to have been sent
to the Company ("Notice Date").
3.4. Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be (i) if the principal trading
market for such securities is an exchange, the last reported sale price, as
officially reported on any consolidated tape, (ii) if the principal market for
such securities is the over-the-counter market, the closing bid price on such
date as reported by Nasdaq or, if there is no closing bid price reported on
Nasdaq or if the security is not quoted on Nasdaq, then the high bid price as
set forth in the National Quotation Bureau sheet listing such securities for
such day. Notwithstanding the foregoing, if there is no reported closing price
or high bid price, as the case may be, on the date next preceding the event
requiring an adjustment hereunder, then the Market Price shall be determined as
of the latest date prior to such day for which such closing price or high bid
price is available, or if the securities are not quoted on Nasdaq, as determined
in good faith by resolution of the Board of Directors of the Company, based on
the best information available to it.
3.5. Company to Reaffirm Obligations. The Company will, at the
time of any exercise of this Warrant, upon the request of the holder hereof,
acknowledge in writing its continuing obligation to afford to such holder any
rights (including, without limitation, any right to registration of the shares
of Common Stock or Other Securities issued upon such exercise) to which such
holder shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant, provided that if the holder of this Warrant shall
fail to make any such request, such failure shall not affect the continuing
obligation of the Company to afford such holder any such rights.
4. Delivery of Stock Certificates, etc., on Exercise. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the holder hereof, or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of fully paid and non-assessable shares of Common
Stock (or Other Securities) to which such holder shall be entitled upon such
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exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash equal to such fraction multiplied by the then
current Market Price of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such holder
is entitled upon such exercise pursuant to Section 5 or otherwise.
5. Adjustment for Dividends in Other Stock, Property, etc.;
Reclassification, etc. In case at any time or from time to time after the
Original Issue Date the holders of Common Stock (or Other Securities) shall have
received, or (on or after the record date fixed for the determination of
stockholders eligible to receive) shall have become entitled to receive, without
payment therefor
(a) other or additional stock or other securities or property
(other than cash) by way of dividend, or
(b) other or additional (or less) stock or other securities or
property other than by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
then, and in each such case, the holder of this Warrant, upon the exercise
hereof as provided in Section 3, shall be entitled to receive the amount of
stock and other securities and property which such holder would hold on the date
of such exercise if on the Original Issue Date he had been the holder of record
of the number of shares of Common Stock called for on the face of this Warrant
and had thereafter, during the period from the Original Issue Date to and
including the date of such exercise, retained such shares and all such other or
additional (or less) stock and other securities and property receivable by him
as aforesaid during such period, giving effect to all adjustments called for
during such period by Sections 6 and 7 hereof.
6. Reorganization, Consolidation, Merger, etc.
In case the Company after the Original Issue Date shall (a)
effect a reorganization, (b) consolidate with or merge into any other person, or
(c) transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, the holder of this Warrant, upon the exercise
hereof as provided in Section 3 at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall be entitled to receive (and the Company
shall be entitled to deliver), in lieu of the Common Stock (or Other Securities)
issuable upon such exercise prior to such consummation or such effective date,
the stock and other securities and property (including cash) to which such
holder would have been entitled upon such consummation or in connection with
such dissolution, as the case may be, if such holder had so exercised this
Warrant immediately prior thereto, all subject to further adjustment thereafter
as provided in Sections 5 and 7 hereof.
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In case the Company after the Original Issue Date shall (i)
subdivide the outstanding Common Stock, (ii) combine the outstanding Common
Stock into a smaller number of shares, or (iii) issue any Other Securities by
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
corporation), then the number and kind of shares of Common Stock and/or Other
Securities issuable, at the time of the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that the
holder of this Warrant after such time shall be entitled to receive upon
exercise of its Warrant the aggregate number and kind of shares of Common Stock
and/or Other Securities which, if its Warrant had been exercised immediately
prior to such time, it would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification, all subject to further adjustment thereafter as provided in
Sections 5 and 7 hereof.
7. Other Adjustments.
7.1. General. Except as provided in Section 7.4, in case the
Company shall issue or sell shares of its Common Stock after the Original Issue
Date for a consideration per share less than the Purchase Price in effect
pursuant to the terms of this Warrant at the time of issuance or sale of such
additional shares, then the Purchase Price in effect hereunder shall
simultaneously with such issuance or sale be reduced to a price determined by
dividing (1) an amount equal to (a) the total number of shares of Common Stock
outstanding immediately prior to such issuance or sale multiplied by the
Purchase Price in effect hereunder at the time of such issuance and sale, plus
(b) the consideration, if any, received by the Company upon such issuance or
sale, by (2) the total number of shares of Common Stock outstanding immediately
after such issuance or sale of such additional shares; and the number of shares
of Common Stock which may be purchased upon exercise of this Warrant shall be
increased so that the aggregate amount to be paid upon full exercise of this
Warrant, after giving effect to each reduction in the Purchase Price, shall not
be reduced.
7.2. Convertible Securities. Except as provided in Section
7.4, in case the Company shall issue or sell any securities convertible into
Common Stock of the Company ("Convertible Securities") after the Original Issue
Date, there shall be determined the price per share for which Common Stock is
issuable upon the conversion or exchange thereof, such determination to be made
by dividing (a) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (b) the maximum number of
shares of Common Stock issuable upon the conversion or exchange of all of such
Convertible Securities.
If the price per share so determined shall be less than the
applicable Purchase Price, then such issue or sale shall be deemed to be an
issue or sale for cash (as of the date of issue or sale of such Convertible
Securities) of such maximum number of shares of Common Stock at the price per
share so determined, provided that, if such Convertible Securities shall by
their terms provide for an increase or increases, with the passage of time, in
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the amount of additional consideration, if any, to the Company, or in the rate
of exchange, upon the conversion or exchange thereof, the adjusted Purchase
Price shall, forthwith upon any such increase becoming effective, be readjusted
to reflect the same, and provided further, that upon the expiration of such
rights of conversion or exchange of such Convertible Securities, if any thereof
shall not have been exercised, the adjusted Purchase Price shall forthwith be
readjusted and thereafter be the price which it would have been had an
adjustment been made on the basis that the only shares of Common Stock so issued
or sold were issued or sold upon the conversion or exchange of such Convertible
securities, and that they were issued or sold for the consideration actually
received by the Company upon such conversion or exchange, plus the
consideration, if any, actually received by the Company for the issue or sale of
all of such Convertible Securities which shall have been converted or exchanged;
provided that, notwithstanding the foregoing, no readjustment shall be
effectuated hereunder with respect to any shares of Common Stock already issued
upon exercise of the Warrant.
7.3. Rights and Options. Except as provided in Section 7.4, in
case the Company shall grant any rights or options to subscribe for, purchase or
otherwise acquire Common Stock after the Original Issue Date, there shall be
determined the price per share for which Common Stock is issuable upon the
exercise of such rights or options, such determination to be made by dividing
(a) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of such rights or options, by (b) the maximum number of shares of
Common Stock of the Company issuable upon the exercise of such rights or
options.
If the price per share so determined shall be less than the
applicable Purchase Price, then the granting of such rights or options shall be
deemed to be an issue or sale for cash (as of the date of the granting of such
rights or options) of such maximum number of shares of Common Stock at the price
per share so determined, provided that, if such rights or options shall by their
terms provide for an increase or increases, with the passage of time, in the
amount of additional consideration payable to the Company upon the exercise
thereof, the adjusted purchase price per share shall, forthwith upon any such
increase becoming effective, be readjusted to reflect the same, and provided,
further, that upon the expiration of such rights or options, if any thereof
shall not have been exercised, the adjusted Purchase Price shall forthwith be
readjusted and thereafter be the price which it would have been had an
adjustment been made on the basis that the only shares of Common Stock so issued
or sold were those issued or sold upon the exercise of such rights or options
and that they were issued or sold for the consideration actually received by the
Company upon such exercise, plus the consideration, if any, actually received by
the Company for the granting of all such rights or options, whether or not
exercised.
7.4. Exceptions. The provisions of Sections 7.1, 7.2 and 7.3
do not apply to (i) the exercise of any Warrant,(ii) the exercise of any right
or option with respect to which an adjustment shall have been made at the time
of the issuance of such right or option pursuant to Section 7.3, (iii)
conversion or exchange of any Convertible Security with respect to which an
adjustment shall have been made at the time of the issuance of such Convertible
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Security pursuant to Section 7.2, (iv) any transaction with respect to which an
adjustment shall have been made pursuant to Sections 5 or 6, and (v) the
issuance or sale of any Common Stock pursuant to the exercise or conversion of
any option, right or Convertible Security that was issued on or prior to the
Original Issue Date.
8. Further Assurances. The Company will take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and non-assessable shares of stock upon the exercise of the Warrants.
9. Accountants' Certificate as to Adjustments. In each case of any
adjustment or readjustment in the shares of Common Stock (or Other Securities)
issuable upon the exercise of the Warrant, the Company at its expense will
promptly cause the Company's regularly retained auditor to compute such
adjustment or readjustment in accordance with the terms of the Warrant and
prepare a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based, and the
number of shares of Common Stock outstanding or deemed to be outstanding. The
Company will forthwith mail a copy of each such certificate to the holder of
this Warrant.
10. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend (other than a cash dividend payable out of
earned surplus of the Company) or other distribution, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or
(d) any proposed issue or grant by the Company of any shares
of stock of any class or any other securities, or any right or option to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities (other than the issue of Common Stock on the exercise of
the Warrant),
then and in each such event the Company will mail or cause to be mailed
to each holder of the Warrant a notice specifying (i) the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and stating the amount and character of such dividend, distribution or right,
(ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
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winding-up is to take place, and the time, if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or Other Securities) for securities or other property
deliverable upon such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up, and
(iii) the amount and character of any stock or other securities, or rights or
options with respect thereto, proposed to be issued or granted, the date of such
proposed issue or grant and the persons or class of persons to whom such
proposed issue or grant is to be offered or made. Such notice shall be mailed at
least 20 days prior to the date therein specified.
11. Reservation of Stock, etc., Issuable on Exercise of Warrants. The
Company will at all times reserve and keep available, solely for issuance and
delivery upon the exercise of the Warrant, all shares of Common Stock (or Other
Securities) from time to time issuable upon the exercise of the Warrant.
12. Listing on Securities Exchanges; Registration. If the Company at
any time shall list any Common Stock on any national securities exchange, or
interdealer quotation system, and shall register such Common Stock under the
Securities Exchange Act of 1934 (as then in effect, or any similar statute then
in effect), the Company will, at its expense, simultaneously list on such
exchange, upon official notice of issuance upon the exercise of the Warrant, and
maintain such listing of all shares of Common Stock from time to time issuable
upon the exercise of the Warrant; and the Company will so list on any national
securities exchange, will so register and will maintain such listing of, any
Other Securities if and at the time that any securities of like class or similar
type shall be listed on such national securities exchange by the Company.
13. Exchange of Warrants. Subject to the provisions of Section 2
hereof, upon surrender for exchange of the Warrant, properly endorsed, to the
Company, the Company at its own expense will issue and deliver to or upon the
order of the holder thereof a new Warrant or Warrants of like tenor, in the name
of such holder or as such holder (upon payment by such holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant or Warrants so surrendered.
14. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Warrant and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement reasonably satisfactory in form and amount to the
Company or, in the case of any such mutilation, upon surrender and cancellation
of the Warrant, the Company at its expense will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
15. Warrant Agent. The Company may, by written notice to each holder of
a Warrant, appoint an agent having an office in New York, New York, for the
purpose of issuing Common Stock (or Other Securities) upon the exercise of the
Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 13, and
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replacing Warrants pursuant to Section 14, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
16. Negotiability, etc. This Warrant is issued upon the following
terms, to all of which each holder or owner hereof by the taking hereof consents
and agrees:
(a) subject to the provisions hereof, title to this Warrant
may be transferred by endorsement (by the holder hereof executing the form of
assignment attached hereto as Schedule II) and delivery in the same manner as in
the case of a negotiable instrument transferable by endorsement and delivery;
(b) subject to the foregoing, any person in possession of this
Warrant properly endorsed is authorized to represent himself as absolute owner
hereof and is empowered to transfer absolute title hereto by endorsement and
delivery hereof to a bona fide purchaser hereof for value; each prior taker or
owner waives and renounces all of his equities or rights in this Warrant in
favor of each such bona fide purchaser and each such bona fide purchaser shall
acquire absolute title hereto and to all rights represented hereby; and
(c) until this Warrant is transferred on the books of the
Company, the Company may treat the registered holder hereof as the absolute
owner hereof for all purposes, notwithstanding any notice to the contrary.
17. Notices, etc. All notices and other communications from the Company
to the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such holder, or, until an address is so furnished, to
and at the address of the last holder of this Warrant who has so furnished an
address to the Company.
18. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant is being delivered in the State of New York and shall be
construed and enforced in accordance with and governed by the laws of such
State. The headings in this Warrant are for purposes of reference only, and
shall not limit or otherwise affect any of the terms hereof.
19. Assignability. Subject to the transfer conditions referred to in
the legend endorsed hereon, this Warrant is fully assignable at any time upon
surrender of this Warrant with a properly executed Assignment (in the form of
Schedule II hereto) at the principal office of the Company.
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Dated: August 12, 1998
ROLLING PIN KITCHEN EMPORIUM, INC.
By________________________________
Chairman of the Board
[Corporate Seal]
Attest:
_______________________________________
Secretary
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SCHEDULE I
FORM OF SUBSCRIPTION
(To be signed only upon exercise or surrender of each Warrant)
To: ROLLING PIN KITCHEN EMPORIUM, INC.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, _________ shares of Common Stock of ROLLING PIN KITCHEN
EMPORIUM, INC., and herewith [use version (a) in the event of the payment of
cash purchase price]
(a) makes payment of $_________ therefor, and requests that the certificates for
such shares be issued in the name of, and delivered to, __________ , whose
address is _________________________________.
or [use version (b) in the event of a cashless exercise]
(b) surrenders that portion of the Warrant representing ____ shares of Common
Stock, and requests that the certificates for such shares be issued in the name
of, and delivered to ___________________, whose address is
______________________________.
To the extent that the exercise hereunder is for less than all of the shares of
Common Stock represented by the Warrant, the undersigned hereby requests that a
new Warrant for the remaining amount of shares of Common Stock be issued to
__________________ whose address is _____________________________________.
Dated:
________________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant)
(Address) __________________________
__________________________
Insert here the number of shares called for on the face of the Warrant (or, in
the case of a partial exercise, the portion thereof as to which the Warrant is
being exercised), in either case without making any adjustment for additional
Common Stock or any other stock or other securities or property or cash which,
pursuant to the adjustment provisions of the Warrant, may be deliverable upon
exercise.
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SCHEDULE II
FORM OF ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and
transfers unto ______________ the right represented by the within Warrant to
purchase _____________shares of Common Stock of ROLLING PIN KITCHEN EMPORIUM,
INC., to which the within Warrant relates, and appoints _______________________
as attorney to transfer such right on the books of ROLLING PIN KITCHEN EMPORIUM,
INC. with full power of substitution in the premises.
Dated:
________________________________________
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
(Address) ____________________________
____________________________
____________________________
____________________________
(Signature guaranteed by a Bank or Trust Company having its principal office in
New York City or by a Member Firm of the New York or American Stock Exchange)
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<PAGE>
Void after August 31, 2003
This Warrant and any shares acquired upon the exercise of this
Warrant have not been registered under the Securities Act of 1933. This Warrant
and such shares may not be sold or transferred in the absence of such
registration or an exemption therefrom under said Act and no transfer of this
Warrant or such shares shall be valid or effective unless and until such
conditions shall have been complied with.
ROLLING PIN KITCHEN EMPORIUM, INC.
COMMON STOCK PURCHASE WARRANT
ROLLING PIN KITCHEN EMPORIUM, INC. (the "Company"), having its
principal office at 4264 Winters Chapel Road, Building B, Atlanta, Georgia 30360
hereby certifies that, for value received, Spinnernet Financial Services, Ltd.
("Spinnernet") or assigns, is entitled, subject to the terms set forth below, to
purchase from the Company at any time on or from time to time after the
effective date of the Company's initial public offering and before 5:00 P.M.,
New York City time, on August 31, 2003 (the "Expiration Date") 4,500 fully paid
and non-assessable shares of Common Stock of the Company, at the price per share
of the Purchase Price. The number and character of such shares of Common Stock
and the Purchase Price as hereinafter defined are subject to adjustment as
provided herein.
This Warrant is one of the Common Stock Purchase Warrants (the
"Warrants") originally issued as of the Original Issue Date (as defined below)
and evidencing the right to purchase an aggregate of 4,500 shares of Common
Stock of the Company, subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Company" includes any corporation which shall
succeed to or assume the obligations of the Company hereunder.
(b) The term "Common Stock" means the Class A Common Stock,
$.01 par value, of the Company and its successors.
(c) The "Original Issue Date" is August 12, 1998, the date as
of which the Warrant was first issued.
(d) The term "Other Securities" refers to any stock (other
than Common Stock) and other securities of the Company or any other person
(corporate or otherwise) which the holder of the Warrant at any time shall be
entitled to receive, or shall have received, upon the exercise of the Warrant,
in lieu of or in addition to Common Stock, or which at any time shall be
issuable or shall have been issued in exchange for or in replacement of Common
Stock or Other Securities pursuant to Section 6 or otherwise.
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<PAGE>
(e) The term "Purchase Price" shall be 165% of the initial
price to the public pursuant to which the Company first sells $1 million or more
of Common Stock (taking into account gross proceeds, not net proceeds), as set
forth on the cover page of the prospectus contained in the registration
statement pertaining to such offering, as such price may be adjusted pursuant to
the terms hereof.
(f) The terms "registered" and "registration" refer to a
registration effected by filing a registration statement in compliance with the
Securities Act, to permit the disposition of Common Stock (or Other Securities)
issued or issuable upon the exercise of Warrants, and any post-effective
amendments and supplements filed or required to be filed to permit any such
disposition.
(g) The term "Registrable Securities" shall mean the shares of
Common Stock or Other Securities issuable upon exercise of the Warrants,
excluding Common Stock or other Securities that (a) have been registered under
the Securities Act pursuant to an effective registration statement filed
thereunder and disposed of in accordance with such registration statement or (b)
are eligible for sale under Rule 144(k) under the Securities Act, or have been
sold pursuant to Rule 144 under the Securities Act.
(h) The term "Registration Period" shall mean the period
commencing concurrently with the closing of the Company's first public offering
of $1 million or more of securities registered under the Securities Act that
takes place after the Original Issue Date and ending on the earlier of the
second anniversary thereof and the Expiration Date.
(i) The term "Securities Act" means the Securities Act of 1933
as the same shall be in effect at the time.
1. Registration Rights.
1.1. Incidental Registration. During the Registration Period,
each holder of Registrable Securities will have a right to have its Registrable
Securities included in registration statements filed by the Company on general
registration forms under the Securities Act, except as otherwise provided
herein. The Company will notify each such holder in writing (the "Company
Notice") promptly after making the decision to file a registration statement
under the Securities Act with respect to the proposed sale of the Company's
equity securities (except with respect to registration statements filed on Forms
S-4 or S-8 or such others in similar form then in effect under the Securities
Act), specifying in the Company Notice the form of registration statement, the
number of shares of securities the Company proposes to register, the name of the
managing underwriter or underwriters (if any) and the general terms and
conditions of the
2
<PAGE>
proposed registration and sale. Subject to Section 1.6 and the remainder of this
Section 1.1, if requested by any holder of Registrable Securities in a writing
(the "Investor Notice"), delivered to the Company not later than 30 days after
the Company gives the Company Notice, to include in such registration statement
Registrable Securities (the "Requested Shares"), the Company will, unless
prohibited by the Underwriter, include the Requested Shares in the registration
statement, and, if the proposed sale is to be underwritten, to cause the
underwriters of securities to be sold by the Company in such registration
statement to purchase such Requested Shares. In the event that any registration
pursuant to this Section 1.1 shall be an underwritten offering of securities of
the Company, any request by such holders pursuant to this Section 1.1 to
register the Requested Shares, may, but need not, specify that such shares are
to be included in the underwriting on the same terms and conditions as the
securities, if any, otherwise being sold through underwriters under such
registration. In the event of an underwritten offering of securities of the
Company, such notice shall also specify as to whether such holder of Registrable
Securities desires that any of such Requested Shares to be included in any such
registration statement be subject to any over-allotment option granted the
underwriters of such offering. No holder shall be required to have its Requested
Shares be part of any underwritten offering and/or subject to any over-allotment
option granted any underwriter by the Company. Notwithstanding the foregoing, if
the managing underwriter or underwriters shall inform the Company of its
opinion, at least 15 days prior to the date that the registration statement
becomes effective, that part or all of the Requested Shares be excluded from the
registration statement on the ground that the inclusion of such Requested Shares
will adversely affect the orderly sales and distribution of the Common Stock
being sold, the Company shall include all securities to be sold by holders,
including the Company, which have the right to require that their securities be
included in the registration on a pro rata basis. If the underwriters agree to
purchase any of the Requested Shares beneficially owned by any holder who has
agreed that such Requested Shares shall be sold pursuant to the underwritten
offering or pursuant to the exercise of any over-allotment option as described
above, such holders will enter into a reasonably customary underwriting
agreement with the underwriters and will sell such Requested Shares to the
underwriters unless, and except to the extent that, upon written notice to the
Company and the managing underwriter or underwriters at least two days prior to
the effective date of the registration statement, any such holder withdraws any
portion of such Requested Shares. If the underwriters elect to purchase less
than all the Requested Shares beneficially owned by holders who have agreed that
such Requested Shares shall be sold pursuant to the underwritten offering or
pursuant to the exercise of any over-allotment option, the underwriters shall
purchase such Requested Shares on a pro rata basis among the Requested Shares
that were included in the timely requests from holders of Registrable Securities
under this subsection and the Requested Shares requested to be included in the
registration statement by other stockholders holding registration rights and who
have requested that such shares be sold pursuant to the underwritten offering or
pursuant to the exercise of an over-allotment option. Notwithstanding the
foregoing, the Company may withdraw any registration statement referred to in
this Section 1 without any liability to the holders of Registrable Securities.
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<PAGE>
1.2. Market Standoff. Each holder of Registrable Securities
agrees that if the managing underwriter or underwriters of the offering
contemplated by Section 1.1 so request, such holder shall not effect any public
sale or distribution of any Registrable Securities being registered thereunder
or of any securities convertible into or exchangeable or exercisable for such
Registrable Securities being registered thereunder for a period equal to the
lesser of (x) the period management of the Company has agreed to lockup and (y)
90 days after the effective date of the registration statement filed in
connection with the public offering.
1.3. Obligations of the Company. When required under Section
1.1 effect the registration of any Registrable Securities, the Company shall, as
expeditiously as is reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to exercise the Company's best efforts to cause such
registration statement to become effective at the earliest practicable date and
to remain effective for a period of 90 days or until the holders and any
underwriter purchasing such Registrable Securities have sold or otherwise
disposed of the Registrable Securities registered in such registration
statement, whichever is earlier.
(b) Furnish to each holder selling Registrable Securities
such number of copies of conformed copies of such registration statement and of
each such amendment and supplement thereto (with all exhibits) and such number
of copies of the prospectus, including a preliminary prospectus, in conformity
with the requirements of the Securities Act, and such other documents as such
holder may reasonably request in order to facilitate the disposition of
Registrable Securities to be sold by such holder pursuant to such registration
statement.
(c) Exercise the Company's best efforts to register and
qualify the Registrable Securities covered by such registration statement under
other securities laws or State Securities Laws of such states or jurisdictions
where a self-executing exemption is not available and as any seller of such
Registrable Securities shall reasonably request; provided, however, 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.
(d) Cause all securities covered by such registration
statement to be registered with or approved by such other federal or state
governmental agencies or authorities as may be necessary in the opinion of
counsel to the Company and counsel to the seller or sellers of securities to
enable the seller or sellers thereof to consummate the disposition of such
securities.
(e) Notify each seller of securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
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 any material fact required to be stated therein
or necessary to make the statements therein not misleading, in the light of the
circumstances under which they were made, and at the request of any such seller
promptly prepare and furnish to it a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statement therein not
misleading in the light of the circumstances under which they were made.
4
<PAGE>
(f) Comply with all applicable rules and regulations of the
SEC, make timely filing of all reports pursuant to the Securities Exchange Act
of 1934, as amended ("Exchange Act") at such time as the Company's securities
are registered under the Exchange Act, and make available to its securities
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first full calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly
furnish to each such seller of securities a copy of such earnings statement.
(g) Use its best efforts to list all securities covered by
such registration statement on any national securities exchange on which
securities of the same class and, if applicable, series, covered by such
registration statement are then listed or on the Nasdaq Stock Market ("Nasdaq")
if the securities are reported on Nasdaq.
1.4. Information to be Furnished. It shall be a condition
precedent to the obligation of the Company to take any action pursuant to this
Section 1 that the holders of Registrable Securities promptly furnish to the
Company such information regarding them, the securities of the Company held by
them and the intended method of disposition of such securities as the Company
shall reasonably request and as shall be required in connection with the
Company's obligations under this Section 1.
1.5. Underwritten Offerings.
(a) Incidental Underwritten Offerings. If the Company
proposes to register any of its securities under the Securities Act as
contemplated by Section 1.1 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any holder
of Registrable Securities, use its best efforts to arrange for such underwriters
to include all the securities to be offered and sold by such requesting holder
among the securities of the Company to be distributed by such underwriters. The
holders of Registrable Securities to be distributed by such underwriters shall
be parties to the underwriting agreement between the Company and such
underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
holders of Registrable Securities. Any such requesting holder of Registrable
Securities shall not be required to make any representations or warranties to or
agreements with the Company other than representations, warranties or agreements
regarding such holder, such holder's securities and such holder's intended
method of distribution or any other representations required by applicable law.
5
<PAGE>
1.6. Notice. In connection with the preparation and filing of
each registration statement under the Securities Act pursuant to this Agreement,
the Company shall promptly notify the holders of Registrable Securities included
in the Registration Statement and their respective counsel of any stop order
issued or threatened by the SEC and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered.
1.7. Registration Expenses. All expenses incurred by the
Company and the holders of Registrable Securities in complying with this Section
1, including, without limitation, all registration, NASD and filing fees,
duplication and printing expenses, travel expenses, fees and disbursements of
counsel for the Company or its independent public accountants, reasonable fees
and disbursements of counsel for holders of securities included in a Company
registration statement and the expense of any special audits incident to or
required by any such registration shall be paid by the Company, except that each
holder of Registrable Securities shall pay underwriting discounts and
commissions attributable to such holder's shares, and transfer taxes on shares
held by such holder.
1.8. Indemnification. In the event any of the Common Stock of
a holder of Registrable Securities is included in a registration statement
pursuant to this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each holder of Registrable Securities (and its
officers, directors, employees, partners and affiliates) selling Registrable
Securities, any underwriter (as defined in the Securities Act) with respect to
the Registrable Securities, and each person, if any, who controls such holder or
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, to which they may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue or allegedly untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or allegedly necessary to make the statements
therein not misleading; and will reimburse each such holder of Registrable
Securities (and its officers, directors, employees, partners and affiliates),
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 1.8(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 written consent of the Company, which shall
not be unreasonably withheld, nor shall the Company be liable under this Section
1.8(a) to such a holder, underwriter or controlling person for any such loss,
claim, damage, liability or action to the extent that it arises out of, or is
based upon, an untrue statement or allegedly untrue statement or omission or
alleged omission made in connection with such registration statement,
preliminary prospectus, final prospectus, or amendments or supplements thereto,
in reliance upon and in conformity with information furnished in writing
expressly for use in connection with such registration by such holder, the
Company will reimburse each such holder for any legal or other expenses
reasonably incurred by each such holder in connection with investigating or
defending any such loss, claim, damage, liability or action.
6
<PAGE>
(b) To the extent permitted by law, each holder selling
Registrable Securities pursuant to this Section 1 will indemnify and hold
harmless the Company, each of its directors, officers and employees, each
person, if any, who controls the Company within the meaning of the Securities
Act, and any underwriter for the Company (within the meaning of the Securities
Act) against any losses, claims, damages or liabilities to which the Company or
any such person or underwriter may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of, or are based upon, any untrue or allegedly untrue
statement of any material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or allegedly necessary to make the statements therein not
misleading, in each case to the extent that such untrue statement or allegedly
untrue statement or omission or alleged omission was made in such registration
statement, preliminary prospectus, or amendments or supplements thereto in
reliance upon and in conformity with information furnished in writing by such
holder expressly for use in connection with such registration; provided,
however, that the indemnity agreement contained in this Section 1.8(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 written consent of such
holder, which shall not be unreasonably withheld; and each such holder will
reimburse the Company or any such person or underwriter for any legal or other
expenses reasonably incurred by the Company or any such person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under this
Section 1.8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying party
under this Section 1.8, notify the indemnifying party in writing of the
commencement thereof and generally summarize such action. The indemnifying party
shall have the right to participate in and to assume the defense thereof with
counsel mutually satisfactory to the parties; provided that each indemnified
party shall have the right to employ its own counsel in any such case, but the
fees and expense of such counsel shall be at the expense of such indemnified
party unless the employment of such counsel shall have been authorized in
writing by the indemnifying party in connection with the defense of such action
or the indemnifying party shall not have employed counsel to have charge of the
defense of such action or such indemnified party or the indemnified parties
shall have reasonably concluded that there may be defenses available to it or
them that are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties) in any of which events the fees and expenses of such counsel shall be
borne by the indemnifying parties. The failure of any indemnified party to give
notice as provided herein shall not relieve the indemnifying party of its
obligations under this Section 1.8, except to the extent that the indemnifying
party is actually and materially prejudiced by such failure to give notice.
7
<PAGE>
2. Sale or Exercise Without Registration. If, at the time of any
exercise, transfer or surrender for exchange of a Warrant or Common Stock (or
Other Securities) previously issued upon the exercise of Warrants, such Warrant
or Common Stock (or Other Securities) shall not be registered under the
Securities Act, the Company may require, as a condition of allowing such
exercise, transfer or exchange, that the holder or transferee of such Warrant or
Common Stock (or Other Securities), as the case may be, furnish to the Company a
satisfactory opinion of counsel to the effect that such exercise, transfer or
exchange may be made without registration under the Securities Act, provided
that nothing contained in this Section 2 shall relieve the Company from
complying with any request for registration pursuant to Section 1 hereof.
3. Exercise of Warrant; Partial Exercise; Cashless Exercise.
3.1. Exercise in Full. Subject to the provisions hereof, this
Warrant may be exercised in full one year after the date hereof by the holder
hereof by surrender of this Warrant, with the form of subscription attached
hereto as Schedule I ("Subscription Form") duly executed by such holder, to the
Company at its principal office accompanied by payment, in cash or by certified
or official bank check payable to the order of the Company, in the amount
obtained by multiplying the number of shares of Common Stock called for on the
face of this Warrant, as adjusted herein, by the Purchase Price.
3.2. Partial Exercise. Subject to the provisions hereof, this
Warrant may be exercised in part one year after the date hereof by the holder
hereof by surrender of this Warrant in the manner and at the place provided in
Section 3.1 except that the amount payable by the holder upon any partial
exercise shall be the amount obtained by multiplying (a) the number of shares of
Common Stock, as adjusted herein, designated by the holder in the Subscription
Form, by (b) the Purchase Price. Upon any such partial exercise, the Company at
its expense will forthwith issue and deliver to or upon the order of the holder
hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof
or as such holder (upon payment by such holder of any applicable transfer taxes)
may request, calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock equal (without giving effect to any adjustment
therein) to the number of such shares called for on the face of this Warrant
minus the number of such shares designated by the holder in the Subscription
Form.
3.3. Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Sections 3.1 and 3.2 and in lieu of any cash
payment required thereunder, the holder of the Warrant shall have the right at
any time (one year after the date hereof) and from time to time to exercise the
Warrants in full or in part by surrendering the Warrant Certificate in the
manner and at the place specified in Section 3.1 as payment of the aggregate
Purchase Price. The number of shares subject to the portion of the Warrant to be
surrendered in payment of the aggregate Exercise Price for the shares to be
purchased shall be determined by multiplying the number of shares to be
purchased by the Purchase Price, and then dividing the product thereof by an
amount equal to the Market Price (as defined below). Upon any such partial
exercise, the Company, at its expense will forthwith issue and deliver to or
upon the order of the holder hereof a new Warrant of like tenor, in the name of
such holder or as such holder may designate (upon payment by such holder of any
applicable transfer taxes), calling in the aggregate on the face thereof for the
number of shares of Common Stock equal (without giving effect to any adjustment
therein) to (A) the number of shares called for on the face of this Warrant
minus (B) the sum of (i) the number of shares so surrendered by the holder
pursuant to this Section plus (ii) the number of shares issued in the exchange.
Solely for the purposes of this paragraph, Market Price shall be calculated as
the average of the Market Prices for each of the ten (10) trading days preceding
the date which the form of election attached hereto is deemed to have been sent
to the Company ("Notice Date").
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3.4. Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be (i) if the principal trading
market for such securities is an exchange, the last reported sale price, as
officially reported on any consolidated tape, (ii) if the principal market for
such securities is the over-the-counter market, the closing bid price on such
date as reported by Nasdaq or, if there is no closing bid price reported on
Nasdaq or if the security is not quoted on Nasdaq, then the high bid price as
set forth in the National Quotation Bureau sheet listing such securities for
such day. Notwithstanding the foregoing, if there is no reported closing price
or high bid price, as the case may be, on the date next preceding the event
requiring an adjustment hereunder, then the Market Price shall be determined as
of the latest date prior to such day for which such closing price or high bid
price is available, or if the securities are not quoted on Nasdaq, as determined
in good faith by resolution of the Board of Directors of the Company, based on
the best information available to it.
3.5. Company to Reaffirm Obligations. The Company will, at the
time of any exercise of this Warrant, upon the request of the holder hereof,
acknowledge in writing its continuing obligation to afford to such holder any
rights (including, without limitation, any right to registration of the shares
of Common Stock or Other Securities issued upon such exercise) to which such
holder shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant, provided that if the holder of this Warrant shall
fail to make any such request, such failure shall not affect the continuing
obligation of the Company to afford such holder any such rights.
4. Delivery of Stock Certificates, etc., on Exercise. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the holder hereof, or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of fully paid and non-assessable shares of Common
Stock (or Other Securities) to which such holder shall be entitled upon such
exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash equal to such fraction multiplied by the then
current Market Price of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such holder
is entitled upon such exercise pursuant to Section 5 or otherwise.
9
<PAGE>
5. Adjustment for Dividends in Other Stock, Property, etc.;
Reclassification, etc. In case at any time or from time to time after the
Original Issue Date the holders of Common Stock (or Other Securities) shall have
received, or (on or after the record date fixed for the determination of
stockholders eligible to receive) shall have become entitled to receive, without
payment therefor
(a) other or additional stock or other securities or property
(other than cash) by way of dividend, or
(b) other or additional (or less) stock or other securities or
property other than by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
then, and in each such case, the holder of this Warrant, upon the exercise
hereof as provided in Section 3, shall be entitled to receive the amount of
stock and other securities and property which such holder would hold on the date
of such exercise if on the Original Issue Date he had been the holder of record
of the number of shares of Common Stock called for on the face of this Warrant
and had thereafter, during the period from the Original Issue Date to and
including the date of such exercise, retained such shares and all such other or
additional (or less) stock and other securities and property receivable by him
as aforesaid during such period, giving effect to all adjustments called for
during such period by Sections 6 and 7 hereof.
6. Reorganization, Consolidation, Merger, etc.
In case the Company after the Original Issue Date shall (a)
effect a reorganization, (b) consolidate with or merge into any other person, or
(c) transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, the holder of this Warrant, upon the exercise
hereof as provided in Section 3 at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall be entitled to receive (and the Company
shall be entitled to deliver), in lieu of the Common Stock (or Other Securities)
issuable upon such exercise prior to such consummation or such effective date,
the stock and other securities and property (including cash) to which such
holder would have been entitled upon such consummation or in connection with
such dissolution, as the case may be, if such holder had so exercised this
Warrant immediately prior thereto, all subject to further adjustment thereafter
as provided in Sections 5 and 7 hereof.
10
<PAGE>
In case the Company after the Original Issue Date shall (i)
subdivide the outstanding Common Stock, (ii) combine the outstanding Common
Stock into a smaller number of shares, or (iii) issue any Other Securities by
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
corporation), then the number and kind of shares of Common Stock and/or Other
Securities issuable, at the time of the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that the
holder of this Warrant after such time shall be entitled to receive upon
exercise of its Warrant the aggregate number and kind of shares of Common Stock
and/or Other Securities which, if its Warrant had been exercised immediately
prior to such time, it would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification, all subject to further adjustment thereafter as provided in
Sections 5 and 7 hereof.
7. Other Adjustments.
7.1. General. Except as provided in Section 7.4, in case the
Company shall issue or sell shares of its Common Stock after the Original Issue
Date for a consideration per share less than the Purchase Price in effect
pursuant to the terms of this Warrant at the time of issuance or sale of such
additional shares, then the Purchase Price in effect hereunder shall
simultaneously with such issuance or sale be reduced to a price determined by
dividing (1) an amount equal to (a) the total number of shares of Common Stock
outstanding immediately prior to such issuance or sale multiplied by the
Purchase Price in effect hereunder at the time of such issuance and sale, plus
(b) the consideration, if any, received by the Company upon such issuance or
sale, by (2) the total number of shares of Common Stock outstanding immediately
after such issuance or sale of such additional shares; and the number of shares
of Common Stock which may be purchased upon exercise of this Warrant shall be
increased so that the aggregate amount to be paid upon full exercise of this
Warrant, after giving effect to each reduction in the Purchase Price, shall not
be reduced.
7.2. Convertible Securities. Except as provided in Section
7.4, in case the Company shall issue or sell any securities convertible into
Common Stock of the Company ("Convertible Securities") after the Original Issue
Date, there shall be determined the price per share for which Common Stock is
issuable upon the conversion or exchange thereof, such determination to be made
by dividing (a) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (b) the maximum number of
shares of Common Stock issuable upon the conversion or exchange of all of such
Convertible Securities.
If the price per share so determined shall be less than the
applicable Purchase Price, then such issue or sale shall be deemed to be an
issue or sale for cash (as of the date of issue or sale of such Convertible
Securities) of such maximum number of shares of Common Stock at the price per
share so determined, provided that, if such Convertible Securities shall by
their terms provide for an increase or increases, with the passage of time, in
the amount of additional consideration, if any, to the Company, or in the rate
11
<PAGE>
of exchange, upon the conversion or exchange thereof, the adjusted Purchase
Price shall, forthwith upon any such increase becoming effective, be readjusted
to reflect the same, and provided further, that upon the expiration of such
rights of conversion or exchange of such Convertible Securities, if any thereof
shall not have been exercised, the adjusted Purchase Price shall forthwith be
readjusted and thereafter be the price which it would have been had an
adjustment been made on the basis that the only shares of Common Stock so issued
or sold were issued or sold upon the conversion or exchange of such Convertible
securities, and that they were issued or sold for the consideration actually
received by the Company upon such conversion or exchange, plus the
consideration, if any, actually received by the Company for the issue or sale of
all of such Convertible Securities which shall have been converted or exchanged;
provided that, notwithstanding the foregoing, no readjustment shall be
effectuated hereunder with respect to any shares of Common Stock already issued
upon exercise of the Warrant.
7.3. Rights and Options. Except as provided in Section 7.4, in
case the Company shall grant any rights or options to subscribe for, purchase or
otherwise acquire Common Stock after the Original Issue Date, there shall be
determined the price per share for which Common Stock is issuable upon the
exercise of such rights or options, such determination to be made by dividing
(a) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of such rights or options, by (b) the maximum number of shares of
Common Stock of the Company issuable upon the exercise of such rights or
options.
If the price per share so determined shall be less than the
applicable Purchase Price, then the granting of such rights or options shall be
deemed to be an issue or sale for cash (as of the date of the granting of such
rights or options) of such maximum number of shares of Common Stock at the price
per share so determined, provided that, if such rights or options shall by their
terms provide for an increase or increases, with the passage of time, in the
amount of additional consideration payable to the Company upon the exercise
thereof, the adjusted purchase price per share shall, forthwith upon any such
increase becoming effective, be readjusted to reflect the same, and provided,
further, that upon the expiration of such rights or options, if any thereof
shall not have been exercised, the adjusted Purchase Price shall forthwith be
readjusted and thereafter be the price which it would have been had an
adjustment been made on the basis that the only shares of Common Stock so issued
or sold were those issued or sold upon the exercise of such rights or options
and that they were issued or sold for the consideration actually received by the
Company upon such exercise, plus the consideration, if any, actually received by
the Company for the granting of all such rights or options, whether or not
exercised.
7.4. Exceptions. The provisions of Sections 7.1, 7.2 and 7.3
do not apply to (i) the exercise of any Warrant,(ii) the exercise of any right
or option with respect to which an adjustment shall have been made at the time
of the issuance of such right or option pursuant to Section 7.3, (iii)
conversion or exchange of any Convertible Security with respect to which an
adjustment shall have been made at the time of the issuance of such Convertible
Security pursuant to Section 7.2, (iv) any transaction with respect to which an
adjustment shall have been made pursuant to Sections 5 or 6, and (v) the
issuance or sale of any Common Stock pursuant to the exercise or conversion of
any option, right or Convertible Security that was issued on or prior to the
Original Issue Date.
12
<PAGE>
8. Further Assurances. The Company will take all such action as
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and non-assessable shares of stock upon the exercise of
the Warrants.
9. Accountants' Certificate as to Adjustments. In each case of
any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable upon the exercise of the Warrant, the Company at its
expense will promptly cause the Company's regularly retained auditor to compute
such adjustment or readjustment in accordance with the terms of the Warrant and
prepare a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based, and the
number of shares of Common Stock outstanding or deemed to be outstanding. The
Company will forthwith mail a copy of each such certificate to the holder of
this Warrant.
10. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend (other than a cash dividend payable out of
earned surplus of the Company) or other distribution, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or
(d) any proposed issue or grant by the Company of any shares
of stock of any class or any other securities, or any right or option to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities (other than the issue of Common Stock on the exercise of
the Warrant),
then and in each such event the Company will mail or cause to be
mailed to each holder of the Warrant a notice specifying (i) the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution or
right, (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or Other Securities) for securities or other property
deliverable upon such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up, and
(iii) the amount and character of any stock or other securities, or rights or
options with respect thereto, proposed to be issued or granted, the date of such
proposed issue or grant and the persons or class of persons to whom such
proposed issue or grant is to be offered or made. Such notice shall be mailed at
least 20 days prior to the date therein specified.
13
<PAGE>
11. Reservation of Stock, etc., Issuable on Exercise of
Warrants. The Company will at all times reserve and keep available, solely for
issuance and delivery upon the exercise of the Warrant, all shares of Common
Stock (or Other Securities) from time to time issuable upon the exercise of the
Warrant.
12. Listing on Securities Exchanges; Registration. If the
Company at any time shall list any Common Stock on any national securities
exchange, or interdealer quotation system, and shall register such Common Stock
under the Securities Exchange Act of 1934 (as then in effect, or any similar
statute then in effect), the Company will, at its expense, simultaneously list
on such exchange, upon official notice of issuance upon the exercise of the
Warrant, and maintain such listing of all shares of Common Stock from time to
time issuable upon the exercise of the Warrant; and the Company will so list on
any national securities exchange, will so register and will maintain such
listing of, any Other Securities if and at the time that any securities of like
class or similar type shall be listed on such national securities exchange by
the Company.
13. Exchange of Warrants. Subject to the provisions of Section 2
hereof, upon surrender for exchange of the Warrant, properly endorsed, to the
Company, the Company at its own expense will issue and deliver to or upon the
order of the holder thereof a new Warrant or Warrants of like tenor, in the name
of such holder or as such holder (upon payment by such holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant or Warrants so surrendered.
14. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Warrant and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement reasonably satisfactory in form and amount to the
Company or, in the case of any such mutilation, upon surrender and cancellation
of the Warrant, the Company at its expense will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
15. Warrant Agent. The Company may, by written notice to each
holder of a Warrant, appoint an agent having an office in New York, New York,
for the purpose of issuing Common Stock (or Other Securities) upon the exercise
of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section
13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
14
<PAGE>
16. Negotiability, etc. This Warrant is issued upon the
following terms, to all of which each holder or owner hereof by the taking
hereof consents and agrees:
(a) subject to the provisions hereof, title to this Warrant
may be transferred by endorsement (by the holder hereof executing the form of
assignment attached hereto as Schedule II) and delivery in the same manner as in
the case of a negotiable instrument transferable by endorsement and delivery;
(b) subject to the foregoing, any person in possession of this
Warrant properly endorsed is authorized to represent himself as absolute owner
hereof and is empowered to transfer absolute title hereto by endorsement and
delivery hereof to a bona fide purchaser hereof for value; each prior taker or
owner waives and renounces all of his equities or rights in this Warrant in
favor of each such bona fide purchaser and each such bona fide purchaser shall
acquire absolute title hereto and to all rights represented hereby; and
(c) until this Warrant is transferred on the books of the
Company, the Company may treat the registered holder hereof as the absolute
owner hereof for all purposes, notwithstanding any notice to the contrary.
17. Notices, etc. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first class registered
or certified mail, postage prepaid, at such address as may have been furnished
to the Company in writing by such holder, or, until an address is so furnished,
to and at the address of the last holder of this Warrant who has so furnished an
address to the Company.
18. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Warrant is being delivered in the State of New
York and shall be construed and enforced in accordance with and governed by the
laws of such State. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof.
19. Assignability. Subject to the transfer conditions referred
to in the legend endorsed hereon, this Warrant is fully assignable at any time
upon surrender of this Warrant with a properly executed Assignment (in the form
of Schedule II hereto) at the principal office of the Company.
15
<PAGE>
Dated: August 12, 1998
ROLLING PIN KITCHEN EMPORIUM, INC.
By:
-------------------------------
Chairman of the Board
[Corporate Seal]
Attest:
- ---------------------------------
Secretary
16
<PAGE>
SCHEDULE I
FORM OF SUBSCRIPTION
(To be signed only upon exercise or surrender of each Warrant)
To: ROLLING PIN KITCHEN EMPORIUM, INC.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, _________ shares of Common Stock of ROLLING PIN KITCHEN
EMPORIUM, INC., and herewith [use version (a) in the event of the payment of
cash purchase price]
(a) makes payment of $_________ therefor, and requests that the certificates for
such shares be issued in the name of, and delivered to, __________ , whose
address is _________________________________.
or [use version (b) in the event of a cashless exercise]
(b) surrenders that portion of the Warrant representing ____ shares of Common
Stock, and requests that the certificates for such shares be issued in the name
of, and delivered to ___________________, whose address is
_________________________.
To the extent that the exercise hereunder is for less than all of the shares of
Common Stock represented by the Warrant, the undersigned hereby requests that a
new Warrant for the remaining amount of shares of Common Stock be issued to
__________________ whose address is _____________________________________.
Dated:
__________________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant)
(Address) __________________________
__________________________
Insert here the number of shares called for on the face of the Warrant (or, in
the case of a partial exercise, the portion thereof as to which the Warrant is
being exercised), in either case without making any adjustment for additional
Common Stock or any other stock or other securities or property or cash which,
pursuant to the adjustment provisions of the Warrant, may be deliverable upon
exercise.
17
<PAGE>
SCHEDULE II
FORM OF ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and
transfers unto ______________ the right represented by the within Warrant to
purchase _____________shares of Common Stock of ROLLING PIN KITCHEN EMPORIUM,
INC., to which the within Warrant relates, and appoints
_________________________________ as attorney to transfer such right on the
books of ROLLING PIN KITCHEN EMPORIUM, INC. with full power of substitution in
the premises.
Dated:
___________________________________________________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant)
(Address) ____________________________
____________________________
____________________________
_______________________________________
(Signature guaranteed by a Bank or Trust Company having its principal office in
New York City or by a Member Firm of the New York or American Stock Exchange)
18
<PAGE>
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT ("First Amendment")
is entered into as of November 25, 1998, between Rolling Pin Kitchen Emporium,
Inc. (formerly known as Home Retail (Holdings, Inc.), a Delaware corporation
("Borrower"), the Guarantors whose signatures are set forth below and GREENFIELD
COMMERCIAL CREDIT, L.L.C., a Michigan limited liability company ("Lender").
RECITALS
Lender and Borrower entered into a Loan and Security Agreement
as of August 20, 1998 ("Loan Agreement").
Lender and Borrower have agreed to modify the terms and
conditions of the Loan Agreement and Borrower and Lender wish to set forth their
agreement in this First Amendment. The Loan Agreement, as amended by this First
Amendment, shall be also referred to as the "Loan Agreement".
NOW, THEREFORE, in consideration of the mutual covenants,
conditions, and provisions as hereinafter set forth, the parties hereto agree as
follows:
The following new section is hereby added to the Loan Agreement:
12A. Purchase of Put Options. On or before December 11, 1998,
Borrower shall pay to Lender the sum of $100,000.00 in
exchange for Lender's agreement to execute and deliver
to Borrower contemporaneously herewith an Amendment to
Common Stock Purchase Warrant dated as of November 25,
1998 substantially in the form of Exhibit A attached. If
Borrower fails to make such payment when due, then the
Amendment to Common Stock Purchase Warrant shall be void
ab initio.
Borrower agrees to reimburse Lender for all costs and
expenses, including attorneys fees incurred by Lender with respect to this First
Amendment.
Except as amended hereby, the Loan Agreement remains in full
force and effect.
This First Amendment may be executed in counterparts, which
together shall constitute one original.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be executed and delivered as of the date first hereinabove set forth.
BORROWER:
ROLLING PIN KITCHEN EMPORIUM, INC.
(formerly known as Home Retail Holdings, Inc.),
a Delaware corporation
By: /s/ John D. Critser
--------------------------------------
John Critser
Its: President
GUARANTORS:
THE COOKSTORE, INC.,
an Ohio corporation
<PAGE>
By: /s/ Greg Dukoff
-----------------------------
Greg Dukoff
Its: Secretary
THE COOKSTORE WORTHINGTON, INC.,
an Ohio corporation
By: /s/ Greg Dukoff
-----------------------------
Greg Dukoff
Its: Secretary
AROPI, INCORPORATED,
an Iowa corporation
By: /s/ Greg Dukoff
-----------------------------
Greg Dukoff
Accepted: Its: Secretary
GREENFIELD COMMERCIAL CREDIT, L.L.C.
By: /s/ Donald G. Barr
--------------------------------
Donald G. Barr, Jr.
Its: President
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement on Form SB-2,
Amendment Number 3, of our report dated August 12, 1998, relating to the
consolidated financial statements of Gaylord Companies, Inc. for the years ended
December 31, 1997 and 1996, and of our report dated October 30, 1998 related to
the consolidated balance sheet of Rolling Pin Kitchen Emporium, Inc. as of
August 12, 1998, and the reference to our firm under the caption "Experts" in
this Registration Statement.
/s/ FELDMAN SHERB EHRLICH & CO., P.C.
--------------------------------------
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants
New York, New York
December 4, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS CONSENT
We hereby consent to the use in Amendment No. 3 of the Rolling Pin Kitchen
Emporium, Inc. Registration Statement (Registration Statement) of our report
dated August 24, 1998, relating to the financial statements of Aropi,
Incorporated, which appears in the Registration Statement. We also consent to
the reference to us under the heading Experts in such Registration Statement.
/s/ Smith & Radigan, Certified Public Accountants, LLC
------------------------------------------------------
Smith & Radigan, Certified Public Accountants, LLC
Atlanta, Georgia
December 4, 1998
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0
300,000
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<NET-INCOME> (3,251,499)
<EPS-PRIMARY> (.85)
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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0
240,000
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<EPS-DILUTED> (0.72)
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