<PAGE>
As filed with the Securities and Exchange Commission on September 16, 1998
Registration No. 333-
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ROLLING PIN KITCHEN EMPORIUM, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 5719 31-1421571
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
4264 Winters Chapel Road, Building B Glenn Kaas
Atlanta, Georgia 30360 President and Chief Executive Officer
(Address and Telephone Number of Principal Executive Rolling Pin Kitchen Emporium, Inc.
Offices and Principal Place of Business) 4264 Winters Chapel Road, Building B
Atlanta, Georgia 30360
(Name, Address and Telephone Number of Agent for
Service of Process)
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
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==================================================================================================================
Proposed Proposed Maximum
Number of Maximum Aggregate Amount of
Title of Each Class of Securities to be Shares to be Offering Price Offering Price(1) Registration
Registered Registered Per Share Fee
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $0.01 par value 1,361,650 $ 7.00 $ 9,531,550 $2,812
- ------------------------------------------------------------------------------------------------------------------
Common Stock held by Selling Stockholders 138,350 $ 7.00 $ 968,450 $ 286
- ------------------------------------------------------------------------------------------------------------------
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 1,990,412 $13,809,000 $4,074
==================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee, pursuant
to rule 457(a) under the Securities Act.
(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.
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.
<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 SEPTEMBER 16, 1998
Prospectus
[GRAPHIC}
1,500,000 shares of common stock
$5.00 to $7.00 per share
Rolling Pin Kitchen Emporium, Inc.
This prospectus relates to the offering of up to 1,500,000 shares of
Class A common stock, par value $.01 per share, including 138,350 shares held by
certain selling stockholders of the company.
Shares of the predecessor company, Gaylord Companies, Inc., were traded
on the Nasdaq's SmallCap Market and OTC Bulletin Board under the symbol "GJCO."
Effective August 12, 1998, the company emerged from bankruptcy and ceased
trading on the OTC Bulletin Board. Application will be made to list the common
stock 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 5.
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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Price per share $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
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.
ii
<PAGE>
NUTMEG SECURITIES, LTD.
The underwriters' website is located at http://[email protected].
iii
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
----
<S> <C>
Summary............................................................................................................1
About Our Company...............................................................................................1
Recent Bankruptcy of our Predecessor............................................................................1
The Offering....................................................................................................1
Common Stock....................................................................................................1
Selling Shareholders............................................................................................2
Warrants Held by the Underwriter................................................................................2
Other Warrants..................................................................................................2
Our Predecessor Entity Failed to Make All Required Securities Filings...........................................2
Where You Can Find More Information.............................................................................2
Key Facts.......................................................................................................3
Summary Financial Information...................................................................................4
RISK FACTORS.......................................................................................................5
Recent Bankruptcy of our Predecessor............................................................................5
Seasonal Variations in the Quality Cookware Industry Will Affect Our Revenues...................................5
Need for Additional Capital to Attract New Acquisition Candidates and the Impact on Operating Results...........5
Competition in the Quality Cookware Industry May Affect Our Revenues and Market Position........................6
Risks Associated with Our Cookware Store Franchises.............................................................6
Lack of Written Contracts with Suppliers........................................................................6
Dependence on Existing Leased Locations in Shopping Malls.......................................................6
Ability to Retain and Attract Key Executives....................................................................6
Control by Current Officers and Directors; Relationship of Principal Stockholders...............................7
Dilution in the Value of Your Shares............................................................................7
Certain Anti-Takeover Provisions in Our Charter and Bylaws; Possible Future Issuances of Preferred Stock........7
Our Predecessor Entity Failed to Make All Required Securities Filings...........................................8
Negotiated Public Offering Price of the Common Stock............................................................8
No Liquid Trading Market for Your Common Stock..................................................................8
Potential Effects of Failure to List Common Stock on The Nasdaq SmallCap Market.................................8
Our Stock Price May Fluctuate Which May Affect the Value of Your Shares.........................................8
Shares Eligible For Future Sale.................................................................................8
Risks Associated with Forward-Looking Statements................................................................9
THE COMPANY.......................................................................................................10
USE OF PROCEEDS...................................................................................................11
DIVIDEND POLICY...................................................................................................11
CAPITALIZATION....................................................................................................12
DILUTION..........................................................................................................14
PRICE RANGE OF COMMON STOCK.......................................................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................17
Historical.....................................................................................................17
Overview.......................................................................................................17
Business and Operational Model of the Company..................................................................18
Liquidity and Capital Resources................................................................................20
Seasonality....................................................................................................22
BUSINESS..........................................................................................................23
The Company....................................................................................................23
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Industry Background............................................................................................23
Strategy.......................................................................................................24
Reorganization of Predecessor..................................................................................26
Acquisition of Aropi...........................................................................................26
Discontinued Operations........................................................................................27
Properties.....................................................................................................27
Trademarks.....................................................................................................27
Employees......................................................................................................27
Legal Proceedings..............................................................................................28
MANAGEMENT........................................................................................................29
Executive Officers, Directors and Key Employees................................................................29
Director Compensation..........................................................................................30
Executive Compensation.........................................................................................30
Summary Compensation Table.....................................................................................31
Stock Option Grants............................................................................................31
1998 Equity Incentive Plan.....................................................................................31
Employment Agreements..........................................................................................34
Indemnification of Officers and Directors......................................................................34
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..............................................................35
The Home Retail Acquisition Corp. ("HRAC") Junior Participation; the Merger Agreement..........................35
The Reorganization.............................................................................................35
Other Transactions.............................................................................................36
Control by Certain Directors...................................................................................36
Advisory Agreement.............................................................................................37
PRINCIPAL STOCKHOLDERS............................................................................................38
SELLING STOCKHOLDERS..............................................................................................39
DESCRIPTION OF SECURITIES.........................................................................................43
Common Stock...................................................................................................43
Preferred Stock................................................................................................44
Registration Rights............................................................................................44
Warrants.......................................................................................................44
Transfer Agent and Registrar...................................................................................46
SHARES ELIGIBLE FOR FUTURE SALE...................................................................................47
UNDERWRITING......................................................................................................48
LEGAL MATTERS.....................................................................................................50
EXPERTS...........................................................................................................50
ADDITIONAL INFORMATION............................................................................................50
INDEX TO FINANCIAL STATEMENTS....................................................................................F-1
</TABLE>
v
<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, which 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 in August 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 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 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 common stock are entitled to receive dividends declared by the board
of directors. Currently, we do not pay a dividend and we do not expect to pay
dividends in the foreseeable future. Each holder of common stock is entitled to
one vote per share. The holders of common stock have no preemptive or cumulative
voting rights.
1
<PAGE>
Selling Shareholders
Some of our shareholders are selling their shares of common stock in this
offering. These shareholders were creditors of the predecessor entity and
received the common stock in connection with reorganization of the company in
1998. These shares represent all of the shares that were acquired by these
shareholders in connection with the reorganization. These shares of common stock
will have the same rights as described above.
Warrants Held by the Underwriter
We have issued warrants to purchase 150,000 shares of common stock to 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 adjustments 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 by 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 503,879 shares of
common stock.
Our Predecessor Entity Failed to Make All Required Securities Filings
Prior to 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
reference 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 (707) 457-2600.
2
<PAGE>
Key Facts
<TABLE>
<CAPTION>
<S> <C>
Class A Common Shares Offered To The Public including 1,361,650 shares by the
Company and 138,350 shares by the Selling Shareholders.......................... 1,500,000 shares
Total Shares Outstanding After Offering......................................... 2,883,691
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>
- ------------------
(1) Excludes options, warrants, Class B common stock and 180,000 shares
of common stock reserved under the 1998 Equity Incentive Plan.
3
<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:
The Gaylord Companies, Inc.
<TABLE>
<CAPTION>
Six months Year ended December 31,
ended June 30, -------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 1,135,645 $ 3,724,157 $ 3,497,940
Cost of Goods Sold 1,447,387 3,508,874 2,899,932
Gross profit (loss) (311,742) 215,283 598,008
Operating expenses 367,490 1,649,601 458,457
Other Income (expenses) (85,887) (191,687) (424,394)
Loss from operations (765,119) (2,026,654) (284,843)
</TABLE>
Aropi, Incorporated
<TABLE>
<CAPTION>
Six months Year ended December 31, Year ended June 30,
ended June 30, ----------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 2,240,561 $ 6,397,922 $ 6,310,362 $ 6,572,905
Cost of Goods Sold 1,065,972 3,231,302 3,134,668 3,407,466
Gross profit (loss) 1,174,589 3,166,620 3,175,694 3,165,439
Operating expenses 1,486,326 3,153,074 3,100,287 3,188,113
Other Income (expenses) (96,571) 5,170 (90,126) 65,968
Income (loss) from operations (408,308) 18,716 (14,719) 43,294
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------------------
Gaylord Gaylord
(historical) "Fresh Start" Pro-forma As Adjusted(1)
------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Working Capital (Deficit) $(1,671,985) $ (66,701) $ (398,259) $ 4,009,554
Total Assets 1,436,237 4,164,095 7,059,245 12,217,058
Total Liabilities 2,786,591 1,181,307 4,076,457 2,076,457
Stockholders' Equity (1,350,354) 2,982,788 2,982,788 9,640,601
</TABLE>
- ----------
(1) Adjusted for the sale of the 1,361,650 shares of common stock offered
hereby (less underwriting discount and estimated offering expenses) and the
application of the net proceeds therefrom.
4
<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 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.
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 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 projected demand for products can have an adverse affect on our
sales and profitability.
Need for Additional Capital to Attract New Acquisition Candidates and the Impact
on Operating Results
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, the purchase
price, the availability and terms of financing, 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. No assurances can be
given that we will be able to operate acquired businesses profitably or
otherwise successfully implement our expansion strategy. We will also attempt
to: (i) hire, train, and integrate qualified employees; (ii) locate and obtain
sites for new cookware stores; and (iii) adapt our management information and
other operational systems to the extent necessary to grow in a profitable
manner. We expect to finance future acquisitions and planned internal growth
through borrowings or the issuance of equity securities. We have no commitment
for any debt or equity
5
<PAGE>
financing, and we may not 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.
Further, if we issue additional equity securities, then it could have a
significant dilutive effect on the holders of common stock, including purchasers
in the offering. Such acquisitions may result in increased costs, significant
goodwill, increases in the amount of depreciation and amortization expense, 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.
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.
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 could 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."
Lack of Written Contracts with Suppliers
We currently purchase products from more than 200 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.
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
lease, we may not be able to find favorable store sites for expansion or
negotiate leases on satisfactory terms and conditions for new sites.
Ability 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
6
<PAGE>
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.
Control by Current Officers and Directors; Relationship of Principal
Stockholders
Cambridge Holdings, L.L.C., its affiliates, and related persons
currently own an aggregate of approximately 40% of the common stock, 22% after
this offering, and all but two of our directors are principals of or are
affiliated with Cambridge. Global Strategic Holdings, Inc. also owns an
aggregate of approximately 40% of the common stock, 22% after this offering.
Thomas Tuttle, a director of the company, is the sole investment advisor to
Global Strategic Holdings, Ltd. Additionally, we have entered into an advisory
agreement with DDG Management Services Corp., that will give it control over
certain aspects of our business. David Danovitch, a director of the Company and
a member of Cambridge Holdings, L.L.C., is a director of DDG Management Services
Corp. As a result, Cambridge 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.
See "Certain Relationships and Related Party Transactions."
Dilution in the Value of Your Shares
As a result of the Plan of Reorganization under the fresh start
accounting rules, there will be 1,522,041 shares of Class A common stock
outstanding, and the net tangible book value per share will increase by $0.50 to
$0.17 per share. Subsequent to the acquisition of Aropi, Incorporated there was
a $647,240 increase in goodwill, resulting in a dilution of $0.43 in the net
tangible book value per share to ($0.26) per share. 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 3,121,972 shares of common stock outstanding with a net tangible book
value of $2.17 per share. This would represent an immediate increase in net
tangible book value of $2.43 to existing shareholders and an immediate dilution
of $3.83 per share to new investors. See "Description of Securities."
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
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 in its sole discretion
and without approval of the holders of common stock, and 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 310,000 shares of preferred stock outstanding resulting
from a private placement which occurred upon emerging from 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
7
<PAGE>
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 All Required Securities Filings
Prior to 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.
Negotiated Public Offering Price of the Common Stock
The public offering price of the common stock has been artificially
determined by 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
In the event that we are unable in the future to satisfy the Nasdaq
SmallCap listing requirements, trading would continue to 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 Exchange Act for non-Nasdaq and
non-exchange listed securities. Under such 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 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.
Our Stock Price May Fluctuate Which May Affect the Value of Your Shares
From time to time, there may be significant volatility in the market
price for the 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 the 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.
Shares Eligible For Future Sale
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
2,883,691 shares of common stock to be
8
<PAGE>
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 shareholders
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. See "Shares Eligible for Future Sale."
In addition, we intend to file a registration statement on Form S-8
with respect to the 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 certain warrants to purchase shares are
entitled to incidental registration rights with respect to such shares. Upon
registration, 451,306 of such shares may be sold in the market without
limitation. In addition, pursuant to the plan of reorganization the predecessor
of the company 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. These warrants do not contain
registration rights. See "Description of Securities--Registration Rights." Sales
of such shares 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 Exchange 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.
9
<PAGE>
THE COMPANY
Rolling Pin Kitchen Emporium, Inc. (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 7, 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 in August 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 primarily smaller markets throughout
the United States. Although the Company has had general 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 believes that, through the prior experience of its management team
and board members, and its referral network of investment and commercial
bankers, business leaders, attorneys, accountants and business and financial
brokers, it can identify, attract, and acquire attractive acquisition
candidates.
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 200 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. The Company has four stores 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 trademark in Arkansas,
Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South Carolina, and
Tennessee.
The Company's principal executive offices are located at 4264 Winters
Chapel Road, Building B, Atlanta, Georgia 30360.
10
<PAGE>
USE OF PROCEEDS
If all 1,361,650 shares (the "Shares") of the Company's Class A Common
Stock ("Common Stock") offered pursuant to this prospectus (the "Prospectus")
are sold (the "Offering"), the Company will receive gross proceeds of
approximately $8,169,900 (assuming the public offering price is $6.00, and
assuming the over-allotment option is not exercised). The Company will not
receive any proceeds from the sale of shares by the selling stockholders of the
Company (the "Selling Stockholders"). If the underwriters ("Underwriters")
exercise the over-allotment option, the Company will receive an additional
$1,575,000. The estimated net proceeds of $6,657,813 were determined after
deduction of all commissions, discounts and expenses paid to the Underwriters
(estimated to be $1,062,087) and after all expenses of the Offering (estimated
to be $450,000).
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 33.79%
Acquisition of Existing Chains 1,000,000 15.03%
Expenses Associated with Selling New Franchises 250,000 3.75%
Expand Alternative Distribution Channels 600,000 9.01%
Total - Expansion of Business Operations $ 4,100,000 61.58%
Repayment a portion of Existing Indebtedness(2) 1,500,000 22.54%
Working capital and general corporate purposes 1,057,813 15.89%
TOTAL $6,657,813 100.00%
========== =======
</TABLE>
- ----------------------
(1) Assumes that 18 stores are opened over the next 18 months at an average
cost of $125,000 per store (not including costs to stock inventory).
(2) The proceeds will be used to refinance a portion of existing indebtedness
that bears interest of three percentage points over the Prime Rate as
published in the Wall Street Journal and is to be completely repaid out of
the proceeds of this Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DIVIDEND POLICY
Holders of the Common Stock are entitled to dividends only, as and if,
declared by the 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.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1998: (i) on an actual basis; (ii) on a Fresh-Start basis ("Fresh
Start"); (iii) on a pro forma basis after giving effect to the acquisition of
Aropi; and (iv) 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>
June 30, 1998
------------------------------------------------------------------
Actual Fresh Start Pro Forma As Adjusted
------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Long term debt less current portion(1) $ 0 $ 0 $670,502 $670,502
Stockholders' equity:
Preferred Stock, 1,500,000 shares authorized 300,000 0 0 0
60,000 issued and outstanding actual;
60,000 shares issued and outstanding pro
forma and pro forma as adjusted
Class A Common Stock, par value $.01 per 40,950 15,220 15,220 28,837
share, 10,000,000 shares authorized;
issued and outstanding 4,095,000
actual shares; 1,522,041 shares issued
and outstanding Fresh Start and pro
forma; 2,883,691 shares issued and
outstanding pro forma as adjusted(2)(3)
Class B Common Stock, par value $.01 per 0 1,550 1,550 1,550
share, 154,951 shares issued and
outstanding actual pro forma and
pro forma as adjusted(3)
Additional Paid-in Capital 2,641,834 2,966,018 2,966,018 9,610,214
Accumulated deficit (4,333,142) 0 0 0
Total stockholders equity (1,350,354) 2,982,788 2,982,788 9,640,601
Total capitalization (1,350,354) 2,982,788 3,653,290 10,311,103
</TABLE>
- ---------------
(1) As of June 30, 1998, the current portion of obligations under long term
debt was approximately $726,313.
(2) Excludes (i) 92,595 shares of the Common Stock subject to warrants granted
to Liberty Bidco Investment Corporation, a Michigan corporation ("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 Commercial Credit,
L.L.C. ("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
12
<PAGE>
price (the "Individual Warrants"), and 98,246 shares of the Common Stock
subject to warrants granted to Michael Leonard and William Laux,
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 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."
(3) The Class B Common Stock automatically converts into shares of Common Stock
upon the occurrence of certain events. See "Description of Securities."
13
<PAGE>
DILUTION
As of June 30, 1998, there were 4,095,000 shares of Common Stock
outstanding, having a negative net tangible book value per share of
approximately $(0.33). 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 1,361,650 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 2,883,691 shares
of Common Stock outstanding with a net tangible book value of approximately
$2.17 per share. This would represent an immediate increase in net tangible
book value of $2.43 per share to existing stockholders and an immediate
dilution of $3.83 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>
<CAPTION>
<S> <C> <C>
Public offering price per share $6.00
Net tangible book value per share - 06/30/98 actual (0.33)
Increase attributable to Fresh Start Reorganization 0.50
Dilution attributable to Aropi acquisition (0.43)
------
Net tangible book value per share before Offering (0.26)
Increase attributable to new investors 2.43
----
Net tangible book value per share after Offering 2.17
-----
Dilution to new investors $3.83
=====
</TABLE>
The following table summarizes, on a pro forma basis, as of September
14, 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 52.8% $1,695,500 $1.11
New investors 1,361,650 47.2% 8,169,900 6.00
--------- ------- --------- ----
Total 2,883,691 100.00% $9,865,400
========= ======= ==========
</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
14
<PAGE>
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, or (e) Other Financing Warrants to purchase
98,246 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 June 30, 1998. As of June 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 June 30, 1998, there will be further dilution to new investors.
See "Description of Securities."
15
<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
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 August 31, 1998, there were approximately 345
holders of record of shares of Common Stock.
16
<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 in November 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
competitors and increased operating expenses resulted in the 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 tendency of more families to prepare an increased
number of meals at home means greater demand for a variety of cooking equipment,
tools and related merchandise.
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
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) including 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 This market currently 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.
17
<PAGE>
o There are presently a limited number of companies of
significant size that have targeted this market in the manner and with the
approach to the market as the Company anticipates doing.
o There is a growing segment of the population that has a keen
interest in cooking. The Company's stores intend to cater to as the
high-end segment of the industry.
Business and Operational Model of the Company
The Company's business plan is based on the belief that retail
success today is a function of the traditional location, price, and promotion
approaches of traditional merchandising 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 the store offerings to meet the demands of as 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 will focus on operating efficiencies and synergies
by combining administrative functions. The Company will manage cost through a
expense control system that requires analysis of the cost benefits of each
expenditure and through analysis of the decision process for selecting new
sites.
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.
Six Months Ended June 30, 1998 Compared To Six Months Ended June 30,
1997 - The Company
Net Revenues. For the six months ended June 30, net revenues decreased
$330,000, or 23%, from $1.47 million in 1997 to $1.14 million in 1998, primarily
due to the Company's operating under bankruptcy protection and the resultant
inability to keep its stores fully stocked with inventory and to engage in
promotional activities.
Operating Expenses. For the six months ended June 30, operating
expenses increased approximately $34,000, or 10%, from $333,000 in 1997 to
$367,000 in 1998. As a percentage of net revenues, operating expenses increased
18
<PAGE>
from 23% in 1997 to 32% in 1998, primarily due to a combination of reduced sales
and increased costs associated with operating in bankruptcy.
General and Administrative Expenses. For the six months ended June 30,
general and administrative expenses decreased $111,000, or 39%, from $284,000 in
1997 to $173,000 in 1998. As a percentage of net revenues, general and
administrative expenses decreased from 19% in 1997 to 15% in 1998. This decrease
as a percentage of net revenues was due to among other things reductions in
overhead brought about by the need to conserve cash while in bankruptcy.
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 $1.2
million, or 262%, from $458,000 in 1996 to $1.65 million in 1997. As a
percentage of net revenues, operating expenses increased from 13.1% in 1996 to
44.2% 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 $683,000, or 175%, from $390,000 in 1996 to $1.07 million in
1997. As a percentage of net revenues, general and administrative expenses
increased from 11.1% in 1996 to 28.8% in 1997. This increase as a percentage of
net revenues was primarily due to an increase in professional, consulting and
financing fees.
Liquidity and Capital Resources - The Company
The Company used $290,872 in net cash from operating activities in
1997. In the six months ended June 30, 1998, $940,871 of cash was used by
operating activities. Net cash used in investing activities was approximately
$34,915 in 1997 and $0 in the six months ended June 30, 1998. Net cash provided
by financing activities was $577,772 in 1997, including the incurrence of (i)
$395,000 in long-term debt which was used to repay bank debt, and (ii) $300,986
in short-term debt which was used for the repayment of notes payable. In the six
months ended June 30, 1998, net cash provided by financing activities was
$83,049. At June 30, 1998, the Company had a working capital deficit of $1.67
million, with all debt being classified as current.
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 1998 Compared To 1997 - Aropi
Net Revenues. Net revenues decreased $262,543, or 4%, from $6.57
million in 1997 to $6.31 million in 1998, primarily due to the remodeling of a
mall which resulted in reduced traffic, new competition entering two of the
markets, and a new mall opening in close proximity to one of the Company's
existing stores.
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 an increase in annual rental payments and increases occuring in the
ordinary course of business.
19
<PAGE>
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 an increase in expenses for the ordinary
course of business.
Results For 1997 Compared To 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 due to a closing of one
store.
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 lower sales and the fact that overhead in
the store which had closed decreased at a slower rate than sales.
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, incurrence of $15,353 in
long-term debt which was used for working capital purposes. 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 million, and had $846,815
million of long-term debt outstanding.
Liquidity and Capital Resources
When the Company emerged from Bankruptcy on August 7, 1998, it had a
working capital deficit of $(66,701). At June 30, 1998, the Company had a
working capital of $(1,671,985). The increase of $1,605,284 is primarily
attributable to the elimination of liabilities subject to compromise as a result
of the Plan of Reorganization.
Bidco Loan Agreement
In August 1998, the Company entered into a Business Loan Agreement With
Covenants (the "Loan Agreement") with Bidco, that provided exit financing in the
amount of $1,300,000 pursuant to the terms of the Plan of Reorganization. The
Loan Agreement was amended on August 20, 1998 by the First Amendment to the Loan
Agreement among Bidco, the Company, its subsidiaries and Aropi (the "First
Amendment") that provided for an additional $700,000 in financing used to fund
the Aropi acquisition as well as for working capital.
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
20
<PAGE>
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 continuing
security interest in the current assets of the Company and Aropi, including,
among other items, instruments, furniture, accounts receivable and inventory. In
addition, the First Amendment provided Bidco with a security interest in the
stock of Aropi.
Pursuant to the Loan Agreement, the Company executed a Promissory Note
that bears interest 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, which are
subject to a put option by Bidco. Each of the Bidco Warrants and the New
Bidco Warrants contain registration rights for the shares received by the Bidco
pursuant to such warrants. Under the terms of the Loan Agreement, 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 amended Promissory Note is required to be paid in
full with the proceeds from this Offering. See "Description of Securities -
Warrants."
As of August 31, 1998, there was an outstanding balance of $2.0
million. The Loan Agreement and the First Amendment expires on January 31, 1999.
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.
The Loan and Security Agreement granted Greenfield a continuing
priority after Bidco perfected security interest in the certain collateral of
the Company and its subsidiaries, including, among other items, accounts
receivable, general intangibles, inventory, instruments, furniture, and other
property.
Pursuant to the Loan and Security Agreement, the Company executed a
Revolving Credit Note that bears interest at the rate of interest which is equal
to 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 per annum rate of
interest equal to 15%. The interest on each note is computed upon the basis of a
year of 360 days 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
21
<PAGE>
contain registration rights for the shares received by the Greenfield pursuant
to such warrants. See "Description of Securities - Warrants."
As of August 31, 1998, there was an outstanding balance of $260,000
under the Bulge Loan and a balance approximately of $1.5 million under the Term
Facility. The outstanding balance is to be repaid in full from the proceeds of
this Offering or, in any event, no later than January 29, 1999.
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."
22
<PAGE>
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 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 primarily smaller markets throughout
the United States. Although the Company has had general discussions with
representatives of certain potential acquisition candidates, the Company
currently has no agreement with any other company with regard to any
acquisitions. The Company believes that, through the prior experience of its
management team and board members, and its referral network of investment and
commercial bankers, business leaders, attorneys, accountants and business and
financial brokers, it can identify, attract, and acquire attractive acquisition
candidates.
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, from over 200 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. The Company has four stores 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 trademark
in Arkansas, Florida, Georgia, Illinois, Iowa, Kentucky, North Carolina, South
Carolina, and Tennessee.
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 have 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.
23
<PAGE>
The Company's standard store format (between 1,600 - 3,000 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. 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.
Strategy
The Company's goal is to become the 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 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 plans or 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 (not including the value of the inventory) is $125,000.
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
24
<PAGE>
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 would not be likely to
enter. The Company believes that in smaller markets, the local franchisee is
better positioned 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 to
see the franchise community grow at about the same 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 catalog will be expanded and used in
carefully 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. This electronic commerce vehicle will be 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
may benefit from favorable prices and rebates accruing as the result of
high 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. The
Company believes that if it increases the size and scale of its
consolidated enterprises then it will be able to negotiate improved terms
and performance of delivery vehicles, long distance voice and data
services, overnight delivery services, real estate services, banking and
financial services, and insurance.
25
<PAGE>
As a part of the management agreements signed between the Company and
DDG Management Services Corp. and Deltennium Consulting, Inc., these entities
have agreed to assume oversight responsibility for the development and execution
of the corporate strategy defined in this Prospectus. In addition to his normal
duties as Chairman of the Board of the Company, Mr. Czarnecki is the person
primarily responsible for overseeing and coordinating the key functions of
strategy formulation, mergers and acquisitions, general expansion efforts and
financial markets support. Mr. Czarnecki has also agreed to coordinate the
activities of the DDG Management Services Corp. and Deltennium Consulting
organizations in the furtherance of their responsibilities under the management
agreements as they relate to the Company's operations. See "Certain
Relationships and Related Party Transactions."
Reorganization of Predecessor
The Company is the successor entity to the Predecessor Entity, which
filed for bankruptcy in November 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
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 7, 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.
Acquisition of Aropi
In August 1998, the Company acquired Aropi for $1.3 million in cash and
two notes for $250,000 each convertible into Common Stock and $1.3 million
applied to certain indebtedness. 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 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. Aropi owned and operated 15 cookware stores in eight states and 21
franchised stores in nine states. 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'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 name 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.
Mr. Kaas is the President, Chief Executive Officer and a director of
the Company and, following the Offering, he will own approximately 2% of the
Common Stock with options to acquire an additional 5,000 shares of Common Stock
received in connection with the acquisition of Aropi.
26
<PAGE>
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.
Properties
The Company leases all of its cookware stores. The Company-owned
cookware 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 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 ten years.
The Company believes that its current facilities are adequate for the
foreseeable future and that alternate facilities are readily available.
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 August 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.
27
<PAGE>
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 7, 1998.
28
<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>
Glenn Kaas 40 President, Chief Executive Officer and 1998
Director
Gerald Czarnecki(1) 58 Chairman of the Board of Directors 1998
Greg Dukoff 34 Secretary, Interim Chief Financial Officer 1998
and Director
John Critser 43 Vice President, Operations 1998
David Danovitch(2) 36 Director 1998
Donald Jackson(1) 47 Director 1998
George Lucaci(2) 47 Director 1998
Thomas Tuttle (2) 31 Director 1998
</TABLE>
- -----------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Glenn Kaas has been the President and Chief Executive Officer of the
Company since August 1998. He has also been a director of the Company since
August 1998. From September 1989 to August 1998, Mr. Kaas was the President,
Chief Executive Officer and a director of Aropi. From 1985 to 1989, Mr. Kaas was
the Vice President of Aropi. From 1982 to 1985, he was the sole owner of two
franchised Rolling Pin stores. Mr. Kaas received a Bachelor of Science and
Pharmacology from the University of Illinois Medical School in 1980.
Gerald 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, with specific
responsibility for overseeing the affairs of HonFed Savings Bank, a bank located
in Hawaii.
Greg Dukoff has been the Secretary of the Company since 1998. Since May
1998, he has also been the Administrator of the Predecessor Entity, The
Cookstore, Inc., and The Cookstore Worthington, Inc. Since March 1998, he has
been a Principal of CH Equity Partners, L.P., a private equity partnership. 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.
John Critser has 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
29
<PAGE>
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.
David Danovitch has been a director of the Company since May 1998 and
interim Chief Financial Officer since August 1998. Since October 1997, Mr.
Danovitch has been a Managing Director of Cambridge Holdings, L.L.C., an
investment firm. 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.
Donald Jackson has been a director of the Company since August 1998.
Mr. Jackson is the Chief Operating Officer of Cambridge Holdings, L.L.C., an
investment firm. From February 1995 to June 1997, he was a founder and the
President of RiverBank Securities, a small broker-dealer firm. From September
1991 to February 1995, Mr. Jackson was Vice President and Investment Manager for
DelCal Enterprises, Inc., a money management firm. From 1990 to 1991, he was
Vice President of Institutional Sales, with Nomura Securities International,
Inc.
George Lucaci has been a director of the Company since August 1998. Mr.
Lucaci has been Vice Chairman and Chief Executive Officer of Cambridge Holdings,
L.L.C., an investment firm, since June 1995. From October 1992 to June 1995, he
was the Managing Director of Normandy Asset Management, a private international
investor group.
Thomas 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.
Following the Offering, the Company intends to retain a Chief Financial
Officer with public company experience. The Company is actively seeking to fill
such position.
Director Compensation
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
$500 for attending each meeting of the Board of Directors or one of its
Committees. Directors who provide active, continuous support for the Company's
goals and objectives in addition to serving as directors will also be
compensated with stock options. In addition, directors may be reimbursed for
certain expenses incurred in connection with attendance at any meeting of the
Board of Directors or Committees. Other than reimbursement of expenses,
directors who are employees of the Company receive no additional compensation
for service as a director.
Officers are elected by the Board of Directors and serve until their
successors are appointed by the Board of Directors.
Executive Compensation
The following table sets forth total compensation for the Chief
Executive Officer of the Company for each of the last three fiscal years.
30
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- ------------------------------------------------------------------------------------------------------------------------
Awards
Name and Other Securities All Other
Principal Annual Underlying Compensation
Position Year Salary($) Bonus($) Compensation Options (#) ($)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Glenn Kaas, 1997 68,000(1) --- --- --- ---
President and
Chief Executive
Officer
- ------------------------------------------------------------------------------------------------------------------------
1996 69,000(1) --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------
1995 --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Reflects compensation paid by Aropi.
Stock Option Grants
The following table sets forth information concerning the grant of
stock options made during 1998 to the Chief Executive Officer:
<TABLE>
<CAPTION>
Name 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> <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 option is 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
31
<PAGE>
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
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
32
<PAGE>
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 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.
33
<PAGE>
Employment Agreements
Mr. Kaas, the Chief Executive Officer of the Company, has entered into
an employment agreement with the Company providing for an annual base salary of
$105,000 for the first 12 month period, $115,500 for the second 12 month period,
and $127,050 for the third 12 month period. This agreement has a term of three
years and contains a covenant not to compete (the "Covenant") with the Company
for a period of one year immediately following termination of employment. Under
this Covenant, Mr. Kaas is prohibited from, directly or indirectly: (i) engaging
in, being employed by, or participating in the operation or management of any
business which competes with the Company; (ii) being a stockholder of any
corporation or partner of any partnership, or as an owner, investor, principal
or agent, or in any other manner, engage in any business which competes within
ten miles of any Company cookware store open as of the termination of the
employment agreement; or (iii) soliciting, inducing, influencing or attempting
to influence or causing any business, firm or corporation which directly
competes with the Company to solicit, induce, influence or attempt to influence,
the employment of a key employee of the Company.
Indemnification of Officers and Directors
The Company, to the fullest extent permitted by the provisions of ss.
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 is
against public policy and unenforceable pursuant to Section 14 of the Securities
Act.
34
<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 loans, between the Company and
its officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and 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. ("HRAC") Junior Participation; the Merger
Agreement
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. The Term Sheet originally
envisioned that Greenfield, would remain a lender to the Company through the
Effective Date and that Cambridge 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 HRAC, an affiliate of Cambridge, to assume a more active
advisory role in our 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 insure 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 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
35
<PAGE>
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. It is anticipated that such consultancy will continue
consistent with the Company's needs. Mr. Dukoff was President and a director of
HRAC.
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 invested immediately. In
addition to his employment agreement, Mr. Kaas will 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
will also 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 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.
In August 1998, the Company entered into an agreement to lease its
executive offices from Glenn Kaas, the President, Chief Executive Officer and a
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
rental 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 rental 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 a monthly interest rate of 10.5%. This
demand note was later amended to be held by DDG Management Services Corp. on
behalf of the aforementioned parties.
Control by Certain Directors
Cambridge, its affiliates, and related persons currently own an
aggregate of approximately 40% of the Common Stock, 22% after this Offering, and
all but two of the Company's directors are principals of or are affiliated with
Cambridge. As a result, Cambridge 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 has 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 lessor 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.
36
<PAGE>
Global Strategic Holdings, Ltd. currently owns an aggregate of
approximately 40% of the Common Stock, 22% 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 management 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
shall be paid and future payments shall be made monthly. David Danovitch, a
director of the Company, is a director to DDG Management Services Corp. See "The
Reorganization."
37
<PAGE>
PRINCIPAL STOCKHOLDERS
As of September 14, 1998, the Company has outstanding 1,522,041 shares
of Common Stock held by 345 holders of record. The following table sets forth
certain information regarding the beneficial ownership of shares of Common Stock
as of September 14, 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 Czarnecki(2) ..................................... 100,830 6.6% 3.5%
Glenn Kaas(3)............................................ 5,000 * *
Greg Dukoff(4) .......................................... 73,813 4.8% 2.6%
John Critser............................................. 8,937 * *
David Danovitch(5)....................................... 132,627 8.7% 4.6%
Donald Jackson(6)........................................ 132,627 8.7% 4.6%
George Lucaci(7)......................................... 132,627 8.7% 4.6%
Thomas Tuttle(8)......................................... 605,362 39.7% 21.0%
Global Strategic Holdings, Ltd........................... 605,362 39.7% 21.0%
Amelar Investments, LLC.................................. 132,627 8.7% 4.6%
Alemer Productions, LLC.................................. 132,627 8.7% 4.6%
TJQL Investments, LLC.................................... 132,627 8.7% 4.6%
Cambridge Holdings, LLC.................................. 103,777 6.8% 3.6%
Deltennium Group, Inc.................................... 100,830 6.6% 3.5%
Bjorn Q. Aaserod(9)...................................... 172,962 4.5% 6.0%
All Directors and Executive Officers as a Group (8
Persons) .............................................. 1,191,822 78.3% 41.3%
</TABLE>
- ----------
* Less than one percent.
(1) Unless indicated otherwise, the address of the beneficial owners is,
Cambridge Holdings, L.L.C., 535 Madison Avenue, 19th Floor, New York, New
York 10022.
(2) Includes 100,830 shares held by Deltennium Group, Inc. Mr. Czarnecki is the
Chairman and Chief Executive Officer of Deltennium Group, Inc.
(3) Includes 5,000 shares which may be acquired upon the exercise of options.
(4) 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.
(5) Includes 132,627 shares held by Amelar Investments, LLC. Mr. Danovitch is a
manager of Amelar Investments, LLC.
(6) Includes 132,627 shares held by TJQL Investments, LLC. Mr Jackson is a
manager of TJQL Investments, LLC.
(7) Includes 132,627 shares held by Alemer Productions, LLC. Mr. Lucaci is a
member of Alemer Productions, LLC.
(8) 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.
(9) Includes 103,777 shares held by Cambridge Holdings, L.L.C. Bjorn Aaserod
the Chairman of Cambridge Holdings, L.L.C.
38
<PAGE>
SELLING STOCKHOLDERS
The following sets forth information, as of September 14, 1998
concerning the Shares being registered hereunder by the Selling Stockholders.
The shares held by the Selling Stockholders were acquired by them as creditors,
pursuant to the Plan of Reorganization. The Company is registering all of the
shares of Common Stock acquired by the Selling Stockholders in connection with
said transactions pursuant to the Plan of Reorganization.
<TABLE>
<CAPTION>
Shares Owned
After Offering
------------------------------
Shares Owned Before Shares Being
Name of Selling Stockholder(1) Offering Registered Number Percent(2)
------------------------------ -------- ---------- ------ ----------
<S> <C> <C> <C> <C>
AFLAC
Airnet Systems, Inc.
Alexander Hamilton Institute
America's Amish Country
American Business Forms, Inc.
American Electric Power
American Italian Moving
Ameritech
Ameritech Mobile Communication
Bolton Flying Service
Buckeye Printing and Mailing
C&P Vending, Inc.
Cadmus
Calendar Models of America
Cardinal Imaging
Carlisle Patchen & Murphy
Century Graphics
Ceridian Employer Services
Cincinnati Bell
Cleveland Magazine
Cobraserve National Service
Columbus Alive
Columbus Dispatch
Columbus Gas
Columbus Sports Publication
Columbus Time Recorder
Computer Group Printing
Continental Stock Transfer & Trust
Company
Crystal Streams
Daycoa, Inc.
Depository Trust Company
Doral
Dynamex
Eden Toys
Elizabeth Guild
Fasteners for Retail, Inc.
Federal Express Corp.
Flex One
Frontier Telemanagement, Inc.
G-Man Graphic Design
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Shares Owned
After Offering
------------------------------
Shares Owned Before Shares Being
Name of Selling Stockholder(1) Offering Registered Number Percent(2)
------------------------------ -------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Garborg's Heart 'N Home
Gordon Flesch Company
Great Lakes Booksellers Association
Greenbook
Greyden Press
Hamco Cincinnati Co.
Innovative Cooking Ent.
Insiders' Publishing, Inc.
J.W. Cleary Company
John E. Sestina & Co.
John Gaylord
K&B Printing
Kinko's
Lane & Mittendorf
Lawpack
Leveck Lighting Products
Lexis Document Services
Liebert, Robert A.
Smith, Craig A.
Long's Commercial Art
Lucent Technologies
M&I First National Leasing Corp.
Mad Hungarian
Madison Leasing Co.
Margaret S. Vickers
Martha Wheeler
Masada Security
Metropolitan Armored Car
Michael Citrin
Midcom Communications, Inc.
One Game Season
Pitney Bowes
Pitney Bowes Credit Corp.
Pleasure Guild of Children's
Pony Express Courier Corp.
Progressive Business
Ralph C. Liebert Family Trust No. 2
Smith, Craig A.
Ralph C. Liebert Family Trust No. 2
Smith, Craig A.
Reliable Office Supply
Reynolds & Reynolds
RGIS
Rose Products & Services, Inc.
Safeguard Bus. Systems
SDL, Inc.
Service Transport
Signature Sports
Sir Speedy Printing
SMZ
Squire Boone
Squire Sanders & Dempsey
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Shares Owned
After Offering
------------------------------
Shares Owned Before Shares Being
Name of Selling Stockholder(1) Offering Registered Number Percent(2)
------------------------------ -------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Staples
Suburban News Publications
T-Shirt Alert
Teachers Ins. and Annuity
The General Insurance Agency
Thomson Central Ohio
U.S. Postal Service
U.S. Dairy Company
United Financial Publishers
United Parcel Service
Victory Postcards
Viserv, Inc.
Washington Subscription
Waste Management of Columbus, Ohio
Wells Fargo Armored Service
3-A Mobile Lock 24 Hour Service
8700 Simon Debartolo Group
9750 Debartolo Capital
ABCO Distribution, Inc.
Acrylic Plastic Products
Akron Beacon Journal
All-Clad Metalcrafters
Alpine West
American Leather Products
Anchor Hocking
APA Transport Corp.
Arccon Investments, Inc.
Aspen Mulling Spices
Auto-Tech Fire Systems
B. Via Int'l Housewares
Better Living & Savings
BIA Cordon Bleu, Inc.
Boone County Fiscal Court
Bortner & Bortner, Ltd.
Briel America, Inc.
Bristol Publishing Enterprises
Brita (U.S.A) Inc.
Browne & Co. Ltd.
Buckeye Beans & Herbs, Inc.
Bureua of Workers' Compensation
Calphalon Corporation
Catamount Glassware, Inc.
CBV, Inc.
CF Motorfreight
Charcoal Companion, Inc.
Cherchies, Ltd.
Chronicle Books
Cincinnati Enquirer
Clay Critters, Inc.
Claybakers
Clear Solutions, Inc.
CM Products, Inc.
Coloney Glass
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Shares Owned
After Offering
------------------------------
Shares Owned Before Shares Being
Name of Selling Stockholder(1) Offering Registered Number Percent(2)
------------------------------ -------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Community Press
Conair Corporation, Inc.
Consolidated Freightways
CR Gibson Company
Crinklaw Farms
Custom Companies
Cuthbertson Imports, Inc.
D & J Masterclean, Inc.
Dacus, Inc.
DeBartolo Capitol Partnership
Delta Heating & Cooling, Inc.
Design Ideas
Design Imports Ltd.
Design Imports, India
Dextille International
Doral Packaging
E. Mishan & Sons
East Hampton Industries
Edgecraft Corporation
El Paso Chile Co.
Emile Henry USA Corp.
Eucalyptus Stoneware
Faraway Farm
Flavorbank Company, Inc.
Foley Marters Company
Fox Run Craftsmen
Franklin County Treasurer
Gems By Rochelle
General Growth Management
General Housewares Corp.
Genin Trudeau & Co. Ltd.
Glenn Earle's Glass, Inc.
Goldrush Products
Grant-Howard Associates
H. George Caspari, Inc.
HA Mack & Company, Inc.
Haddon House
Harold Import Company
Hartin International
Hill Design, Inc.
Himark Enterprises, Inc.
Hindostone Products, Inc.
IM Press
Indiana Department of Revenue
Indianapolis County Treasurer
Indianapolis Newspaper
Indianapolis Water Co.
</TABLE>
(1) Based upon 1,522,041 shares, which reflect the shares of Common Stock
outstanding on September 14, 1998.
42
<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"), 155,000 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 Stock
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) is 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
43
<PAGE>
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.
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 310,000 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 investor has the right to convert the
Preferred Stock into Common Stock at 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 conversion date, or (b) 150% of the five day average
closing bid price for the Common Stock for the five trading days preceding the
closing of the private placement.
Registration Rights
Registration rights were granted in connection with the issuance of the
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 until January 1, 1999 and thereafter
$14.40 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
44
<PAGE>
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.
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 $4.00 per share, 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 incidental 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. Bidco has the right to have 25% of the
Common Stock issued upon exercise of the Bidco Warrants, sold as a part of this
Offering, and any remaining portion of Common Stock sold pursuant to subsequent
securities registrations. Bidco, in its sole discretion, has the right to have
the Bidco Warrants redeemed by the Company at the greater of (i) $400,000, or
(ii) the difference between the purchase price of the warrants and the then
current fair market value of such Common Stock; Bidco, in its sole discretion,
has the right to have the Common Stock issued upon the exercise of the Bidco
Warrants redeemed by the Company at the greater of (i) $400,000, or (ii) the
then current fair market value of such Common Stock. Bidco's put option shall
not be exercisable until the earlier of (i) thirteen (13) months following this
Offering, or (ii) January 31, 2000.
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 incidental registration rights with respect to the Common Stock
issuable upon the exercise of the New Bidco Warrants. Bidco, in its sole
discretion, shall have the right to have the New Bidco Warrants redeemed by the
Company at the greater of: (i) $165,000.00, or (ii) the difference between the
purchase price and the then current fair market value; and Bidco, in its sole
discretion, shall have the right to have all of the Common Stock issued upon the
exercise of the New Bidco Warrants redeemed by the Company at the greater of:
(i) $165,000.00 or (ii) the then current fair market value of such Common Stock.
Bidco's put option shall not be exercisable until the earlier of: (x) eighteen
(18) months following this Offering; or (y) June 30, 2000.
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
45
<PAGE>
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.
Greenfield, in its sole discretion, has the right to have the Greenfield
Warrants, and all the Common Stock theretofore issued upon the exercise of the
Greenfield Warrants, redeemed by the Company pursuant to the first put option at
the greater of: (i) $125,000, or (ii) the then fair market value of such Common
Stock; and pursuant to the second put option, at the greater of: (i) $25,000, or
(ii) the then fair market value of such Common Stock. Greenfield's first put
option shall not be exercisable until thirteen (13) months after August 20,
1998; and the second put option shall not be exercisable until fifteen (15)
months after the same date.
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
Michael Leonard and two warrants to William Laux for the purchase of 98,246
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. The Other
Financing Warrants are exercisable for a period of five-years, commencing on
August 20, 1998 and terminating 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 incidental registration
rights with respect to the Common Stock issuable upon the exercise of the Other
Financing Warrants. The holders of the Other Financing Warrants have the right
to have such warrants redeemed by the Company at the greater of (i) $100,000 per
warrant, or (ii) the difference between the purchase price of the warrants and
the then current Common Stock. The holders also have the right to have the
Common Stock issued upon the exercise of the Other Financing Warrants redeemed
by the Company at the greater of (i) $100,000 per warrant, or (ii) the then
current fair market value of the Common Stock.
Transfer Agent and Registrar
Continental Stock Transfer and Trust Company is acting as transfer
agent and registrar for the Company's Common Stock.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 2,883,691
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 1,383,691
shares held by 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 2,883,691 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 existing stockholders of the Company, an additional
1,383,691 shares will become eligible for sale 13 months from the close of this
Offering, subject to the provisions of Rule 144.
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
451,306 warrants to purchase shares are entitled to certain registration rights
with respect to such shares. Upon registration, such shares may be sold in the
market without limitation. See "Description of Securities -Registration Rights."
Sales of such shares may decrease the market price for our Common Stock. See
"Underwriting;" and "Risk Factors-Negotiated Public Offering Price of the Common
Stock;" "Our Stock Price May Fluctuate Which May Affect the Value of Your
Shares."
47
<PAGE>
UNDERWRITING
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.
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 severally 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.
48
<PAGE>
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 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 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.
49
<PAGE>
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's Common Stock will be traded on the Nasdaq SmallCap
Market. Reports, proxy statements and other information concerning the Company
can also be inspected at the offices of the Nasdaq SmallCap Market, 1735 K
Street, Washington, D.C. 20006.
The Company intends to furnish to its stockholders annual reports
containing financial statements audited and reported upon by its independent
public accountants.
50
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Gaylord Companies, Inc.:
Independent Auditors' Report F-3
Consolidated Balance Sheet at December 31, 1997 F-4
Consolidated Statement of Operations for the years ended December 31, 1997 and 1996
F-5
Consolidated Statement of Stockholders' Equity for the years ended December 31,
1997 and 1996 F-6
Consolidated Statement of Cash Flows for the years ended December 31, 1997 and 1996 F-7
Notes to Consolidated Financial Statements Unaudited Financial Statements
F-8
Consolidated Balance Sheet at June 30, 1998 (Unaudited) F-14
Consolidated Statement of Operations (Unaudited) for the six months ended June 30, 1998 and 1997
F-15
Consolidated Statement of Cash Flows (Unaudited) for the six months ended June 30, 1998 and 1997
F-16
Aropi Incorporated:
Independent Auditors' Report F-17
Balance Sheet at June 30, 1998 and 1997 F-18
Statement of Income for the years ended June 30, 1998 and 1997 F-20
Statement of Stockholders' Equity for the years ended June 30, 1998 and 1997
F-21
Statement of Cash Flows for the years ended June 30, 1998 and 1997 F-22
Notes to Financial Statements F-23
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
(Unaudited) Pro-forma Financial Statements:
- ------------------------------------------
Report on (Unaudited) Pro-forma Financial Statements F-28
(Unaudited) Pro-forma Condensed Consolidated Balance Sheet at June 30, 1998 F-29
(Unaudited) Pro-forma Statement of Operations for the six months ended June 30, 1998 F-30
(Unaudited) Pro-forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1997 F-31
Notes to (Unaudited) Pro-forma Financial Statements F-32
</TABLE>
F-2
<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 (deficit), 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.
/s/ FELDMAN SHERB EHRLICH & CO., P.C.
-------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
August 6, 1998
F-3
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
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 910,000
Notes payable 348,675
------------
2,636,208
Net liabilities of discontinued operations 489,776
------------
Total current liabilities 3,125,984
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 (3,718,024)
------------
TOTAL STOCKHOLDERS' DEFICIT (735,236)
------------
$ 2,390,748
============
</TABLE>
See notes to consolidated financial statements.
F-4
<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 1,072,706 390,123
Non-cash imputed stock compensation 469,255 0
Depreciation and amortization 107,640 68,334
------------ -----------
1,649,601 458,457
------------ -----------
OPERATING INCOME (LOSS) (1,434,318) 139,551
------------ -----------
OTHER INCOME (EXPENSE):
Interest expense, net (79,710) (311,817)
Amortization of debt issue costs and discounts (74,000) (149,986)
Other - net (37,977) 37,409
------------ -----------
(191,687) (424,394)
------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,626,005) (284,843)
PROVISION FOR INCOME TAXES (400,649) 0
------------ -----------
LOSS FROM CONTINUING OPERATIONS (2,026,654) (284,843)
LOSS FROM DISCONTINUED OPERATIONS, including provision for
gain on disposal of $556,468 (668,377) (702,966)
------------ -----------
NET LOSS $ (2,695,031) $ (987,809)
============ ===========
BASIC LOSS PER COMMON SHARE:
Continuing $ (0.53) $ (0.10)
Discontinued (0.17) (0.23)
------------ -----------
$ (0.70) $ (0.33)
============ ===========
WEIGHTED AVERAGE COMMON SHARES USED 3,870,000 3,103,957
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- ------------------------ Additional
Shares Amount Shares Amount Paid-in Capital
--------- -------- ----------- --------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1995 60,000 $300,000 2,750,000 $27,500 $1,600,817
Sale of stock to consultant 0 0 300,000 3,000 297,000
Shares issued with note payable 0 0 180,000 1,800 94,200
Shares issued for services 0 0 170,000 1,700 112,050
Conversion of notes, net of associated
deferred debt issue costs 0 0 235,000 2,350 234,871
Dividends on preferred stock 0 0 0 0 0
Amortization of unearned stock
Compensation 0 0 0 0 0
Net loss 0 0 0 0 0
------ -------- --------- ------- ----------
BALANCE - DECEMBER 31, 1996 60,000 $300,000 3,635,000 $36,350 $2,338,938
Sale of stock to consultant 0 0 160,000 1,600 155,900
Stock issuance to consultant 0 0 300,000 3,000 147,000
Amortization and write off of unearned
stock compensation 0 0 0 0
Dividends on preferred stock
Write off of stock receivable 0 0 0 0 0
Net loss 0 0 0 0 0
------ -------- --------- ------- ----------
BALANCE - DECEMBER 31, 1997 60,000 $300,000 4,095,000 $40,950 $2,641,838
====== ======== ========= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Unearned Retained
Stock Receivable Earnings
Compensation for Stock (deficit) Totals
---------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1995 $ 0 $ 0 $ 24,591 $ 1,952,908
Sale of stock to consultant 0 (168,571) 0 131,429
Shares issued with note payable 0 0 0 96,000
Shares issued for services (110,000) 0 0 3,750
Conversion of notes, net of associated
deferred debt issue costs 0 0 0 237,221
Dividends on preferred stock 0 0 (36,000) (36,000)
Amortization of unearned stock
Compensation 13,333 0 0 13,333
Net loss 0 0 (987,809) (987,809)
---------- ---------- ----------- -----------
BALANCE - DECEMBER 31, 1996 $ (96,667) $ (168,571) $ (999,218) $ 1,410,832
Sale of stock to consultant (143,750) 0 0 13,750
Stock issuance to consultant 0 0 0 150,000
Amortization and write off of unearned
stock compensation 240,417 0 0 240,417
Dividends on preferred stock (23,775) (23,775)
Write off of stock receivable 0 168,571 0 168,571
Net loss 0 0 (2,695,031) (2,695,031)
---------- ---------- ----------- -----------
BALANCE - DECEMBER 31, 1997 $ 0 $ 0 $(3,718,024) $ (735,236)
========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<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 loss $(2,695,031) $ (987,810)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
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 0
Write off of investment 125,000 0
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 65,211 (38,231)
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 0
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 0
------------ -----------
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 0 3,785
------------ -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (34,915) (200,766)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 0 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 0 622,500
(Increase) decrease in restricted cash 0 250,000
------------ -----------
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 $ 0 $ 0
============ ===========
Non cash financing and investing activity:
Conversion of notes payable to common stock $ 0 $ 352,500
============ ===========
Common stock issued for future services $ 0 $ 112,500
============ ===========
Receivable for common stock $ 0 $ 168,571
============ ===========
Credit line debt settled in bankruptcy plan $ 387,547 $ 0
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<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
F-8
<PAGE>
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.
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.
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 will be extinguished and the reorganized company will
issue 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 1,383,684 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.
F-9
<PAGE>
The Company realized a gain on disposal of $556,468 representing an
excess of liabilities over assets assumed of $1,216,889 (with includes
the assumption of the $387,547 balance on the Greenfield term loan) and
losses through to the disposal date of $660,421. The Company has
accrued this gain at December 31, 1997, in light of its certainty.
The following table presents the composition of the net liabilities of
the discontinued business at December 31, 1997.
<TABLE>
<CAPTION>
<S> <C>
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
Other 3,801
----------
Total Assets 1,828,033
----------
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 (773,630)
Loss through disposal date (660,421)
Accrued gain on disposal 944,275
----------
Net liabilities of discontinued business $ (489,776)
==========
</TABLE>
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
F-10
<PAGE>
(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.
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, subsequent to the July 1998 reorganization, 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.
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:
F-11
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1997 1996
------------- -----------
<S> <C> <C>
Tax benefit computed at statutory rate $ (865,000) $ (346,000)
Change in valuation allowance 398,196 -
Effect of permanent differences - 29,000
Other, net 2,453 3,000
Tax benefit not recognized 865,000 314,000
-------------- ----------
$ 400,649 $ -
============== ==========
</TABLE>
The Company had deferred tax assets total $1,827,000 representing the
tax effects of net operating loss carryforwards totaling $1,688,000,
book depreciation in excess of tax depreciation of $110,000, and other
items aggregating $29,000 as of December 31, 1996. The Company has a
valuation allowance of approximately $1,827,000 as a reserve against
such deferred tax assets. The net operating loss carryforwards totaling
approximately $4,221,000, expire in the years 2009 and 2012. Annual
utilization of the net operating loss carryforwards will be restricted
due to the ownership change in the plan of reorganization.
8. STOCKHOLDERS' EQUITY
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.
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. Warrants are
redeemable by the Company at $0.05 per warrant, generally, upon the
common stock achieving certain price levels. Net proceeds to the
Company after underwriter discounts and other expenses were
F-12
<PAGE>
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-13
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
JUNE 30, 1998
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 212,681
Accounts receivable - trade 4,329
Inventories 882,168
Prepaid expenses and other current assets 15,428
------------
TOTAL CURRENT ASSETS 1,114,606
PROPERTY AND EQUIPMENT 308,028
OTHER ASSETS 13,603
------------
$ 1,436,237
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Liabilities Not Subject to Compromise:
Accounts payable and accrued expenses $ 209,583
Line of credit 971,724
Liabilities Subject to Compromise:
Accounts payable and accrued expenses 1,112,858
Sales and other taxes payable 122,426
Notes payable 370,000
------------
TOTAL CURRENT LIABILITIES 2,786,591
------------
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 (4,333,142)
------------
TOTAL STOCKHOLDERS' DEFICIT (1,350,354)
------------
$ 1,436,237
============
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
GAYLORD COMPANIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
--------------------------------
ended June 30,
--------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
NET SALES $ 1,135,645 $ 1,469,592
COST OF GOODS SOLD, including store occupancy and delivery costs 1,447,387 1,143,713
-------------- --------------
GROSS PROFIT (LOSS) (311,742) 325,879
-------------- --------------
OPERATING EXPENSES:
Selling, general and administrative 172,815 284,013
Non-cash imputed stock compensation 150,000 0
Depreciation and amortization 44,675 49,184
-------------- --------------
367,490 333,197
-------------- --------------
OPERATING INCOME (LOSS) (679,232) (7,318)
-------------- --------------
OTHER INCOME (EXPENSE):
Interest expense, net (56,504) (182,889)
Amortization of debt issue costs and discounts (11,692) (37,000)
Other - net (17,691) 495
-------------- --------------
(85,887) (219,394)
-------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (765,119) (226,712)
LOSS FROM DISCONTINUED OPERATIONS 0 (1,079,483)
-------------- --------------
NET LOSS $ (765,119) $ (1,306,195)
============== ==============
BASIC LOSS PER COMMON SHARE:
Continuing $ (0.20) $ (0.06)
Discontinued 0.00 (0.29)
-------------- --------------
$ (0.20) $ (0.35)
============== ==============
WEIGHTED AVERAGE COMMON SHARES USED 3,870,000 3,735,000
============== ==============
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (765,119) $ (1,306,195)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 44,675 105,738
Non cash imputed compensation expense 150,000 55,705
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 10,789 40,227
Decrease (increase) in other receivables 0 (21,013)
Decrease (increase) in inventory 7,828 84,130
Decrease (increase) in prepaid expenses and other assets 41,253 (474,023)
Decrease (increase) in other assets (4,903) 0
Decrease (increase) in deferred income taxes 0 2,061
Increase (decrease) in accounts payable 31,313 134,592
Increase (decrease) in sales and other taxes payable 33,069 (77,266)
Increase (decrease) in other current liabilities (489,776) 228,101
------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (940,871) (1,227,943)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment 0 (6,929)
------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 0 (6,929)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid 0 (9,000)
Proceeds (repayments) from notes payable 21,325 (5,582)
Proceeds from bank debt 971,724 885,263
Repayments of bank debt (910,000) (434,994)
------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 83,049 435,687
------------- -------------
NET INCREASE (DECREASE) IN CASH (857,822) (799,185)
CASH AT BEGINNING OF PERIOD 1,070,503 818,518
------------- -------------
CASH AT END OF PERIOD $ 212,681 $ 19,333
============= =============
</TABLE>
See notes to consolidated financial statements.
F-16
<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-17
<PAGE>
BALANCE SHEETS
AROPI, INCORPORATED
<TABLE>
<CAPTION>
ASSETS
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-18
<PAGE>
LIABILITIES AND STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
June 30,
-------------------------------------
CURRENT LIABILITIES 1998 1997
---- ----
<S> <C> <C>
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-19
<PAGE>
STATEMENTS OF INCOME
AROPI, INCORPORATED
<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-20
<PAGE>
STATEMENTS OF STOCKHOLDER'S EQUITY
AROPI, INCORPORATED
<TABLE>
<CAPTION>
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
----- ------- -------- ----- ---------
<S> <C> <C> <C> <C> <C>
Stockholder's equity at June $ 485,502 $ 78,600 $ 598,347 $(500,000) $ 662,449
30, 1996
Net income for the year ended
June 30, 1997 -0- -0- 40,342 -0- 40,342
--------- --------- -------- --------- --------
Stockholder's equity at June 485,502 78,600 638,689 (500,000) 702,791
30, 1997
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-21
<PAGE>
STATEMENTS OF CASH FLOWS
AROPI, INCORPORATED
<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-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AROPI, INCORPORATED
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.
F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AROPI, INCORPORATED
June 30, 1998
Note A - Organization and Summary of Significant Accounting Policies - Continued
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.
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.
F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AROPI, INCORPORATED
June 30, 1998
Note B - Line of Credit and Long-Term Debt - Continued
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 $ 283,903 $ 360,000
agent. The note is secured by accounts receivable and inventory and --------- ---------
guaranteed by the stockholder. Principal and interest payments of
$7,430, including interest at 8.75%, are due monthly through May
2002. The note is cross-collateralized with the line of credit.
Notes Payable - Others
Note payable to an individual bearing interest at 8% and payable in 50,000 50,000
1998. ---------- ----------
Notes Payable - Former Stockholders
Note payable to a former stockholder, bearing interest at 9%, payable 372,998 413,435
in monthly principal and interest installments of $6,334 through
December 31, 2004.
69,045 76,530
Noncompetition agreement obligation to a former stockholder, evidenced 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%, payable 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-25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AROPI, INCORPORATED
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:
<TABLE>
<CAPTION>
Year Ending Former Others Total
June 30, Stockholder
-------- -----------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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.
F-26
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AROPI, INCORPORATED
June 30, 1998
Note C - Commitments- Continued
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
==========
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-27
<PAGE>
HOME RETAIL HOLDINGS, INC.
(formerly The Gaylord Companies, Inc.)
UNAUDITED PRO-FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro-forma condensed consolidated balance sheet
presents the pro-forma financial position of Home Retail Holdings, Inc.
(formerly "The Gaylord Companies, Inc.") at June 30, 1998 on a "Fresh Start"
basis, as if the Plan of Reorganization of the Cookstore Operations, which was
approved by the Bankruptcy Court on July 10,1998, had been effective as of June
30, 1998. The Fresh Start basis balance sheet is further adjusted to reflect the
acquisition of Aropi, Incorporated ("Aropi"), which occurred on August 20, 1998.
The unaudited pro-forma condensed consolidated statements of operation
for the six months ended June 30, 1998 and the year ended December 31, 1997
reflect the combined results of Home Retail Holdings, Inc. and Aropi as if the
acquisition had occurred on January 1, 1997.
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, 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-28
<PAGE>
HOME RETAIL HOLDINGS, INC.
(formerly The Gaylord Companies, Inc.)
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
The Gaylord "Fresh Start" The Gaylord
Companies, Inc. Adjustments Companies, Inc. Aropi, Inc.
(historical) Dr (Cr) ("Fresh Start") (historical)
------------ ------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 212,681 $ 212,681 $ 17,448(_)
Accounts receivable = trade 4,329 4,329 49,845
Inventories 882,168 882,168 1,665,833
Prepaid expenses and other current assets 15,428 15,428 3,650
---------- ---------- ----------
TOTAL CURRENT ASSETS 1,114,606 1,114,606 1,736,776
PROPERTY AND EQUIPMENT 308,028 308,028 276,417
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO --(1) 2,727,858 2,727,858 --
IDENTIFIABLE ASSETS
GOODWILL -- -- --(1)
OTHER ASSETS 13,603 13,603 78,403
---------- ---------- ----------
$1,436,237 $ 4,164,095 $2,091,596
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILTIES:
Liabilities Not Subject to Compromise:
Accounts payable and accrued expenses $ 209,583 $ 209,583 $551,709(2)
Notes payable -- -- --
Current portion of long-term debt -- -- 176,313
Line of Credit 971,724 971,724 50,000
Liabilities Subject to Compromise:
Accounts payable and accrued expenses 1,112,858(1) 1,112,858 -- --
Sales and other taxes payable 122,426(1) 122,426 -- --
Notes payable 370,000(1) 370,000 -- --
---------- ---------- ----------
TOTAL CURRENT LIABILTIES 2,786,591 1,181,307 778,022
---------- ---------- ----------
LONG-TERM DEBT -- -- 670,502
STOCKHOLDERS' DEFICIT:
Cumulative preferred stock 300,000(2) 300,000 -- --
Common stock 40,950(2) 24,180 16,770 485,502(1)
Additional paid-in-capital 2,641,838(2) (324,180) 2,966,018 78,600(1)
Accumulated earnings (deficit) (4,333,142)(2) (4,333,142) -- 78,970(1)
---------- ---------- ----------
TOTAL STOCKHOLDERS' DEFICIT (1,350,354) 2,982,788 643,072
---------- ---------- ----------
$1,436,237 $4,164,095 $2,091,596
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro-Forma Adjustments
---------------------
Dr. Cr. Total
--------- ------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash 946,626(1) 790,312 $ 386,443
Accounts receivable = trade 54,174
Inventories 2,548,001
Prepaid expenses and other current assets 19,078
----------
TOTAL CURRENT ASSETS 3,007,696
PROPERTY AND EQUIPMENT 584,445
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO 2,727,858
IDENTIFIABLE ASSETS
GOODWILL 647,240 647,240
OTHER ASSETS 92,006
----------
$7,059,245
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILTIES:
Liabilities Not Subject to Compromise:
Accounts payable and accrued expenses $81,650 $679,642
Notes payable 500,000 500,000
Current portion of long-term debt (1) 176,313
Line of Credit (2, 3) 1,028,276 2,050,000
Liabilities Subject to Compromise:
Accounts payable and accrued expenses --
Sales and other taxes payable --
Notes payable --
----------
TOTAL CURRENT LIABILTIES 3,405,955
----------
LONG-TERM DEBT 670,502
STOCKHOLDERS' DEFICIT:
Cumulative preferred stock --
Common stock 485,502 16,770
Additional paid-in-capital 78,600 2,966,018
Accumulated earnings (deficit) 78,970 --
----------
TOTAL STOCKHOLDERS' DEFICIT 2,982,788
----------
$7,059,245
==========
</TABLE>
See notes to pro-forma financial statements.
F-29
<PAGE>
HOME RETAIL HOLDINGS, INC.
(formerly The Gaylord Companies, Inc.)
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Pro-Forma Adjustments
---------------------
The Gaylord
Companies, Inc. Aropi, Inc.
(historical) (historical) Dr. Cr. Total
--------------- ------------ --- --- -----
<S> <C> <C> <C> <C> <C>
NET SALES $1,135,645 $2,240,561 $ $ $3,376,206
COST OF GOODS SOLD 1,447,387 1,065,972 2,513,359
---------- --------- ----------
GROSS PROFIT (311,742) 1,174,589 862,847
------------ --------- -----------
OPERATING EXPENSES:
Selling, general and administrative 172,815 1,486,326 1,659,141
Non-cash imputed stock compensation 150,000 -- 150,000
Depreciation and amortization 44,675 --(1,2) 111,500 156,175
----------- ---------- ------------
367,490 1,486,326 1,965,316
---------- --------- -----------
OPERATING INCOME (LOSS) (679,232) (311,737) (1,102,469)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net (56,504) --(3) 75,000 (131,504)
Amortization of debt issue costs and (11,692) -- (11,692)
discounts
Franchise fees -- 170,506 170,506
Franchise expenses -- (319,268) (319,268)
Other - net (17,691) 52,191 34,500
----------- ----------- ------
(85,887) (96,571) (257,458)
----------- ------------ -----------
NET LOSS $(765,119) $(408,308) $186,500 $(1,359,927)
========== ========== ======== ===========
NET LOSS PER SHARE $ (0.20) $ (0.81)
========== ===========
WEIGHTED AVERAGE SHARES 3,870,000 2,193,015 1,676,985
========== ========= ===========
</TABLE>
See notes to pro-forma financial statements.
F-30
<PAGE>
HOME RETAIL HOLDINGS, INC.
(formerly The Gaylord Companies, Inc.)
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro-Forma Adjustments
---------------------
The Gaylord
Companies, Inc. Aropi, Inc.
(historical) (historical) Dr. Cr. Total
--------------- ------------ --- --- -----
<S> <C> <C> <C> <C> <C>
NET SALES $3,724,157 $6,397,922 $ $ $10,122,079
COST OF GOODS SOLD 3,508,874 3,231,302 6,740,176
----------- --------- ----------
GROSS PROFIT 215,283 3,166,620 3,381,903
----------- --------- ----------
OPERATING EXPENSES:
Selling, general and administrative 1,072,706 3,153,074 4,225,780
Non-cash imputed stock compensation 469,255 -- 469,255
Depreciation and amortization 107,640 --(1,2) 223,000 330,640
---------- --------- -----------
1,649,601 3,153,074 5,025,675
---------- --------- -----------
OPERATING INCOME (LOSS) (1,434,318) 13,546 (1,643,772)
----------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net (79,710) --(3) 150,000 (229,710)
Amortization of debt issue costs and
discounts (74,000) -- (74,000)
Franchise fees -- 502,423 502,423
Franchise expenses -- (542,787) (542,787)
Other - net (37,977) 45,534 7,557
------------ --------- ------------
(191,687) 5,170 (336,517)
------------ ---------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,626,005) 18,716 (1,980,289)
PROVISION FOR INCOME TAXES (400,649) -- (400,649)
------------ ---------- ------------
NET INCOME (LOSS) $(2,026,654) $18,716 $373,000 $ $(2,380,938)
============ ======= ======== ========== ===========
NET LOSS PER SHARE $ (0.53) $(1.42)
=========== ===========
WEIGHTED AVERAGE SHARES 3,870,000 2,193,015 1,676,985
=========== ========= ==========
</TABLE>
See notes to pro-forma financial statements.
F-31
<PAGE>
HOME RETAIL HOLDINGS, INC.
(formerly The Gaylord Companies, Inc.)
NOTES TO UNAUDITED PRO-FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
A. The following unaudited "Fresh Start" adjustments are included in the
accompanying unaudited pro-forma condensed consolidated balance sheet at
June 30, 1998:
(1) To record the reorganization value in conjunction with the "Fresh
Start" of the Company as a result of the Bankruptcy Court's approval
of its Plan of Reorganization, including the elimination of
accumulated deficit and the settlement of the pre-petition
liabilities.
(2) To record the recapitalization of the Company's stockholders' equity.
B. The following unaudited pro-forma acquisition adjustments are included in
the accompanying unaudited pro-forma condensed consolidated balance sheet
at June 30, 1998:
(1) To record the acquisition of 100% of the common stock of Aropi for a
purchase price of $1,290,312, including payment of $790,312 cash and a
$500,000 issuance of a note payable. Goodwill resulting from the
acquisition of $647,240.
(2) To record initial advance from Liberty Bidco Investment Corporation
("Bidco") to be used to pay off the Fremont loan, with the excess
going to working capital.
(3) To record an additional advance from Bidco to fund the cash portion of
the purchase price for Aropi.
C. 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 six months ended June 30, 1998:
(1) To record amortization of the reorganization value in excess of
amounts allocable to identifiable assets over a 15 year term for the
respective periods.
(2) To record amortization of the goodwill resulting from the Aropi
acquisition over a 15 year term for the respective periods.
(3) To record interest expense on the approximately $1,500,000 of
additional debt arising from the pro-forma transactions for the
respective periods.
F-32
<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 September , 1998.
--------------------------
TABLE OF CONTENTS
PROSPECTUS
Page
----
Summary.................................................. 1
Risk Factors............................................. 5
The Company.............................................. 10
Use of Proceeds.......................................... 11
Dividend Policy.......................................... 11
Capitalization........................................... 12
Dilution................................................. 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................... 17
Business................................................. 23
Management............................................... 29
Certain Relationships and Related Party
Transactions......................................... 35
Principal Stockholders................................... 38
Selling Stockholders..................................... 39
Description of Securities................................ 43
Shares Eligible for Future Sale.......................... 47
Underwriting............................................. 48
Legal Matters............................................ 50
Experts.................................................. 50
Additional Information................................... 50
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>
================================================================================
_____________ SHARES
COMMON STOCK
ROLLING PIN KITCHEN EMPORIUM, INC.
[GRAPHIC OMITTED]
----------
PROSPECTUS
_____________, 1998
Nutmeg Securities, LTD.
================================================================================
<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 ss.
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
<PAGE>
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 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. The Selling Stockholders are responsible for ___% of the
expenses in connection with the preparation and filing of this Prospectus. All
of such expenses are estimates, other than the filing fees payable to the
Commission.
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
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, 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.
In August 1998, the Company issued 310,000 shares of Preferred
Convertible Stock of the Company that are immediately convertible into shares of
Common Stock to an investor for cash. 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.
(iii) Warrants.
In August 1998, the Company issued the Bidco Warrants, New Bidco
warrants, Greenfield Warrants and Other Financing Warrants in connection with
certain loan agreements entered into by the Company. 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.
<PAGE>
ITEM 27. EXHIBITS.
EXHIBIT
* 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 Underwriters' Warrant, dated ___, 1998.
* 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 New Warrants.
4.7 Form of Individual Warrants.
* 4.8 Warrant, dated August 20, 1998, issued to Michael Leonard
for the purchase of _____ shares of Common Stock.
* 4.9 Warrant, dated August 20, 1998, issued to Michael Leonard
for the purchase of _____ shares of Common Stock.
* 4.10 Warrant, dated August 20, 1998, issued to William Laux for
the purchase of _____ shares of Common Stock.
* 4.11 Warrant, dated August 20, 1998, issued to William Laux for
the purchase of _____ 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.
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 (previously 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 (June 30, 1998).
- ---------------
* To be filed by amendment. All other exhibits are filed herewith.
<PAGE>
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.
(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.
(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.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that is has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of New York, State of New York, on September __, 1998.
ROLLING PIN KITCHEN EMPORIUM, INC.
By: /s/ GLENN KAAS
-------------------------------------
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the persons whose name and
signature appears below constitutes and appoints Gerald Czarnecki, Greg Dukoff
and David Danovitch each of them, his or her true and lawful attorneys-in-fact
and agents with full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and any and all Registration Statements filed pursuant to Rule 462
under the Securities Act, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully and to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ GLENN KAAS President, Chief Executive Officer and September __, 1998
- ----------------------------------- Director
Glenn Kaas
/s/ GERALD M. CZARNECKI Chairman of the Board and Director September __, 1998
- -----------------------------------
Gerald M. Czarnecki
/s/ GREG E. DUKOFF Secretary, Principal Accounting Officer September __, 1998
- ----------------------------------- and Director
Greg E. Dukoff
/s/ DAVID E. DANOVITCH Director September __, 1998
- -----------------------------------
David E. Danovitch
/s/ DONALD J. JACKSON Director September __, 1998
- -----------------------------------
Donald J. Jackson
/s/ GEORGE P. LUCACI Director September __, 1998
- ------------------------------------
George P. Lucaci
/s/ THOMAS TUTTLE Director September __, 1998
- ------------------------------------
Thomas Tuttle
</TABLE>
<PAGE>
Exhibit Index
Exhibit
Number Description
------ -----------
* 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 Underwriters' Warrant, dated ___, 1998.
* 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 New Warrants.
4.7 Form of Individual Warrants.
* 4.8 Warrant, dated August 20, 1998, issued to Michael Leonard
for the purchase of _____ shares of Common Stock.
* 4.9 Warrant, dated August 20, 1998, issued to Michael Leonard
for the purchase of _____ shares of Common Stock.
* 4.10 Warrant, dated August 20, 1998, issued to William Laux for
the purchase of _____ shares of Common Stock.
* 4.11 Warrant, dated August 20, 1998, issued to William Laux for
the purchase of _____ 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.
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 (previously 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 (June 30, 1998).
- ---------------
* To be filed by amendment. All other exhibits are filed herewith.
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (the "Agreement"), dated August 20, 1998, by
and among HOME RETAIL HOLDINGS, INC., a Delaware corporation (Home Retail"),
GLENN KAAS, an individual resident of the State of Georgia (the "Shareholder")
and AROPI, INCORPORATED, an Iowa corporation (the "Company"),
WHEREAS, the Shareholder owns all of the issued and outstanding shares
of capital stock of the Company, consisting of 174 shares of the voting Common
Stock, no par value (the "Aropi Common Stock" or "Aropi Shares");
WHEREAS, Home Retail desires to purchase from the Shareholder and the
Shareholder desires to sell to Home Retail, all of the issued and outstanding
shares of the Aropi Common Stock in exchange for the Purchase Price (as
hereafter defined);
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement, the following terms
have the meanings specified or referred to in this Section.
(a) "Aropi Common Stock" or "Aropi Shares" is any and all of the voting
common stock of the Company, no par value, owned by Glenn Kaas.
(b) "Audited Financial Statements" is defined in Section 4.4 hereof.
(c) "Bankruptcy Court" is defined in Section 5.2 hereof.
(d) "Bankruptcy Court Order" is defined in Section 5.2 hereof.
(e) "Benefit Plans" is defined in Section 4.17(a) hereof.
(f) "Blue Sky" are the various state security laws applicable to the
Shareholder or shareholders of Home Retail.
(g) "Closing" is defined in Section 3.2 hereof.
(h) "Closing Date" is defined in Section 3.2 hereof.
(i) "Closing Documents" are those documents set forth on Exhibit 1(j)
attached hereto and incorporated herein by reference.
<PAGE>
(j) "Closing Liabilities" are those liabilities set forth on Exhibit
6.2 attached hereto and incorporated herein by reference.
(k) "Code" is the Internal Revenue Code of 1986, as amended.
(l) "Confidentiality Agreement" is defined in Section 11.2 hereof.
(m) "Conversion Date" is the date on which the Offering has been
consummated in accordance with the underwriting agreement.
(n) "Convertible Promissory Note No. 1" is defined in Section 3.1(b)
hereof.
(o) "Convertible Promissory Note No. 2" is defined in Section 3.1(b)
hereof.
(p) "Convertible Promissory Note No. 1 and Stock Escrow Agreement" is
the escrow agreement attached hereto as Exhibit 7.
(q) "Current-Operating Liabilities" are any and all liabilities of the
Company arising in the ordinary course of business.
(r) "Disclosure Documents" is defined in Section 5.2 hereof.
(s) "ERISA" is defined in Section 4.17(a) hereof.
(t) "Escrow Agreement" is that certain Escrow Agreement dated June 30,
1998 by and between Glenn Kaas, Home Retail Acquisition Corporation, a Delaware
corporation, and Arnall Golden & Gregory, LLP, Escrow Agent.
(u) "Home Retail Shares" is defined in Section 3.1(b) hereof.
(v) "Home Retail Information" is defined in Section 4.21(b) hereof.
(w) "Insurance Policies" is defined in Section 4.18 hereof.
(x) "Interim Financials" is defined in Section 4.4 hereof.
(y) "Lease" is defined in Section 6.5 hereof.
(z) "Letter of Credit" is defined in Section 6.6 hereof.
(aa) "Loan and Financing Agreement" are those certain loan documents
set forth on Exhibit 1(aa) attached hereto and incorporated herein by reference.
-2-
<PAGE>
(ab) "Material-Adverse Effect" or "Material-Adverse Change" is defined
on Exhibit 1(ab) attached hereto and incorporated herein by reference.
(ac) "May 1998 Balance Sheet" is the financial statement attached
hereto as Exhibit 4.4.
(ad) "Offering" is defined on Exhibit 1(ad) attached hereto and
incorporated herein by reference.
(ae) "Offering Price" is defined on Exhibit 1(ae) attached hereto and
incorporated herein by reference.
(af) "Plan" is defined in Section 5.2 hereof.
(ag) "Purchase Price" is defined in Section 2 hereof.
(ah) "Rule 144" is defined in Section 5.5(a)(ii) hereof.
(ai) "Securities Act" is defined in Section 4.21(a) hereof.
(aj) "Tag Along Agreement" is defined in Section 8.2(j) hereof.
2. Sale and Purchase of the Aropi Shares. Subject to the terms and
conditions hereof and in reliance upon the representations, warranties and
covenants contained herein, the Shareholder will sell the Aropi Shares to Home
Retail, and Home Retail will purchase the Aropi Shares from the Shareholder on
the Closing Date for an aggregate purchase price equal to $1,290,312, (the
"Purchase Price") payable as set forth in Section 3.1 below.
3. The Closing; Purchase Price, etc.
3.1. Payment At Closing. At the Closing, Home Retail shall pay the
Purchase Price as follows:
(a) $790,312.21 in cash by wire transfer to the Shareholder of
immediately available funds or by certified bank check.
(b) the balance of the Purchase Price, $500,000, shall be
evidenced by two convertible promissory notes each in the amount of $250,000 and
each bearing interest at the rate of 8% per annum, principal and interest due
and payable as follows: (i) the first convertible promissory note in one lump
sum 365 days from the Closing Date, similar to that attached hereto as Exhibit
3.1(b)(i) and incorporated herein by reference ("Convertible Promissory Note No.
1"), and (ii) the second convertible promissory note in one lump sum 180 days
from the Closing Date, similar to that attached hereto as Exhibit 3.1(b)(ii)
("Convertible Promissory Note No. 2") (collectively, the "Convertible Promissory
Notes"). The Convertible Promissory Notes shall be convertible as set forth in
Section 10.3 hereof into shares of the Class A Voting Common Stock of Home
Retail, par value of $.01 per share having a fair market value as of the
Conversion Date of not less than $500,000 ("Home Retail Shares") which shares as
-3-
<PAGE>
of the Conversion Date shall represent not less than 2% of all of the issued and
outstanding shares of Home Retail on a fully diluted basis. It is understood,
acknowledged and agreed by the Parties hereto, that the Shareholder's purchase
price per share for the Home Retail Shares, on the Conversion Date will be at
the Offering Price per share as that sold to the Public in the Offering.
3.2. The Closing. The Closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the offices of Cambridge
Holdings LLC, 535 Madison Avenue, New York, New York, at 10:00 a.m. New York
time on August 20, 1998 or at such place and on such other date as may be
mutually agreed upon by Home Retail and the Shareholder. The date of the closing
is herein referred to as the "Closing Date".
3.3. Delivery of Aropi Shares. At the Closing, Shareholder will
deliver to Home Retail certificates representing the Aropi Shares duly endorsed
for transfer by the Shareholder or accompanied by stock powers duly executed by
the Shareholder in form reasonably satisfactory to Home Retail and in exchange
therefor Shareholder shall receive (i) the Convertible Promissory Notes and (ii)
the cash portion of the Purchase Price as provided in Section 3.1(a) above.
4. Representations and Warranties of the Shareholder and the Company.
The Shareholder and the Company, jointly and severally, to the best of their
knowledge and belief, represent and warrant to Home Retail as follows:
4.1. (a) Organization and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Iowa and has all requisite power and authority to own, lease and
operate its properties and carry on its business as now being conducted. The
Company is duly qualified and in good standing as a foreign corporation
authorized to do business in each jurisdiction where the character of the
properties owned or leased or the nature of activities conducted makes such
qualification necessary except where the failure to so qualify would not have a
Material-Adverse Effect on the Company.
(b) Certificate of Incorporation and By-Laws. Attached hereto and
incorporated herein by reference as Exhibits 4.1(b)(i) and (b)(ii) hereto, are
true, correct and complete copies, in full force and effect, of the Company's
Certificate of Incorporation and By-Laws, as amended or restated. The Company is
not in violation of any of the provisions of its Certificate of Incorporation or
By-Laws.
4.2. Capitalization. The authorized capital stock of the Company
consists of (i) 10,000 shares of Voting Common Stock, of which 174 shares will
be issued and outstanding as of the Closing Date after the cancellation of the
174 shares of Voting Common Stock held in escrow to secure the Company's
indebtedness to Dennis Kaas which indebtedness will be paid as provided for in
Sections 6.2 and 10.1 hereof, (ii) 10,000 shares of Non-Voting Common Stock and
(iii) 10,000 shares of Non-Voting Preferred Common, none of which are issued or
outstanding. All of the issued and outstanding shares of Aropi Common Stock are
duly authorized, validly issued, fully paid, non-assessable and free of
preemptive rights. There are no options, warrants, calls subscriptions,
convertible securities, or other rights or agreements or commitments of any
character whatsoever obligating the Company to issue or sell any shares of Aropi
Common Stock or any other class of capital stock of the Company, or any
securities convertible into or exchangeable or exercisable for or otherwise
-4-
<PAGE>
evidencing a right to acquire any shares of capital stock or other securities of
any kind of the Company. There are no voting trusts or other agreements or
understandings to which the Company or the Shareholder is a party with respect
to the voting of the Aropi Common Stock or any other class of capital stock of
the Company, except as set forth on Exhibit 4.2 attached hereto and incorporated
herein by reference.
4.3. Agreement; Title to Aropi Shares.
(a) Each of the Shareholder and the Company has the legal
capacity to enter into this Agreement. This Agreement has been duly executed and
delivered by the Shareholder and the Company and, assuming due execution by Home
Retail, constitutes the legal and binding obligation of the Shareholder and the
Company enforceable in accordance with its terms except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization of other similar
laws of general application relating to the rights of creditors and is subject
to general principles of equity. The execution and delivery by the Shareholder
and the Company of this Agreement, the consummation of the transactions
contemplated hereby, and the performance by the Shareholder and the Company of
their respective obligations hereunder will not conflict with or result in any
violation of, or default under (either immediately or with notice or lapse of
time), or in any right to accelerate or the creation of any lien, charge or
encumbrance pursuant to, any provision of (i) the certificate of incorporation
or by-laws of the Company, (ii) any agreement, contract, lease, license, note,
bond, mortgage, indenture, deed of trust or other instrument to which the
Shareholder or the Company is a party or by which any of the properties or other
assets of the Company is bound, (iii) any franchise, license, permit or
authorization, or any judgment or order of any tribunal or governmental body
applicable to the Shareholder or the Company, or any of the properties or other
assets of the Company, (iv) any law, statute, decree, rule or regulation of any
jurisdiction.
(b) No authorization, consent or approval of, or declaration
of, filing with or notice to any governmental body or authority by the
Shareholder or the Company is necessary for the execution of this Agreement, the
consummation by the Shareholder and the Company of the transactions contemplated
hereby or the performance by the Shareholder and the Company of their respective
obligations hereunder other than (i) satisfaction of applicable requirements, if
any, of the Securities Act or state securities, "Blue Sky" or takeover laws and
(ii) other regulatory rules, as required by law.
(c) Since January 1, 1998, the Company has not declared or paid
any dividend on any of the Aropi Common Stock, or directly or indirectly
redeemed, or made any distribution with respect to, or authorized or effected
any split-up or any other purchase or otherwise acquired any of its outstanding
capital stock or agreed to take any such action and will not take any such
action during the period between the date of this Agreement and the Closing
Date, except as set forth on Exhibit 4.3 which is attached hereto and
incorporated herein by reference.
(d) The Shareholder is the record and beneficial owner of the
Aropi Shares, has the sole and undivided ownership of said Aropi Shares with the
full power, right, and authority to enter into and perform this Agreement and to
transfer the Aropi Shares to Home Retail.
-5-
<PAGE>
(e) The Aropi Shares represent all of the Aropi Shares which
the Shareholder owns in the Company.
(f) The Aropi Shares are free and clear of all liens, security
interests, claims, pledges, community property rights and encumbrances of any
nature whatsoever and are not subject to any shareholder agreements, voting
trusts, contractual restrictions, or outstanding proxies.
(g) The Shareholder has not granted any options, warrants or
purchase rights with respect to the Aropi Shares to any individual, group,
partnership, corporation or other legal entity.
(h) The delivery by the Shareholder to Home Retail of the
certificate(s) representing the Aropi Shares shall pass good and marketable
title to the Aropi Shares to Home Retail.
4.4. Financial Statements. The Shareholder has delivered to Home
Retail true and correct copies of the audited financial statements of the
Company for the fiscal years ending June 30, 1996 and June 30, 1997 prepared by
Smith & Radigan, certified public accountants, Atlanta, Georgia (the "Audited
Financial Statements").
The unaudited balance sheet of the Company for the period ending May
31, 1998 ("the May 1998 Balance Sheet") and the related unaudited statements of
operations and accumulated deficit for the period from July 1, 1997 to the May
1998 Balance Sheet, certified by the President of the Company (collectively, the
"Interim Financials") were prepared from the books and records of the Company
and fairly present in all material respects the financial position of the
Company as of their respective dates and the results of operations of the
Company for the periods then ended. The Audited Financial Statements and the
Interim Financials, including the notes to all such statements, are referred to
herein collectively as the "Financial Statements." The Audited Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods specified, and
present fairly in all material respects and in accordance with generally
accepted accounting principles the financial position of the Company as of the
respective dates specified. Except as reflected or reserved against in the
Interim Financials, the Company has no debts, liabilities, or obligations of any
nature, whether accrued, absolute, contingent, or otherwise, arising out of
transactions entered into, or any state of facts existing, other than (a)
liabilities and obligations as disclosed or contemplated in this Agreement, (b)
liabilities and obligations described in the exhibits to this Agreement, (c)
liabilities and obligations arising after the May 1998 Balance Sheet in the
ordinary course of the business of the Company that do not have and cannot
reasonable be expected to have, individually or in the aggregate, a
Material-Adverse Effect, and (d) those set forth on Exhibit 4.4 attached hereto
and incorporated herein by reference.
4.5. Title to Property, Absence of Encumbrances. etc. Except for
leased property and as set forth on Exhibit 4.5 attached hereto and incorporated
herein by reference, the Company has good and marketable title, and is the sole
owner of, all material assets, real or personal, tangible or intangible, owned
or used by it, including, without limitation, all assets reflected in the
balance sheets included in the Interim Financials (other than any assets sold or
-6-
<PAGE>
otherwise disposed of in the ordinary course of business since June 1, 1998),
free and clear of all mortgages, pledges, liens, security interests or
encumbrances of any nature (other than liens for taxes, assessments or other
governmental charges not yet due and payable, or presently payable without
penalty or interest) including, without limitation, any governmental
restrictions on the operation of such assets, except for such leases and such
mortgages, liens and encumbrances, or as otherwise disclosed in Exhibit 4.5 or
other Exhibits to this Agreement. All buildings, other improvements and
leasehold improvements, and all machinery, equipment, tools, furniture and
fixtures except as listed on Exhibit 4.5 owned or leased by the Company are in
good operating condition and repair, except for reasonable wear and tear. The
Company has not received notice of any outstanding enforcement actions or
notices of violation issued by any Federal, state, county or municipal authority
having jurisdiction over any such property, including but not limited to any
notice from any state or Federal environmental agency.
4.6. Inventory; Accounts Receivable. Subject to the aggregate of the
reserves reflected on the May 1998 Balance Sheet with respect to inventory, the
inventories of the Company in all material respects (a) are in good marketable
condition, and (b) conform to generally accepted standards in the industry of
which the Company is a part. The accounts receivable reflected on the books of
the Company on the May 1998 Balance Sheet were valid and existing and represent
monies owed to the Company for services provided or goods sold and delivered in
the ordinary course of the business as of that date. Except as reflected on the
May 1998 Balance Sheet, there were no refunds, discounts, or other adjustments
payable relating to a material amount of the accounts receivable, and the
Company has not received any written notice, or to its knowledge, any notice,
asserting any defenses, rights of set-off, assignments, or conditions
enforceable by third parties against the Company relating to a material amount
of the accounts receivable. The accounts receivable reflected on the May 1998
Balance Sheet were net of a write-off determined in accordance with the
Company's past practices.
4.7. Patents, Trademarks, etc. Exhibit 4.7 attached hereto and
incorporated herein by reference contains a complete and correct list of all
patents, trademarks registered or claimed by the Company, trade names and
registered copyrights owned by, or registered in the name of the Company, and
all applications for patents or for registration of trademarks, trade names or
copyrights made by the Company, or by any of its employees for the benefit of
the Company. Except as otherwise indicated on Exhibit 4.7, the Company is the
registered and beneficial owner of all such patents, trademarks, trade names and
registered copyrights, free and clear of any license, royalty, lien or
encumbrance. The Company owns or has the right to use all patents, patent
applications, trademarks, trade names, copyrights and other intellectual
property rights, including, without limitation, inventions, processes, designs,
formula, trade secrets, technology and know-how necessary for the conduct of its
business. There is no pending or threatened claim by the Company against any
third party for infringement, misuse or misappropriation of any patent,
trademark, trade name, copyright or other intellectual property (including,
without limitation, any trade secrets or know-how) owned by the Company or in
which the Company has an interest, whether as licensee or otherwise. Except as
set forth in Exhibit 4.7, there is no pending or, to the knowledge of the
Shareholder, threatened action, suit or proceeding against the Company or the
Shareholder for infringement, misuse or appropriation of any patent, trademark,
trade name, copyright or other intellectual property (including, without
limitation, any trade secret or know-how) owned by any third party or, to the
knowledge of the Shareholder, any basis therefor.
-7-
<PAGE>
4.8. Employee Remuneration, etc. Exhibit 4.8 attached hereto and
incorporated herein by reference lists the current salaries and bonuses
(together with pending or anticipated increases therein) of each director,
officer employee, and other remuneration with respect to any consultant or agent
of the Company currently paid at a rate in excess of $30,000 per year. No
officer or other key employee of the Company has indicated to the Shareholder,
or to the Shareholder's knowledge has any intention to terminate his or her
employment with the Company.
4.9. Union and Employment Agreements. The Company is not a party to
any collective bargaining agreement, or to any written or oral employment
agreement, including without limitation any agreement regarding severance or
compensation due upon a change of control, with any of its respective officers,
directors, employees, consultants or agents. No attempts to organize the
employees of the Company have been made, nor, to the knowledge of the
Shareholder, are any such attempts now threatened or, being planned. The Company
is in compliance in all material respects with all applicable Federal, state and
local laws, rules and regulations regarding employment conditions and practices,
has withheld all amounts required by law or agreement to be withheld from the
wages or salaries of its employees and is not liable for any arrears of wages or
any taxes or penalties for failure to comply with any of the foregoing. The
Company has not engaged, nor has it been alleged to have engaged in any unfair
labor practices and has not discriminated, nor has it been alleged to have
discriminated on the basis of age, sex or other bases prohibited by law in its
respective employment conditions or practices. There are no unfair labor
practice or age or sex discrimination charges or complaints or other charges or
complaints alleging illegal discriminatory practices pending or, to the
knowledge of the Shareholder, threatened against the Company before any Federal,
state or local board, department, commission or agency. There are no existing
or, to the knowledge of the Shareholder, threatened labor strikes, disputes,
grievances, controversies or other labor troubles affecting the Company. There
are no pending or threatened representation questions respecting the employees
of the Company or any pending arbitration proceedings.
4.10. Officers, Directors and Bank Accounts. Exhibit 4.10 attached
hereto and incorporated herein by reference lists (a) the names of all directors
and officers of the Company, and (b) the name and location of each bank or other
institution in which the Company has any account or safe deposit box, the number
or other identification thereof, and the names of all persons authorized to draw
thereon or have access thereto.
4.11. No Adverse Change. Since the May 1998 Balance Sheet, there has
not been any Material-Adverse Change in the financial condition, operations or
business of the Company, it being understood and agreed that (i) any adverse
changes generally affecting national, regional or local economic conditions or
adverse changes generally affecting industry conditions as a whole, and (ii) the
financial impact to the Company for any fees or expenses incurred in regard to
the consummation of this Agreement shall not be construed to constitute a breach
of the foregoing representation.
-8-
<PAGE>
Home Retail (A) acknowledges that the Shareholder has disclosed to it
that (i) due to an Internal Revenue Service audit for the fiscal years 1995,
1996 and 1997 there will be an adjustment (decrease) to the depreciation
reflected on the Audited Financial Statements of approximately $145,000.00
("Depreciation Adjustment"), and (ii) for the fiscal year ending June 30, 1998
the Company may incur a net operating loss of approximately $10,000.00 to
$20,000.00 ("Loss"), and (B) agrees that neither the Depreciation Adjustment nor
the Loss shall constitute a Material-Adverse Change to the Audited Financial
Statements.
4.12. Absence of Certain Changes. Except as set forth on Exhibit
4.12, since the May 1998 Balance Sheet, the Company has not (a) issued, sold or
delivered or agreed to issue, sell or deliver any shares of its capital stock or
any options or rights to acquire any such capital stock or securities
convertible into or exchangeable for such capital stock, (b) incurred any
obligations or liabilities, whether absolute, accrued, contingent or other,
other than obligations and liabilities incurred in the ordinary course of
business, (c) mortgaged, pledged or subjected to any lien, lease, security
interest or other encumbrance (other than liens for taxes, penalty or interest)
any of its assets, real or personal, tangible or intangible, (d) acquired or
disposed of any assets or properties, or entered into any agreement for any such
acquisition or disposition, except in the ordinary course of business, (e)
declared, made, paid or set apart any sum for any dividend or other distribution
to its Shareholder, or purchased or redeemed any shares of its capital stock or
granted any option, warrant or right to purchase any such capital stock, (f)
forgiven or cancelled any debts or claims other than in the ordinary course of
business or waived any rights of material value not previously accrued for, (g)
granted any increase in compensation in any form to any officer, salaried
employee or any class of other employees, or granted any severance or
termination pay, or entered into any employment agreement, or any modification
of a previously existing employment agreement, with any officer or any other
salaried employee, other than increases in compensation of less than 10% granted
in the ordinary course of business consistent with prior practice to employees
whose base pay at the time of such increase was less than $30,000, (h) adopted,
amended or entered into any collective bargaining, bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation or other
plan, agreement or arrangement for the benefit of employees, (i) granted any
rights or licenses under any of its patents, trademarks, trade names, copyrights
or other intellectual property rights, (j) suffered any loss of, or adverse
change in its relationship with, any supplier or customer, or has reason to know
of any action which would constitute or lead to such a loss or adverse change,
(k) suffered any damage, destruction or loss (whether or not covered by
insurance) which has a Material-Adverse Effect on its business, (l) suffered any
strike or other labor trouble which has had a Material-Adverse Effect on its
operations, (m) terminated or made any substantial revision of, or engaged in
any renegotiation of, any material contract, (n) decreased the level of
maintenance on, or its expenditures for maintenance of, the real property,
machinery, equipment, tools, furniture and fixtures owned or leased by it, (o)
made any change in accounting principles or methods or in classification,
depreciation or amortization policies or rates except as set forth in Section
4.11 above, (p) settled any dispute involving payment by the Company in excess
of $10,000, (q) made any loan or advance in excess of $10,000 to any person or
entity, other than travel or expense advances in accordance with its normal
policies which have been accounted for, or repaid and extensions of trade credit
in accordance with its normal business practices, or (r) entered into any
material transaction other than in the ordinary course of business.
-9-
<PAGE>
4.13. Litigation. Except as set forth on Exhibit 4.13 attached
hereto and incorporated herein by reference, there are no judicial or
administrative actions, suits, proceedings or governmental investigations
pending or, to the knowledge of the Shareholder, threatened before any court or
tribunal or governmental instrumentality, or any citation, order or notice of
violation of any law, decree, rule or regulation, by or against the Company or
any of its properties, or which relate in any way to the Company's business,
properties, assets or operations, or which have or are likely to result in an
imposition of a lien on any of the properties or assets owned or leased by the
Company, or which question the validity of this Agreement, or any action to be
taken in connection herewith or therewith, nor is there any such action, suit,
proceeding or investigation, to the knowledge of the Shareholder, pending or
threatened against the Company. Neither the Company nor any property or assets
of the Company is subject to any judicial or administrative order, judgement,
injunction or decree.
4.14. Contracts, etc. Exhibit 4.14 attached hereto and incorporated
herein by reference contains a complete and correct list of each (a) mortgage,
debenture, note or installment obligation, or other instrument or contract for
the borrowing or lending of money by the Company, including, without limitation,
any agreement or arrangement relating to the maintenance of compensation
balances or the availability of a line of credit, (b) license agreement, sales
agency agreement or distribution agreement to which the Company is a party, (c)
guaranty of any obligation by the Company, including, without limitation, any
keep-well, make-whole or maintenance of working capital or earnings or similar
agreement, (d) agreement for the sale of any properties or assets by the Company
other than sales of products in the ordinary course of business, (e) contract
(other than a contract, purchase order or other agreement for the purchase of
raw materials or other supplies in the ordinary course of business or for the
purchase of machinery, equipment, tools, furniture or fixtures with a cost of
less than $10,000) pursuant to which the Company is or may be obligated to make
payments, contingent or otherwise, on account of or arising out of the
acquisition, prior, pending or future, of the shares, business, or other assets
of another enterprise, (f) secrecy or invention agreement under which the
Company or, to the Shareholder's knowledge, any of the present officers or
employees of the Company has any obligation and relating to the business of the
Company, (g) requirements contract with the Company as purchaser or seller or
other agreement for the purchase or sale of goods or services not terminable
without liability by the Company on 30 days' (or less) notice or involving
payments by or to the Company in excess of $10,000, (h) agreement or arrangement
with a customer or supplier of the Company for rebates, sharing of expenses or
any similar device for the effective reduction or increase of prices or other
charges and involving products with a value in excess of $10,000, (i) agreement
of the Company with, or loan or advance by the Company to or from, or other
obligation of the Company to or from any officer or director of the Company, (j)
lease of real or personal property with the Company as lessor or lessee,
involving rents of more than $5,000 per year, (k) agreement or arrangement
limiting the freedom of the Company or, to the shareholder's knowledge, any of
the present officers or employees of the Company to compete in any line of
business similar to the Company business, with any person or other entity or in
any geographical area, (l) governmental license, franchise, permit or
authorization held by and material to the business of the Company and not listed
on any other Exhibit hereto, (m) joint venture agreement, partnership or profit
sharing to which the Company is a party, (n) agreement pursuant to which the
Company has indemnified or shared tax liability with any party; and (o)
contract, commitment or agreement not referred to above in this Section 4.14 or
in any other Exhibit to this Agreement and which involves aggregate payments by
or to the Company of $10,000 or more. All such contracts and agreements are in
-10-
<PAGE>
full force and effect, the Company is not in default thereunder and no event has
occurred which, whether with notice, lapse of time or otherwise, would
constitute a default thereunder. No consent of any party or the payment of any
penalty or incurrence of additional obligations or change of any terms is
necessary upon or prior to the consummation of the transaction contemplated by
this Agreement so that all rights of the Company under the contracts to which it
is a party shall continue unimpaired on and after the Closing Date.
4.15. Taxes.
(a) The Company has been since 1994, and continues to be an S
corporation, as defined by Section 1361 of the Internal
Revenue Code (the "Code"). The Company has delivered to
Home Retail true and correct copies of (i) the statement
that the Company received from the IRS regarding its
status as an S corporation and (ii) its three (3) most
recently filed U.S. federal income tax returns as an S
corporation. All taxes due and owing by The Company
(whether or not shown on any tax return, whether known or
unknown, asserted or unasserted) have been paid other than
matters previously disclosed in writing, for which
adequate accruals or reserves have been established. The
Company is not a party to any tax sharing or other
agreement that will require any payment with respect to
taxes. The Company is not the beneficiary of any extension
of time within which to file any tax return. The Company
has not waived any statute of limitations in respect of
taxes or agreed to any extension of time with respect to a
tax assessment or deficiency or the collection of taxes.
(b) Except as set forth on Exhibit 4.15 which is attached
hereto and incorporated herein by reference, no taxing
authority or other governmental unit has claimed, raised
with the Shareholder, discussed with the Shareholder,
proposed, or to the Shareholder knowledge threatened any
assessment, deficiency, adjustment, dispute, or claim
concerning any tax return or any tax liability of the
Company. There is no asserted unpaid assessment,
deficiency, or adjustment concerning any tax return or tax
liability of the Company. To the knowledge of the Company,
none of the tax returns of the Company has been selected
for or are now under audit or examination by any taxing
authority or other governmental unit, and there are no
suits, actions, proceedings, or investigations pending or,
to the knowledge of the Shareholder, threatened against
the Company with respect to any taxes, except as set forth
on Exhibit 4.15.
(c) The Company has withheld and timely deposited or paid all
taxes required to have been withheld and deposited or paid
in connection with amounts paid or owing to any employee,
independent contractor, creditor, shareholder, or other
third party.
-11-
<PAGE>
(d) The Company (A) has not been a member of an affiliated
group filing a consolidated federal income tax return; and
(B) has no liability for the taxes of any Person (other
than the Company) under Treas. Reg. Sec. 1.1502-6 or any
similar provision of state, local, or foreign law), as
transferee or successor, by contract, or otherwise. None
of the Company or any shareholder of the Company is a
Person other than a United States person within the
meaning of the Code and payments of purchase price made
pursuant to the transaction contemplated herein are not
subject to the withholding provisions of Sec. 3406 of the
Code or subchapter A of Chapter 3 of the Code.
4.16. Licenses. The licenses listed on Exhibit 4.16 attached hereto
and incorporated herein by reference (the "Licenses"), represent all of the
licenses, permits, approvals, and clearances issued to the Company as of the
date hereof by all foreign, Federal, state or local governmental authorities and
currently used by or useful to the Company in connection with the operation of
its business except for those which the failure to hold has not and cannot
reasonably be expected to have a Material-Adverse Effect. The Licenses represent
all government licenses, permits, approvals, or clearances that the Company is
required to maintain by applicable statute or regulation in connection with the
business as presently conducted except for those which the failure to hold has
not and cannot reasonably be expected to have a Material-Adverse Effect. The
Licenses are full in full force and effect in accordance with their terms, and
there is no outstanding notice of cancellation or termination in connection
therewith.
4.17. Employee Benefit Plans and Arrangements and Compliance with
ERISA.
(a) Exhibit 4.17 attached hereto and incorporated herein by
reference sets forth all employee benefit plans (within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and any other deferred compensation, bonus, overtime, fringe benefit,
insurance, welfare, medical, health, life, company car, disability, injury,
illness, accident, sick pay, sick leave, vacation, termination, severance,
retention, executive compensation, incentive, commission, or other plan,
agreement, policy, trust fund, or arrangement, not otherwise listed on any
exhibit to this Agreement, maintained or to which contributions are being made
by the Company or which provide benefits to the Company's current or former
employees (collectively, the "Benefit Plans"). True and correct copies of each
Benefit Plan have been delivered to Home Retail. To the extent applicable, for
each Benefit Plan, the Company has provided to Home Retail copies of (i) the
most recent determination letter and any outstanding request for a determination
letter; (ii) IRS Forms 5500 with respect to the last two plan years; (iii)
certified financial statements; (iv) summary plan descriptions to employees
purporting to inform them of the Benefit Plan; (v) any related trust agreement;
(vi) all insurance contracts or other funding arrangements; and (vii) all
material communications received from or sent to the IRS or the Department of
Labor within the last two years. All contributions or premiums required to be
made by the Company as of the Closing Date on account of, or under, each Benefit
-12-
<PAGE>
Plan have been paid or adequate accruals have been made therefore on the books
of the Company and, except as disclosed on Exhibit 4.17, no such contribution or
premium is delinquent under the terms of the applicable Benefit Plan. The
Company does not maintain any Benefit Plan that provides post retirement or post
termination welfare benefits for retired employees, except for continuing
benefits required by applicable state and federal laws.
(b) The only Benefit Plan that is an "employee pension benefit
plan" (as defined in Section 3(2) of ERISA) maintained or to which contributions
are being made by The Company or which provide benefits to the Company's
Employees is the Retirement Plan. The Retirement Plan has received a favorable
determination letter from the IRS that it is qualified under Section 401(a) of
the Code, and the trust established in connection with the Retirement Plan has
received a determination letter from the IRS that it is exempt under Section
501(a) of the Code. To the knowledge of the Shareholder, nothing has occurred
with respect to the operation of the Retirement Plan that could cause the loss
of such qualification or exemption or the imposition of any material penalty or
tax under ERISA or the Code. The Company does not contribute to, and has not
within the five-year period ending on the Closing Date, contributed to any
"multi-employer plan" (as defined in Section 4001(a)(3) of ERISA) or any plan
which is subject to Section 412 of the Code or Title IV of ERISA.
(c) No termination, retention, severance, or similar benefit
will become payable as a result of any transaction contemplated under the
Agreement.
(d) Benefits under any Benefit Plan are as represented in said
documents and have not been increased or modified (whether written or not
written) subsequent to the dates of such documents. The Company has not
communicated to any employee or former employee any intention or commitment to
modify any Benefit Plan or to establish or implement any other employee or
retiree benefit or compensation arrangement.
(e) Each Benefit Plan has been maintained and administered in
compliance in all material respects with its terms and in all material respects
with the requirements (including reporting requirements) prescribed by any and
all applicable statutes, orders, rules, and regulations, including, but not
limited to, ERISA and the Code.
4.18. Insurance. Exhibit 4.18 attached hereto and incorporated
herein by reference lists all insurance policies to which the Company is, as of
the date of this Agreement, a party or which have been obtained by the Company
and relate to the employees of the Company (the "Insurance Policies") and, on
attachment if necessary, a claims history for each Insurance Policy since July
1, 1996. The Insurance Policies are in full force and effect, all premiums with
respect thereto covering all periods up to and including the date hereof have
been paid when due, and no notice of cancellation or termination has been
received with respect to any Insurance Policy.
4.19. Other Liabilities. The Company does not have any liabilities
or obligations (direct or indirect, contingent or absolute, matured or
unmatured) of whatever nature, whether arising out of contract, tort, statute or
otherwise, except (a) as reflected in the balance sheets included in the Interim
-13-
<PAGE>
Financials, (b) disclosed in the Exhibits of this Agreement, (c) as contemplated
by this Agreement or (d) liabilities and obligations incurred in the ordinary
course of business since the May 1998 Balance Sheet.
4.20. Absence of Certain Payments. Neither the Shareholder nor the
Company nor, to the best of the Shareholder's and the Company's knowledge, any
officers, directors, employees, agents representatives, or independent
contractors of the Company has made, or arranged for the making of, any unlawful
payment to any official, officer or employee of any Federal, state, county,
municipal or other governmental or regulatory body or authority or any self
regulatory body or authority, or made any payment to any customer or supplier of
the Company or any officer, director, partner, employee or agent of any customer
or supplier, for the unlawful sharing of fees or to any such customer or
supplier or any such officer, director, partner, employee or agent for the
unlawful rebating of charges, or engaged in any other unlawful reciprocal
practice, or made any other unlawful payment or given any other unlawful
consideration to any such customer or supplier or any such officer, director,
partner, employee or agent, in respect of the Company.
4.21. Investment Representation.
(a) On the Conversation Date, the Shareholder represents and
warrants that he will acquire the Home Retail Shares for his own account only,
for investment purposes and not with a view to distribution and acknowledges
that the Home Retail Shares are and will be "restricted securities" within the
meaning of the Rules and Regulations under the Securities Act of 1933 (the
"Securities Act"), that the disposition of such securities is subject to
compliance with the registration and prospectus provisions of the Securities
Act, and that certificates for the securities issued hereunder will bear a
legend to that effect.
(b) The Shareholder acknowledges receipt of and has read,
carefully considered and fully understands this Agreement and all other
documents, including without limitation the exhibits and schedules hereto and,
prior to the Closing, the Disclosure Documents (as hereafter defined) requested
by and furnished to the Shareholder (such documents are herein collectively
referred to as the "Home Retail Information"). The Shareholder acknowledges that
he has not been furnished with or solicited by any offering literature, leaflet,
public promotional meeting, circular, newspaper or magazine article, radio or
television advertisement, or any other form of general advertising.
(c) The Shareholder is able to (i) bear the economic risk of
his investment in the Home Retail Shares and (ii) hold Home Retail Shares for an
indefinite period of time.
(d) The Shareholder understands the business in which Home
Retail is engaged and has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of his
investment in the Home Retail Shares and of making an informed investment
decision with respect thereto. The Shareholder has obtained sufficient
information to evaluate the merits and risks of his investments and to make such
a decision.
-14-
<PAGE>
(e) The Shareholder confirms that neither Home Retail nor any
of its affiliates or agents have made any representations or warranties (oral or
written) concerning Home Retail's investment in the Home Retail Shares, Home
Retail, its business, prospects or anticipated financial results, or other
matters, other than as set forth in the Home Retail Information.
4.22. Disclosure. This Agreement (except for Section 5), the
Exhibits hereto and the Financial Statements do not contain any untrue
statements of a material fact or omit or will omit to state any material fact
necessary to make the statements contained therein, in such light of the
circumstances under which they were made, not false or misleading.
5. Representations and Warranties of Home Retail. Home Retail
represents and warrants to the Shareholder as follows:
5.1. (a) Organization and Qualification. Home Retail is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite power and authority to own, lease
and operation its properties and carry on its business as it is now being
conducted.
(b) Exhibits 5.1(b)(i) and 5.1(b)(ii) attached hereto and
incorporated herein by reference are true, correct and complete copies, in full
force and effect, of Home Retail's Certificate of Incorporation and By-Laws, in
each case as amended. Home Retail is not in violation of any of the provisions
of its Certificate of Incorporation or By-Laws.
5.2. Disclosure Documents. Home Retail has heretofore furnished the
Shareholder, with true, correct and complete copies of the Plan of
Reorganization of Gaylord Companies, Inc., the Cookstore and Worthington, Inc.
dated June 19, 1998 as amended and supplemented, (the "Plan"), the Disclosure
Statement for the Plan dated June 19, 1998 and all exhibits thereto, as amended
and supplemented (collectively, the "Disclosure Documents"). The Plan has been
confirmed by the Bankruptcy Court for the Southern District of Ohio, Eastern
Division (the "Bankruptcy Court") by order dated July 10, 1998 ("Bankruptcy
Court Order") (which Bankruptcy Court Order has not been appealed) attached
hereto as Exhibit 5.2 and incorporated herein by reference. The Disclosure
Documents fairly summarize the business, operations, properties and management
of Home Retail and its subsidiaries as of the dates of filing. The Disclosure
Documents, as of respective dates on which such documents were confirmed by the
Bankruptcy Court, and the representations made by Home Retail herein do not and
did not contain any misstatements of a material fact or omit to state a material
fact necessary to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading.
5.3. Agreement. (a) This Agreement has been duly executed and
delivered by Home Retail and constitutes the legal and binding obligation of
Home Retail enforceable in accordance with its terms. The execution and delivery
by Home Retail of this Agreement, the consummation of the transactions
contemplated hereby, and the performance by Home Retail of its obligations
hereunder will not conflict with or result in any violation of, or default under
(either immediately or with notice or lapse of time), or in any right to
accelerate or the creation of any lien, charge or encumbrance pursuant, to any
provision of (a) the Certificate of Incorporation of Home Retail, (b) any
-15-
<PAGE>
agreement, contract, lease, license, note, bond, mortgage, indenture, deed of
trust or other instrument to which Home Retail is a party or by which any of
Home Retail's properties or other assets is bound, (c) any governmental
franchise, license, permit or authorization, or any judgment or order of any
tribunal or governmental body applicable to Home Retail, or any of Home Retail's
properties or other assets, or (d) any law, statute, decree, rule or regulation
of any jurisdiction.
(b) No authorization, consent or approval of, or declaration
of, filing with or notice to any governmental body or authority by Home Retail
is necessary for the execution of this Agreement by Home Retail, the
consummation by Home Retail of the transactions contemplated hereby or the
performance by Home Retail of its obligations hereunder other than the
satisfaction of the applicable requirements, if any, of (i) the Securities Act
or state securities, "Blue Sky" or takeover laws and (ii) other regulatory
rules, as required by law.
5.4. Capitalization. The authorized capital stock of Home Retail
consists of (i) 20,000,000 shares of Class A Voting Common Stock, par value $.01
per share, of which 1,535,945 shares are issued and outstanding, (ii) 156,000
shares of Class B Restricted Common Stock, par value $.01 per share, of which
156,100 shares are issued and outstanding, and (iii) one million (1,000,000)
shares of Serial Preferred Stock, $.01 par value per share, none of which shares
are issued and outstanding. All of the issued and outstanding shares of Home
Retail's capital stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Except as set forth on Exhibit 5.4
attached hereto and incorporated herein by reference, there are no options,
warrants, calls, subscriptions, convertible securities, or other rights or other
agreements or commitments of any character whatsoever obligating Home Retail to
issue or sell any shares of its capital stock, or any securities convertible
into or exchangeable or exercisable for or otherwise evidencing a right to
acquire any shares of its capital stock or other securities of any kind of Home
Retail. To the best knowledge of Home Retail, there are no voting trusts or
other agreements or understandings with respect to the voting of the capital
stock of Home Retail.
5.5. Home Retail Share. On the Conversion Date, (a) The Home Retail
Shares
(i) will, upon issuance in accordance with the terms of this
Agreement, be duly authorized, validly issued, fully paid, non-assessable and
free of preemptive rights; and
(ii) will be listed on the Nasdaq Small CAP Marketsm subject to
the notice of issuance which will be given on the Conversion Date.
(b) Upon delivery of Home Retail Shares as provided in Section
10.3 hereof, the Shareholder will acquire good, marketable and valid title
thereto, free and clear of any and all liens or other encumbrances.
-16-
<PAGE>
5.6. Information Requirements. On the Conversion Date, Home Retail
will meet the "information" requirements of Rule 144(c).
5.7. No Adverse Change. Since May 31, 1998 there has not been any
Material-Adverse Change in the financial condition, operations or business of
Home Retail, it being understood and agreed that any adverse changes generally
affecting national, regional or local economic conditions or adverse changes
generally affecting industry conditions as a whole shall not be construed to
constitute a breach of the foregoing representation.
5.8. Investment Representation. Home Retail represents and warrants
that it is acquiring the Aropi Shares for its own account only, for investment
purposes and not with a view to distribution and acknowledges that the Aropi
Shares are and will be "restricted securities" within the meaning of the Rules
and Regulations under the Securities Act, that the disposition of such
securities is subject to compliance with the registration and prospectus
provisions of the Securities Act, and that certificates for the securities
issued hereunder will bear a legend to that effect.
5.9. Brokers. No finder, broker, agent or other intermediary has
acted on behalf of Home Retail in connection with this Agreement or the
transactions contemplated hereby for whose fees the Company or the Shareholder
is liable.
5.10. Home Retail's Knowledge. Home Retail has no knowledge of any
inaccuracy in any of the representations and warranties of the Shareholder or
the Company contained in this Agreement or the Exhibits hereto which may give
rise to a claim for indemnification.
6. Covenants and Agreements of Home Retail. Home Retail covenants and
agrees as follows:
6.1. Retention of Records. To facilitate the resolution of any
claims made by or against or incurred by the Shareholder or the Company, or for
any other reasonable purpose, Home Retail shall, for a period of five years
after the date hereof, (a) retain the books and records of the Company which
Home Retail receives as a result of this transaction, and (b) upon reasonable
notice, afford the officers, employees, and authorized agents and
representatives of the Company reasonable access (including the right to make,
at the Company's expense, photocopies), during normal business hours, to the
books and records of the Company which the Company receives as a result of this
transaction; provided, however, that such investigation shall not unreasonably
interfere with the business or operations of Home Retail.
6.2. Payments at Closing. At the Closing, to provide the Company
with sufficient funds to pay in full the Closing Liabilities set forth on
Exhibit 6.2 attached hereto and incorporated herein by reference.
6.3. Further Assurances. Upon the request of the Shareholder or the
Company at any time after the Closing Date, to execute and deliver such
documents as the Shareholder or the Company may reasonably request or effectuate
the purposes of this Agreement.
-17-
<PAGE>
6.4. Payment of Obligations. From and after the Closing, to pay the
Current-Operating Liabilities of the Company in the ordinary course of business.
6.5. Lease. To enter into the Lease attached hereto as Exhibit 6.5
and incorporated herein by reference for the premises located at 4264-B Winters
Chapel Road, Atlanta, Georgia 30360.
6.6. Letter of Credit. At the Closing, Home Retail will provide the
Shareholder with a $250,000 irrevocable standby letter of credit similar to that
attached hereto as Exhibit 6.6 and incorporated herein by reference to secure
payment of both Convertible Promissory Notes ("Letter of Credit"). The Letter of
Credit shall have a maturity date of not less than fourteen (14) months from the
date of issuance.
7. Covenants and Agreements of Shareholder. To secure the Shareholder's
indemnification obligation set forth in Section 9 hereof and his covenant and
agreement to convert the Convertible Promissory Note No. 1 to Home Retail Shares
set forth in Section 10.3 hereof, the Shareholder covenants and agrees (i) to
place in escrow for a period of twelve (12) months from the Closing Date the
Convertible Promissory Note No. 1, or (ii) in the event the Convertible
Promissory Note No. 1 is converted, to place in escrow for a period of six (6)
months from the Closing Date a sufficient number of Home Retail Shares to equal
$125,000 (based upon the value of the shares on the Closing Date) pursuant to
the terms and conditions of the Convertible Promissory Note No. 1 and Stock
Escrow Agreement attached hereto as Exhibit 7 and incorporated herein by
reference.
8. Conditions Precedent.
8.1. Conditions Precedent to Each Party's Obligations. The
respective obligation of each party to consummate the transactions contemplated
in this Agreement is subject to the satisfaction at or prior to the Closing Date
of the following conditions precedent:
(a) no order, decree or injunction shall have been enacted,
entered, promulgated or enforced by any United States court of competent
jurisdiction or any United States governmental authority which prohibits the
consummation of the transactions contemplated herein; provided, however, that
the parties hereto shall use their commercially reasonable best efforts to have
any such order, decree or injunction vacated or reversed;
(b) the Shareholder and the Company shall have entered into a
three-year Employment Agreement in the form attached hereto as Exhibit 8.1(b)
and incorporated herein by reference; and
(c) the transactions contemplated by this Agreement shall (i)
be permitted by the laws and regulations of each jurisdiction or Governmental
Entity to which the Shareholder, the Company or any of their respective
Affiliates are subject and (ii) not violate any applicable law.
-18-
<PAGE>
8.2. Conditions Precedent to Obligations of the Shareholder and the
Company. The obligations of the Company and the Shareholder to consummate the
transactions contemplated in this Agreement are subject to the satisfaction or
waiver at or prior to the Closing Date of the following conditions precedent:
(a) the representations and warranties of Home Retail contained
in Section 5 shall be true and correct in all material respects when made and at
and as of the Closing Date with the same force and effect as if those
representations and warranties had been made at and as of such time except (i)
to the extent such representations and warranties speak as of a specified
earlier date, and (ii) as otherwise contemplated or permitted by this Agreement;
(b) Home Retail shall, in all material respects, have performed
all obligations and complied with all covenants necessary to be performed or
complied with by it on or before the Closing Date;
(c) all proceedings, corporate or other, to be taken by Home
Retail in connection with the transactions contemplated by this Agreement, and
all documents incident thereto, shall be reasonably satisfactory in form and
substance to the Company and the Shareholder and the Company's and the
Shareholder's counsel, and Home Retail shall have made available to the Company
and the Shareholder for examination the originals or true, correct and complete
copies of all documents that the Company or the Shareholder may reasonably
request in connection with the transactions contemplated by this Agreement;
(d) each of the representations and warranties of Home Retail
contained in this Agreement that contains a materiality qualifier shall be true
and accurate in all respects as of the date hereof and on the Closing Date, and
each of the representations and warranties of Home Retail contained in this
Agreement that does not contain a materiality qualifier shall be true and
accurate in all material respects as of the date hereof and on the Closing Date.
Home Retail shall have performed in all material respects all covenants and
agreements on their part required to be performed on or before the Closing Date;
(e) payment of the Purchase Price shall be made to the
Shareholder at the Closing in the amount and in the manner prescribed in Section
3.1;
(f) Home Retail shall have consummated the Loan and Financing
Agreement;
(g) the Shareholder and the Company shall have received copies,
certified by the duly qualified and acting Secretary or Assistant Secretary of
Home Retail, of resolutions adopted by the Board of Directors of Home Retail
approving the Closing Documents to which it is a party and the consummation of
the transactions contemplated by the Closing Documents;
-19-
<PAGE>
(h) the Shareholder and the Company shall have received an
opinion of Brown & Wood, Washington, D.C., counsel for Home Retail, dated the
Closing Date, in substantially the form set forth in Exhibit 8.2(h) attached
hereto and incorporated herein by reference and based on qualifications and
limitations that are reasonably acceptable to the Shareholder and the Company;
(i) Home Retail shall have executed and delivered the Lease;
(j) the stockholders of Home Retail shall have entered into a
mutually acceptable Tag Along Agreement similar to that attached hereto as
Exhibit 8.2(j) and incorporated herein by reference;
(k) at the Closing, the Company and the Shareholder shall have
received a certificate of a senior officer of Home Retail, in form satisfactory
to counsel for the Company and the Shareholder, certifying fulfillment of the
matters referred to in paragraphs (a) through (j) of this Section 8.2; and
(l) Home Retail shall have delivered the Letter of Credit.
8.3. Conditions Precedent to Obligations of Home Retail. The
obligations of Home Retail to consummate the transactions contemplated by this
Agreement are subject to the satisfaction or waiver at or prior to the Closing
Date of the following conditions precedent:
(a) there shall have occurred no Material-Adverse Change from
the date hereof to the Closing Date in the condition or affairs of the Company;
(b) the representations and warranties of the Shareholder and
the Company contained in Section 4 shall be true and correct in all material
respects when made and at and as of the Closing Date with the same force and
effect as if those representations and warranties had been made at and as of
such time except (i) to the extent such representations and warranties speak as
of a specified earlier date, and (ii) as otherwise contemplated or permitted by
this Agreement;
(c) the Shareholder and the Company shall have received all
necessary and material third party consents;
(d) the Shareholder and the Company shall, in all material
respects, have performed all obligations and complied with all covenants
necessary to be performed or complied with by each of them on or before the
Closing Date;
(e) Home Retail shall have received a certificate of the
President of the Company, in form satisfactory to counsel for Home Retail,
certifying fulfillment of the matters referred to in paragraphs (a) through (d)
of this Section 8.3;
-20-
<PAGE>
(f) all proceedings, corporate or other, to be taken by the
Shareholder or the Company in connection with the transactions contemplated by
this Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to Home Retail and Home Retail's counsel, and
the Shareholder and the Company shall have made available to Home Retail for
examination the originals or true, correct and complete copies of all documents
that Home Retail may reasonably request in connection with the transactions
contemplated by this Agreement;
(g) Home Retail shall have received (i) the opinion of Arnall
Golden & Gregory, LLP, counsel for the Shareholder and the Company, dated the
Closing Date, in substantially the form attached as Exhibit 8.3(g) hereto;
(h) Each director of the Company other than Shareholder and
each officer of the Company other than Shareholder shall have delivered a
written resignation effective as of the Closing Date;
(i) all options, warrants and other rights to purchase any
equity securities of the Company, if any, shall be irrevocably cancelled and any
instruments or agreements evidencing such options, etc, shall be delivered to
Home Retail for cancellation.
(j) the Shareholder and the Company shall have delivered to
Home Retail (i) a long form good standing certificate from the Secretary of
State of Iowa confirming as of a date within five days of the Closing Date the
good standing of the Company and a good standing certificate from any state in
which the Company is qualified to do business and (ii) a copy of the current
Certificate of Incorporation of the Company certified by the Secretary of State
of Iowa.
9. Indemnification.
9.1. Survival of Representations and Warranties.
All covenants and agreements shall survive the Closing in
accordance with their terms. The representations and warranties contained in
Sections 4 and 5 of this Agreement shall survive any investigation by either
party and the Closing but shall expire and be extinguished on the secondary
anniversary of the Closing Date, except that (i) the representations and
warranties of the Shareholder set forth in Sections 4.3(d) and (e) shall survive
without limitation as to time, and (ii) the representations and warranties of
the Shareholder set forth in Section 4.15 shall survive until 90 days after
expiration of the applicable statute of limitations for any affected taxable
period. No action for indemnification under this Section 9 may be brought with
respect to such representations and warranties after the applicable date
indicated in the preceding sentence unless, before the date such representations
and warranties expire, the party seeking indemnification has notified in
reasonable detail in writing the party from whom indemnification is sought of a
claim for indemnity hereunder.
9.2. Indemnification by the Shareholder. Subject to the limitations
set forth in this Section 9, from and after the Closing, the Shareholder agrees
to indemnify and defend Home Retail and the Company, and hold Home Retail and
the Company harmless from and against any loss, liability, damage, penalty,
claim or expense, including reasonable attorneys' and technical consultants'
-21-
<PAGE>
fees and other costs and expenses (collectively, "Damage") incurred or sustained
by Home Retail or the Company as a result of or relating to the non-fulfillment
or breach of covenant or agreement or the breach of any representation or
warranty of the Shareholder set forth in this Agreement. As security for the
payment of amounts which may be due to Home Retail pursuant to this Section 9,
the Shareholder shall deliver to the Escrow Agent the Convertible Promissory
Note No. 2 to be held and disposed of by the Escrow Agent pursuant to the terms
of the Stock Escrow Agreement.
9.3. Indemnification by Home Retail. Home Retail agrees to indemnify
and hold harmless the Shareholder from and against any and all Damages, as
defined in Section 9.2 above, the Shareholder may suffer or incur, resulting
from or arising out of the non-fulfillment or breach of any covenant or
agreement or the breach of any representation or warranty of Home Retail in this
Agreement.
9.4. Indemnification Procedures. A party entitled to indemnification
hereunder shall herein be referred to as an "Indemnitee." A party obligated to
indemnify an Indemnitee hereunder shall herein be referred to as an
"Indemnitor." Promptly after receipt by an Indemnitee of notice of any claim or
the commencement of any action, or upon discovery of any facts which an
Indemnitee believes may give rise to a claim for indemnification from an
Indemnitor hereunder, such Indemnitee shall, if a claim in respect thereof is to
be made against an Indemnitor under this Section 9, notify such Indemnitor in
writing in reasonable detail of the claim or the commencement of such action. If
any such claim shall be brought against such Indemnitee, it shall notify the
Indemnitor thereof, the Indemnitor shall be entitled to participate therein, and
to assume the defense thereof with counsel reasonably satisfactory to the
Indemnitee, and to settle or compromise any such claim or action; provided that
the terms of such settlement or compromise provide for the unconditional release
of the Indemnitee and require the payment by the Indemnitor of monetary damages
only. After notice to the Indemnitee of the Indemnitor's election to assume the
defense of such claim or action, the Indemnitor shall be entitled to participate
therein, and to assume the defense thereof with counsel reasonably satisfactory
to the Indemnitee, and to settle or compromise any such claim or action;
provided that the terms of such settlement or compromise provide for the
unconditional release of the Indemnitee and require the payment by the
Indemnitor of monetary damages only. After notice to the Indemnitee of the
Indemnitor's election to assume the defense of such claim or action, the
Indemnitor shall not be liable to the Indemnitee under this Section 9 for any
legal or other expenses subsequently incurred by the Indemnitee in connection
with the defense thereof; provided, however, that the Indemnitee shall have the
right to employ counsel to represent it if, in the Indemnitee's reasonable
judgment, it is advisable for the Indemnitee to be represented by separate
counsel, and in that event the fees and expenses of such separate counsel shall
be paid by the Indemnitee. If the Indemnitor does not elect to assume the
defense of such claim or action, the Indemnitee shall act reasonably and in
accordance with its good faith business judgment with respect thereto, and shall
not settle or compromise any such claim or action without the consent of the
Indemnitor, which consent shall not be unreasonably withheld. The parties hereto
agree to render to each other such assistance as may reasonably be requested in
order to insure the proper and adequate defense of any such claim or proceeding.
-22-
<PAGE>
9.5. Limits to the Right to Indemnification. As Indemnitee's rights
to indemnification under this Section 9 shall be limited as follows:
(a) The Indemnitee shall be entitled to indemnification with
respect to a breach of a representation or warranty, and with respect to
indemnification as may be owed by the Shareholder under Section 9.2, only if the
aggregate amount of all such Damages for which indemnification is otherwise
available hereunder exceeds $125,000. If such Damages owed by the Indemnitor
exceed $125,000, then the Indemnitor shall be liable to the full extent the
Damages exceed $50,000. The maximum aggregate amount of indemnification payable
by the Shareholder or Home Retail under this Agreement shall not exceed
$125,000.
(b) Any indemnification hereunder shall be net of:
(i) any insurance proceeds recovered by the Shareholder,
Home Retail, the Company or any subsidiary on account of, or applicable to, the
satisfaction of claims for which indemnification is provided hereunder,
provided, however, that the term "insurance proceeds", as used in this
subdivision, shall mean the payment received under any applicable insurance
policy less the amount of additional premium payable, or the reduction of any
premium refund, consequent to the application of any retrospective loss
adjustment provisions of such insurance policy to such insurance payments; and
(ii) any Tax Benefit. As used in this Section 9.5, "Tax
Benefit," with respect to any Damage shall mean any reduction in the net federal
or state income tax liability of the Shareholder or the Company or the entity
filing consolidated tax returns which will following the Closing include the
Company, as a result of such Damage, provided, that any calculation of Tax
Benefit, with respect to any Damage, shall include any increase in federal
income tax liability attributable to a reduction in state or local taxes as a
result of such loss.
(c) No indemnification shall be available with respect to the
breach of any representation or warranty made herein if the party claiming
indemnification had received written notice prior to the Closing that the
Indemnitor was in breach of such representation and warranty.
9.6. Exclusive Remedy. The rights to indemnification provided by
this Section 9 shall be exclusive and shall be construed to exclude and preclude
the exercise of, and shall be in substitution and replacement of, any other
rights of the parties hereto, express or implied, under this Agreement or
applicable law, except in the event of a fraudulent breach of a representation,
warranty or covenant contained in this Agreement.
10. Joint Covenants and Agreements of Home Retail, the Shareholder and
the Company.
10.1. Indebtedness to Dennis Kaas. At the Closing, the Company
shall pay in full any and all monies due or owing to Dennis T. Kaas in regard to
(i) the Stock Redemption Agreement dated December 31, 1994, evidenced by (a) the
-23-
<PAGE>
Promissory Note dated December 31, 1994 in the original principal amount of
$500,000.00 and (b) the Promissory Note dated December 31, 1994 in the original
principal amount of $92,554.00, (ii) the Employment Agreement and (iii) the
Covenant Not to Compete set forth on Exhibit 10.1 attached hereto and
incorporated herein by reference.
At the Closing, the Shareholder shall deliver to the Company the stock
certificate of Dennis Kaas for 174 shares of the Company's Class A Voting Common
Stock which shares have been held in escrow pursuant to the Stock Redemption
Agreement with the appropriate Stock Power attached thereto and a letter
authorizing the Company to cancel the stock certificate of record.
10.2. Tax Distributions. Before the Closing, the Company shall be
entitled to make cash distributions to its shareholders in amounts equal to the
estimated federal and state income Tax payments due on September 15, 1998 and
January 15, 1999 with respect to the Company's fiscal year ended December 31,
1998, in each case calculated consistent with past practices and distributed no
more than 20 days before the respective dates on which those payments are due;
provided, however, that the Purchase Price shall be reduced by an amount equal
to the distributions made.
10.3. Conversion of Convertible Promissory Notes. If within 365 days
of the Closing Date, Home Retail shall have completed the Offering, the
Shareholder covenants and agrees and Home Retail covenants and agrees to convert
and exchange the Convertible Promissory Notes (or Convertible Promissory Note
No. 1 plus $250,000 cash) for shares of the Class A Voting Common Stock of Home
Retail, par value of $.01 per share having a fair market value as of the
Conversion Date of not less than $500,000 which shares as of the Conversion Date
shall represent not less than 2% of all of the issued and outstanding shares of
Home Retail on a fully diluted basis. The interest accrued on the Convertible
Promissory Notes shall be paid when due irrespective of whether the principal of
the Convertible Promissory Notes has been converted to Home Retail Shares.
The Shareholder's obligation to convert the Convertible Promissory
Notes is conditioned on (i) the capital structure of Home Retail (on the
Conversion Date) being not less than that described in Exhibit 10.3 attached
hereto and incorporated herein by reference and (ii) Home Retail delivering
evidence satisfactory to the Shareholder that Home Retail has received at least
Five Million Dollars ($5,000,000.00) for the purchase of its Common Stock and/or
Preferred Stock (other than the stock to be purchased by Shareholder) from the
Offering. If the Offering has not been completed within 365 days from the Date
of Closing, the Shareholder's obligation to convert the Convertible Promissory
Notes shall terminate forthwith.
10.4. Delivery of Home Retail Shares. On the Conversion Date, Home
Retail will deliver to Shareholder (or the Escrow Agent if the Conversion Date
is within 180 days of the Closing Date) certificates representing the Home
Retail Shares in exchange for the Convertible Promissory Notes duly endorsed.
-24-
<PAGE>
11. Termination.
11.1. Termination. This Agreement may be terminated at any time
before the Closing:
(a) by the mutual written consents of Home Retail, the
Shareholder and the Company; or
(b) by either Home Retail, the Shareholder or the Company (by
written notice) if the Closing shall not have occurred on
or before October 15, 1998, provided, however, that the
right to terminate this Agreement under this Section
11.1(b) shall not be available to any party whose failure
to fulfill any obligation under this Agreement shall have
been the cause of, or shall have resulted in, the failure
of the Closing to occur on such date, and nothing
contained herein shall relieve such party from liability
for breach of this Agreement.
11.2. Effect of Termination. Upon termination of this Agreement
pursuant to Section 11.1, neither Home Retail nor the Shareholder nor the
Company shall have any further duties, obligations, or liabilities under this
Agreement except for the confidentiality obligations set forth in the
Confidentiality Agreement attached hereto as Exhibit 11.2 and incorporated
herein by reference, and the obligations for expenses under the Escrow
Agreement.
12. Miscellaneous.
12.1. Expenses. Home Retail shall pay its expenses and costs,
including, without limitation, expenses of their respective counsel and
auditors, incidental to the preparation of this Agreement, the performance and
compliance with all agreements and conditions contained in this Agreement to be
performed or complied with by them and the consummation of the transactions
contemplated hereby and thereby. Home Retail acknowledges and agrees that the
professional fees and expenses of the Company and the Shareholder incurred in
regard to (i) this transaction and (ii) the preparation of the various
agreements and documents related to the Agreement have been billed to and will
be paid by the Company at or prior to the Closing. The Shareholder expressly
stipulates that except as set forth in the preceding sentence, the Company shall
not pay or be liable for any expenses and costs of the Shareholder in connection
with this Agreement or the transaction contemplated hereby. Home Retail shall be
responsible for the payment of fees and expenses owed to any finder, agent or
broker who has acted on behalf of Home Retail in connection with this Agreement
or the transactions contemplated hereby.
12.2. Notices, etc. Any and all notices and other communications
made pursuant to this Agreement shall be in writing and shall be deemed to have
been given if delivered by personal delivery or by messenger or overnight
delivery or facsimile, or mailed by registered or certified mail, to the parties
at the following addresses (or such other address for a party as shall be
specified by notice given, from time to time, pursuant hereto):
-25-
<PAGE>
If to Home Retail, to:
Home Retail Holdings, Inc.
c/o Cambridge Holdings LLC
535 Madison Avenue
New York, NY 10022-4212
Attention: David E. Danovitch
Fax: (212) 508-6501
with a copy to:
Brown & Wood, LLP 815 Connecticut Avenue, N.W.
Suite 701
Washington, DC 20006
Attention: William E. Sudow, Esq.
Fax: (202) 223-0485
If to the Shareholder:
Mr. Glenn Kaas
4135 Station Mill Court
Norcross, Georgia 30092
Fax: (770) 448-9758
with a copy to:
Arnall Golden & Gregory, LLP
2800 One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309
Attention: Jack K. Holland, Esq.
Fax: (404) 873-8611
If to the Company:
Aropi, Incorporated
4264-B Winters Chapel Road
Atlanta, GA 30360
Attention: Glenn Kaas, President
12.3. Further Assurances. The parties hereto shall do and perform
or cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments or
documents as the other party hereto may reasonably request in order to carry out
the intent and purposes of this Agreement and the consummation of the
transactions contemplated hereby.
-26-
<PAGE>
12.4. Amendments, etc. This Agreement may be amended, waived,
discharged or terminated only by an instrument in writing executed by the party
against which enforcement of such amendment, waiver, discharge or termination is
sought.
12.5. Miscellaneous. The headings in this Agreement are for
convenience of reference only and shall not constitute a part of this Agreement.
This Agreement shall be construed in accordance with the laws of the State of
Georgia without regard to principles of conflicts of laws. This Agreement may be
executed in several counterparts, each of which is an original but all of which
shall constitute one instrument. Any term or provision of this Agreement which
is invalid or unenforceable shall be ineffective to the extent of such
invalidity or unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement. Neither this Agreement nor any
rights or obligations hereunder may be assigned by one party without the consent
of the other. Subject to the previous sentence, this Agreement shall be binding
upon and inure to the benefit of the successors and assigns of Home Retail and
the successors, assigns, heirs, administrators, executors and legal
representatives of the Shareholder. Time is of the Essence.
12.6. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be one and the same Agreement and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to each of the other parties.
12.7. Entire Agreement. This Agreement, the exhibits to this
Agreement and the Escrow Agreement constitute the entire understanding and
agreement among the parties with respect to the subject matter hereof and shall
supersede any prior agreements, representations and understandings among the
parties with respect to such subject matter, including without limitation that
certain Summary of Terms dated May 6, 1998 by and between Home Retail
Acquisition Corporation and Aropi, Inc. d/b/a Rolling Pin/Kitchen Emporium. No
representations or disclosures, whether oral or in writing, made before the date
hereof, but not made or confirmed herein, shall be of any force or effect, and
the parties acknowledge and agree that they have not relied on any such
representations or disclosures in entering into this Agreement. Prior drafts of
this Agreement shall not be used as a basis for interpreting this Agreement.
12.8. Public Announcements. Any press release or other public
disclosure issued or made by either Home Retail or the Shareholder or the
Company relating to the transactions contemplated hereby shall be first provided
in draft form to the other party, as the case may be, and such other party shall
have the opportunity within a reasonable period of time to review and comment on
such draft before it is released; provided that approval of such press release
or other public disclosure shall not be required if any party is advised by its
legal counsel that disclosure is required by law.
-27-
<PAGE>
12.9. Exhibits. The information disclosed on any Exhibit hereto
shall be deemed to have been disclosed in every other Exhibit where the
disclosure of such information would be pertinent. The parties hereto may, at
their option, include in the Exhibits or elsewhere items which by virtue of such
disclosure shall be deemed not to be material or to have a Material-Adverse
Effect to avoid any misunderstanding, and such inclusion shall not be deemed to
be an acknowledgment by a party hereto that such items would but for such
disclosure be material or have a Material-Adverse Effect.
12.10. Knowledge. Whenever in this Agreement a reference is made to
the "knowledge" of the Company or the Shareholder, such reference shall mean the
actual knowledge of the Shareholder, without giving effect to imputed knowledge,
and does not connote a duty to investigate or an obligation to know.
-28-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
HOME RETAIL:
HOME RETAIL HOLDINGS, INC.
By: /S/ DAVID E. DANOVITCH
----------------------
Name:
Title:
THE SHAREHOLDER:
/S/ GLENN KAAS
-------------------------
Glenn Kaas
THE COMPANY:
AROPI, INCORPORATED
By: /S/ GLENN KAAS
---------------------
Name:
Title:
-29-
<PAGE>
Exhibits
Exhibit 1(j) Closing documents
Exhibit 1(aa) List of Loan Documents
Exhibit 1(ab) Material-Adverse Effect or Material-Adverse Change
Exhibit 1(ad) Offering
Exhibit 1(ae) Offering Price
Exhibit 3.1(b)(i) Convertible Promissory Note No. 1
Exhibit 3.1(b)(ii) Convertible Promissory Note No. 2
Exhibit 4.1(b)(i) Certificate of Incorporation of Aropi
Exhibit 4.1(b)(ii) By-Laws of Aropi
Exhibit 4.2 Voting trusts and other agreements
Exhibit 4.3(c) Distribution of Stock or Dividends
Exhibit 4.4 May 1998 Balance Sheet
Exhibit 4.5 Leased property
Exhibit 4.7 List of Patents, trademarks, trade names, registered
copyrights
Exhibit 4.8 List of Salaries and Bonuses of each Director, Officer, and
Consultant or Agent Paid in Excess of $30,000 per year
Exhibit 4.10 List of Directors and Officers of the Company and
Bank Accounts
Exhibit 4.12 Changes with regard to Company's assets
Exhibit 4.13 Litigation
Exhibit 4.14 List of contracts and agreements
Exhibit 4.15 Exceptions to any tax returns
Exhibit 4.16 List of licenses
Exhibit 4.17 Employee benefit plans
Exhibit 4.18 List of insurance policies
<PAGE>
Exhibit 5.1(b)(i) Certificate of Incorporation of Home Retail
Exhibit 5.1(b)(ii) By-Laws of Home Retail
Exhibit 5.2 Order of Bankruptcy Court
Exhibit 5.4 Options, warrants, calls, etc. of Home Retail
Exhibit 6.2 Closing Liabilities
Exhibit 6.5 Lease for 4264-B Winters Chapel Road, Atlanta,
Georgia 30360
Exhibit 6.6 Letter of Credit from Home Retail
Exhibit 7 Convertible Promissory Note No. 1 and Stock Escrow
Agreement
Exhibit 8.1(b) Employment Agreement between Shareholder & Company
Exhibit 8.2(h) Opinion letter from Brown & Wood, LLP
Exhibit 8.2(j) Tag Along Agreement
Exhibit 8.3(g) Opinion letter from Arnall Golden & Gregory, LLP
Exhibit 10.1 Indebtedness to Dennis Kaas
Exhibit 10.3 Capital Structure of Home Retail
Exhibit 11.2 Confidentiality Agreement
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
HOME RETAIL HOLDINGS, INC.
Home Retail Holdings, Inc., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation (the "Corporation") is Home
Retail Holdings, Inc. (formerly Gaylord Companies, Inc.), and its original
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on July 19, 1994.
2. This Amended and Restated Certificate of Incorporation of
the Corporation restates and integrates and further amends the Certificate of
Incorporation of the Corporation, as the same heretofore has been amended,
supplemented or restated (the "Certificate of Incorporation").
3. The text of the Certificate of Incorporation is hereby
further amended and restated to read in full as herein set forth:
FIRST: The name of the Corporation is Home Retail Holdings,
Inc.
SECOND: The address of its registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, Delaware, 19805, County of New
Castle. The name of the registered agent at such address is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which Corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH:
(a) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is twenty-one million one hundred
fifty-six thousand (21,156,000), which are divided into twenty million
(20,000,000) shares of Class A Common Stock of a par value of $0.01 per share
("Class A Common Stock"), one hundred fifty-six thousand (156,000) shares of
Class B Restricted Common Stock of a par value of $0.01 per share ("Class B
Common Stock") and one million (1,000,000) shares of Serial Preferred Stock of a
par value of $0.01 per share ("Preferred Stock"). The Class A Common Stock and
Class B Common Stock shall have the same rights, privileges and preferences
except that the Class B Common Stock (i) shall have no dividend or liquidation
rights except as otherwise required under the General Corporation Law of the
State of Delaware, and (ii) shall not be transferable except by operation of law
in the event of the death, bankruptcy or liquidation of the holder thereof. Each
share of Class B Common Stock shall be automatically converted into one share of
Class A Common Stock (the "Conversion Rate") in any one of the following events
(each, a "Trigger Event"): (i) the closing sale price for twenty (20)
consecutive trading days of the Class A Common Stock as quoted on Nasdaq or, if
such shares are not trading on Nasdaq, then on the principal market on which
such
<PAGE>
shares shall then be trading exceeds $11.57 per share of Class A Common
Stock (the "Trigger Price") or (ii) of a sale of all or substantially all the
assets of the Corporation, a sale of all the equity interests of the Corporation
or a merger or consolidation of the Corporation with or into another entity in
which the Corporation is not the surviving entity pursuant to which the holders
of Class A 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
provided in ARTICLE FOURTH Subsection (b) hereof. As soon as practicable after a
Trigger Event, the Corporation 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 Class A 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 the Corporation, shall receive in exchange therefor a certificate or
certificates representing the number of whole shares of Class A Common Stock
which such holder shall be entitled to receive as provided herein. The
certificate or certificates so surrendered shall be duly endorsed as the
Corporation may require. Subject to the following provision of this ARTICLE
FOURTH Subsection (a), 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 Class A Common Stock as provided herein. No dividend or other
distribution payable with respect to the Class A 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 as provided in this ARTICLE FOURTH Subsection (a). All
shares of Class A 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 or certificates pursuant to this ARTICLE FOURTH
Subsection (a). The Corporation shall at all times reserve a number of shares of
authorized but unissued Class A 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.
(b) In order to prevent dilution of the conversion rights
granted to the Class B Common Stock under this ARTICLE FOURTH, the Conversion
Rate and Trigger Price will be subject to adjustment from time to time pursuant
to this ARTICLE FOURTH Subsection (c) as follows:
(i) If the Corporation at any time subdivides (by any stock
split, stock dividend or otherwise) its outstanding shares of Class A
Common Stock into a greater number of shares, the Conversion Rate and
the Trigger Price in effect immediately prior to such subdivision will
be proportionately increased and reduced, respectively, and if the
Corporation at any time combines (by reverse stock split or otherwise)
its outstanding shares of Class A Common Stock into a smaller number of
shares, the Conversion Rate
2
<PAGE>
and the Trigger Price in effect immediately prior to such combination
will be proportionately reduced and increased, respectively.
(ii) If the Corporation at any time subdivides (by any stock
split, stock dividend or otherwise) its outstanding shares of Class B
Common Stock into a greater number of shares, the Conversion Rate in
effect immediately prior to such subdivision will be proportionately
reduced, and if the Corporation at any time combines (by reverse stock
split or otherwise) its outstanding shares of Class B Common Stock into
a smaller number of shares, the Conversion Rate in effect immediately
prior to such combination will be proportionately increased.
(iii) After any reorganization or any consolidation or merger
of the Corporation or any sale, lease, mortgage, pledge, exchange,
transfer, or other disposition of all or substantially all of the
assets of the Corporation other than a Trigger Event, the holders of
Class B Common Stock shall thereafter be entitled to receive, upon
conversion in accordance with ARTICLE FOURTH Subsection (a), the kind
and amount of shares or other securities or property which they would
have been entitled to receive had they converted their shares of Class
B Stock into shares of Class A Common Stock of the Corporation as of
the record date for the determination of holders of Class A Common
Stock entitled to cast their votes for or against or to express any
dissent to such reorganization, consolidation, merger, sale, lease,
exchange, or other disposition; and, after the happening of one or more
of the aforesaid events, if any, the rights of the holders of Class B
Common Stock with respect to the adjustment of the Conversion Rate and
Trigger Price shall be appropriately continued and preserved in order
to afford, as nearly as possible, protection against dilution of the
conversion rights and privileges comparable to those conferred herein.
(iv) In the event of a judicial or non-judicial dissolution of
the Corporation, the conversion rights and privileges of the holders of
Class B Common Stock in accordance with ARTICLE FOURTH Subsection (a)
shall terminate on a date, as fixed by the Board of Directors of the
Corporation, not more than 45 days and not less than 30 days before the
date of such dissolution. The reference to shares of Class A Common
Stock in this Subsection (b) shall be deemed to include shares of any
class into which said shares of Class A Common Stock may be changed.
(c) The Board of Directors of the Corporation is expressly
authorized at any time, and from time to time, to provide for the issuance of
shares of Preferred Stock in one or more series, with such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations, or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issue thereof
adopted by the Board of Directors.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed
between the Corporation and its creditors or any class of them and/or between
the Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of
3
<PAGE>
Delaware may, on the application in a summary way of the Corporation or of any
creditor or stockholder thereof or on the application of any receiver or
receivers appointed for the Corporation under the provisions of ss.291 of Title
8 of the Delaware Code or on the application of trustees in dissolution or of
any receiver or receivers appointed for the Corporation under the provisions of
ss.279 of Title 8 of the Delaware Code, order a meeting of the creditors or
class of creditors and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
SEVENTH: For the management of the business and for the
conduct of the affairs of the Corporation, and in further definition,
limitation, and the regulation of the powers of the Corporation and of its
directors and of its stockholders or any class thereof, as the case may be, it
is further provided:
1. Number of Directors. The management of the business and the
conduct of the affairs of the Corporation shall be vested in its Board
of Directors. The number of directors which shall constitute the whole
Board of Directors shall be fixed by, or in the manner provided in, the
Bylaws. The phrase "whole Board" and the phrase "total number of
directors" shall be deemed to have the same meaning, to wit, the total
number of directors which the Corporation would have if there were no
vacancies. No election of directors need be by written ballot.
2. Terms of Directors. Except as otherwise provided in or
fixed by or pursuant to the provisions of Article FOURTH hereof
relating to the rights of the holders of any class or series of stock
having a preference over the Class A Common Stock as to dividends or
upon liquidation or to elect directors under specified circumstances,
the directors shall be classified, with respect to the time for which
they severally hold office, into three classes, as nearly equal in
number as possible, as shall be provided in the manner specified in the
By-Laws of the Corporation. One class shall be originally elected for a
term expiring at the annual meeting of stockholders to be held in 1999,
another class shall be originally elected for a term expiring at the
annual meeting of stockholders to be held in 2000, and another class
shall be originally elected for a term expiring at the annual meeting
of stockholders to be held in 2001, with each member of each class to
hold office until a successor is elected and qualified. At each annual
meeting of stockholders of the Corporation and except as otherwise
provided in or fixed by or pursuant to the provisions of Article FOURTH
hereof relating to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, the
successors of the class of directors whose term expires at that meeting
shall be elected to hold office for a term of three years.
4
<PAGE>
3. Newly Created Directorships and Vacancies. Except as
otherwise required by law and except as otherwise provided in or fixed
by or pursuant to the provisions of Article FOURTH hereof relating to
the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation to
elect directors under specified circumstances: (i) newly created
directorships resulting from any increase in the number of directors
and any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other cause shall be filled
by the affirmative vote of a majority of the remaining directors then
in office, even though less than a quorum of the Board of Directors;
(ii) any director elected in accordance with the preceding clause (i)
shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy
occurred and until such director's successor shall have been elected
and qualified; and (iii) no decrease in the number of directors
constituting the Board of Directors shall shorten the term of any
incumbent director.
4. Removal. Except as otherwise provided in or fixed by or
pursuant to the provisions of Article FOURTH hereof relating to the
rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation to
elect directors under specified circumstances, any director may be
removed from office only for cause by the affirmative vote of the
holders of at least a majority of the combined voting power of the then
outstanding shares of the Corporation's stock entitled to vote
generally, voting together as a single class. Whenever in this Article
SEVENTH hereof, the phrase, "the then outstanding shares of the
Corporation's stock entitled to vote generally" is used, such phrase
shall mean each then outstanding share of any class or series of the
Corporation's stock that is entitled to vote generally in the election
of the Corporation's directors.
5. Amendment or Repeal of this Article. Notwithstanding any
other provisions of this Article SEVENTH or any other Article hereof or
of the By-Laws of the Corporation (and notwithstanding the fact that a
lesser percentage may be specified from time to time by law, this
Article SEVENTH, any other Article hereof, or the By-Laws of the
Corporation), the provisions of this Article SEVENTH may not be
altered, amended or repealed in any respect, nor may any provision
inconsistent therewith be adopted, unless such alteration, amendment,
repeal or adoption is approved by the affirmative vote of at least 75%
of the combined voting power of the then outstanding shares of the
Corporation's capital stock entitled to vote generally, voting together
as a single class.
6. Amendment of Bylaws. The power to adopt, amend, or repeal
the By-Laws of the Corporation may be exercised by the Board of
Directors of the Corporation, unless otherwise provided in the By-Laws.
7. Voting Power. Whenever the Corporation shall be authorized
to issue only one class of stock, each outstanding share shall entitle
the holder thereof to notice of, and the right to vote at, any meeting
of stockholders. Whenever the Corporation shall be authorized to issue
more than one class of stock, no outstanding share of any class of
stock which is denied voting power under the provisions of the
Certificate of Incorporation shall entitle the holder thereof to the
right to vote at any meeting of
5
<PAGE>
stockholders except as the provisions of paragraph (2) of subsection
(b) of 242 of the General Corporation Law of the State of Delaware
shall otherwise require; provided, that no share of any such class
which is otherwise denied voting power shall entitle the holder thereof
to vote upon the increase or decrease in the number of authorized
shares of said class.
EIGHTH: The personal liability of the directors of the
Corporation is hereby eliminated to the fullest extent permitted by the
provisions of paragraph (7) of subsection (b) of ss.102 of the General
Corporation Law of the State of Delaware, as the same may be amended and
supplemented. No amendment or repeal of this Article EIGHTH shall apply to or
have any effect on the liability or alleged liability of any director of this
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
NINTH: The Corporation shall, to the fullest extent permitted
by the provisions of ss. 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify, and upon
request advance 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 this Corporation or while a director or officer is
or was serving at the request of this Corporation 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); provided, however, that the foregoing
shall not require this Corporation to indemnify or advance expenses to any
person in connection with any action, suit, proceeding, claim or counterclaim
initiated by or on behalf of such person other than solely to enforce rights
under this ARTICLE NINTH. The indemnification provided for herein shall not be
deemed 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 his 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 under this Article NINTH shall be deemed to have
met the standard of conduct required for such indemnification unless the
contrary shall be established by a court of competent jurisdiction. No amendment
or repeal of the foregoing provisions of this Article NINTH shall adversely
affect any right or protection of a director or officer of the Corporation with
respect to any acts or omissions of such director or officer occurring prior to
such amendment or repeal.
TENTH: From time to time any of the provisions of this
Certificate of Incorporation may be amended, altered, or repealed, and the
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted in the manner and at the time prescribed by said laws,
and all rights at any time conferred upon the stockholders of the Corporation by
this Certificate of Incorporation are granted subject to the provisions of this
Article TENTH.
6
<PAGE>
ELEVENTH: The Corporation hereby elects to be governed by
Section 203 of the Delaware General Corporation Law.
TWELFTH: If at any time the Corporation shall have a class of
stock registered pursuant to the provisions of the Securities Exchange Act of
1934, for so long as such class is so registered, any action by the stockholders
of such class must be taken at an annual or special meeting of stockholders and
may not be taken by written consent.
THIRTEENTH: The Board of Directors of the Corporation, when
evaluating any offer of another party (a) to make a tender or exchange offer for
any equity security of the Corporation or (b) to effect a business combination,
shall, in connection with the exercise of its judgment in determining what is in
the best interests of the Corporation as a whole, be authorized to give due
consideration to any such factors as the Board of Directors determines to be
relevant, including without limitation:
a. the interests of the Corporation's stockholders;
b. whether the proposed transaction might violate federal or
state laws;
c. not only the consideration being offered in the proposed
transaction, in relation to the then current market price
for the outstanding capital stock of this Corporation, but
also to the market price for the capital stock of the
Corporation over a period of years, the estimated price
that might be achieved in a negotiated sale of the
Corporation as a whole or in part or through orderly
liquidation, the premiums over market price for the
securities of other corporations in similar transactions,
current political, economic and other factors bearing on
securities prices and the Corporation's financial
condition and future prospects; and
d. the social, legal and economic effects upon employees,
suppliers, customers and others having similar
relationships with the Corporation, and the communities in
which the Corporation conducts its business.
In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and engage in such legal proceedings as the Board of
Directors may determine.
FOURTEENTH: Notwithstanding any other provisions of this
Certificate of Incorporation or the Bylaws (and notwithstanding the fact that a
lesser percentage may be specified by law, this Certificate of Incorporation or
the Bylaws of this Corporation), the affirmative vote of 75% of the total number
of votes of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend or repeal, or to adopt any provision
inconsistent with the purpose or intent of ARTICLES SEVENTH, EIGHTH, NINTH,
TENTH, ELEVENTH, TWELFTH, THIRTEENTH and this ARTICLE FOURTEENTH. Notice of any
such proposed amendment, repeal or adoption, shall be contained in the notice of
the meeting at which it is to be
7
<PAGE>
considered. Subject to the provisions set forth herein, this Corporation
reserves the right to amend, alter, repeal or rescind any provision contained in
this Certificate of Incorporation in the manner now or hereafter prescribed by
law.
4. This Amended and Restated Certificate of Incorporation was
duly adopted in accordance with Sections 242, 245 and 303 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Amended
and Restated Certificate of Incorporation to be signed and attested to by its
duly authorized officers on this 16th day of August, 1998.
HOME RETAIL HOLDINGS, INC.
ATTEST:
By: /S/ GREG DUKOFF By: /S/ DAVID DANOVITCH
--------------- --------------------
Secretary
<PAGE>
RESTATED AND AMENDED
BYLAWS
OF
HOME RETAIL HOLDINGS, INC.
(a Delaware corporation)
Effective 1998
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in
the Corporation shall be signed by, or in the name of, the Corporation by the
Chairman or Vice-Chairman of the Board of Directors, if any, or by the President
or a Vice President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Corporation. Any or all the
signatures on any such certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
Whenever the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class of stock, and whenever the
Corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The Corporation may issue a new certificate of stock or uncertificated
shares in place of any certificate theretofore issued by it, alleged to have
been lost, stolen, or destroyed, and the Board of Directors may require the
owner of the lost, stolen, or destroyed certificate, or his legal
representative, to give the Corporation a bond sufficient to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the
General Corporation Law, the Board of Directors of the Corporation may provide
by resolution or resolutions that some or all of any or all classes or series of
the stock of the Corporation shall be uncertificated shares. Within a reasonable
time after the issuance or transfer of any uncertificated shares, the
Corporation shall send to the registered owner thereof any written notice
prescribed by the General Corporation Law.
<PAGE>
3. FRACTIONAL SHARE INTERESTS. The Corporation may, but shall not be
required to, issue fractions of a share. If the corporation does not issue
fractions of a share, it shall (1) arrange for the disposition of fractional
interests by those entitled thereto, (2) pay in cash fair value of fractions of
a share as of the time when those entitled to receive such fractions are
determined, or (3) issue scrip or warrants in registered form (either
represented by a certificate or uncertificated) or bearer form (represented by a
certificate) which shall entitle the holder to receive a full share upon the
surrender of such scrip or warrants aggregating a full share. A certificate for
a fractional share or an uncertificated fractional share shall, but scrip or
warrants shall not unless otherwise provided therein, entitle the holder to
exercise voting rights, to receive dividends thereon, and to participate in any
of the assets of the Corporation in the event of liquidation. The Board of
Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for certificates representing the
full shares or uncertificated full shares before a specified date, or subject to
the conditions that the shares for which scrip or warrants are exchangeable may
be sold by the Corporation and the proceeds thereof distributed to the holders
of scrip or warrants, or subject to any other conditions which the Board of
Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers or
registration of transfers of shares of stock of the Corporation shall be made
only on the stock ledger of the Corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the Corporation or with a transfer agent or a
registrar, if any, and, in the case of shares represented by certificates, on
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than sixty nor less than ten days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting. In order that the Corporation may determine the
stockholders entitled to consent to corporate
2
<PAGE>
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten days after the date upon which the resolution fixing
the record date is adopted by the Board of Directors. If no record date has been
fixed by the Board of Directors, the record date for determining the
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of directors is required by the
General Corporation law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an office or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by the General Corporation Law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action. In order that
the Corporation may determine the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "share of stock" or "shares of
stock" or "stockholder" or "stockholders" refers to an outstanding share or
shares of stock and to a holder or holders of record of outstanding shares of
stock when the Corporation is authorized to issue only one class of shares of
stock, and said reference is also intended to include any outstanding share or
shares of stock and any holder or holders of record of outstanding shares of
stock of any class upon which or upon whom the certificate of incorporation
confers such rights where there are two or more classes or series of shares of
stock or upon which or upon whom the General Corporation Law confers such rights
notwithstanding that the certificate of incorporation may provide for more than
one class or series of shares of stock, one or more of which are limited or
denied such rights thereunder, provided, however, that no such right shall vest
in the event of an increase or a decrease in the authorized number of shares of
stock of any class or series which is otherwise denied voting rights under the
provisions of the certificate of incorporation, except as any provision of law
may otherwise require.
7. STOCKHOLDER MEETINGS.
-- TIME. The annual meeting shall be held on the date and at
the time fixed, from time to time, by the directors. A special meeting shall be
held on the date and at the time fixed by the directors.
-- PLACE. Annual meetings and special meetings shall be held
at such place, within or without the State of Delaware, as the directors may,
from time to time, fix. Whenever the directors shall fail to fix such place, the
meeting shall be held at the registered office of the Corporation in the State
of Delaware.
3
<PAGE>
-- CALL. Annual meetings and special meetings may be called by
a majority of the directors or by any officer instructed by a majority of the
directors to call the meeting.
-- NOTICE OR WAIVER OF NOTICE. Written notice of all meetings
shall be given, stating the place, date, and hour of the meeting and stating the
place within the city or other municipality or community at which the list of
stockholders of the Corporation may be examined. The notice of an annual meeting
shall state that the meeting is called for the election of directors and for the
transaction of other business which may properly come before the meeting, and
shall (if any other action which could be taken at a special meeting is to be
taken at such annual meeting) state the purpose or purposes. The notice of a
special meeting shall in all instances state the purpose or purposes for which
the meeting is called. The notice of any meeting shall also include, or be
accompanied by, any additional statements, information, or documents prescribed
by the General Corporation Law. Except as otherwise provided by the General
Corporation Law, a copy of the notice of any meeting shall be given, personally
or by mail, not less than ten days nor more than sixty days before the date of
the meeting, unless the lapse of the prescribed period of time shall have been
waived, and directed to each stockholder at his record address or at such other
address which he may have furnished by request in writing to the Secretary of
the Corporation. Notice by mail shall be deemed to be given when deposited, with
postage thereon prepaid, in the United states Mail. No business shall be
conducted at an annual meeting except in accordance with this procedure. The
Chairman of an annual meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting and in
accordance with the provisions of this section, and if so determined, shall
declare to the meeting that any such business not properly brought before the
meeting shall not be transacted. If a meeting is adjourned to another time, not
more than thirty days hence, and/or to another place, and if an announcement of
the adjourned time and/or place is made at the meeting, it shall not be
necessary to give notice of the adjourned meeting unless the directors, after
adjournment, fix a new record date for the adjourned meeting. Notice need not be
given to any stockholder who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of a stockholder at a
meeting of stockholders shall constitute a waiver of notice of such meeting,
except when the stockholder attends the meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice.
-- STOCKHOLDER LIST. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city or other municipality or community
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the
4
<PAGE>
stock ledger, the list required by this section or the books of the Corporation,
or to vote at any meeting of stockholders.
-- CONDUCT OF MEETING. Meetings of the stockholders shall be
presided over by one of the following officers in the order of seniority and if
present and acting - the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, the President, a Vice-President, or, if none of the foregoing is
in office and present and acting, by a chairman to be chosen by the
stockholders. The Secretary of the Corporation, or in his absence, an Assistant
Secretary, shall act as secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present the Chairman of the meeting shall appoint
a secretary of the meeting.
-- PROXY REPRESENTATION. Every stockholder may authorize
another person or persons to act for him by proxy in all matters in which a
stockholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally.
-- INSPECTORS. The directors, in advance of any meeting, may,
but need not, appoint one or more inspectors of election to act at the meeting
or any adjournment thereof. If an inspector or inspectors are not appointed, the
person presiding at the meeting may, but need not, appoint one or more
inspectors. In case any person who may be appointed as an inspector fails to
appear or act, the vacancy may be filled by appointment made by the directors in
advance of the meeting or at the meeting by the person presiding thereat. Each
inspector, if any, before entering upon the discharge of his duties, shall take
and sign an oath faithfully to execute the duties of inspectors at such meeting
with strict impartiality and according o the best of his ability. The
inspectors, if any, shall determine the number of shares of stock outstanding
and the voting power of each, the shares of stock represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots, or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots, or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question, or matter determined by him
or them and execute a certificate of any fact found by him or them. Except as
otherwise required by subsection (e) of Section 231 of the General Corporation
Law, the provisions of that Section shall not apply to the Corporation.
-- QUORUM. The holders of a majority of the outstanding shares
of stock shall constitute a quorum at a meeting of stockholders for the
transaction of any business. The stockholders present may adjourn the meeting
despite the absence of a quorum.
-- VOTING. Each share of stock shall entitle the holder
thereof to one vote. Directors shall be elected by a plurality of the votes of
the shares present in person or represented
5
<PAGE>
by proxy at the meeting and entitled to vote on the election of directors. Any
other action shall be authorized by a majority of the votes cast except where
the General Corporation Law prescribes a different percentage of votes and/or a
different exercise of voting power, and except as may be otherwise prescribed by
the provisions of the certificate of incorporation and these Bylaws. In the
election of directors, and for any other action, voting need not be by ballot.
8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the
General Corporation Law to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special meeting
of stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted; provided that if at any time the Corporation shall have a class of stock
registered pursuant to the provisions of the Securities Exchange Act of 1934,
for so long as such class is so registered, any action by the stockholders of
such class must be taken at an annual or special meeting of stockholders and may
not be taken by written consent. Prompt notice of the taking of the corporation
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing. Action taken pursuant
to this paragraph shall be subject to the provisions of Section 228 of the
General Corporation Law.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of Directors
of the Corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board" herein
refers to the total number of directors which the Corporation would have if
there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a
citizen of the United States, or a resident of the State of Delaware. The
initial Board of Directors shall consist of three persons. Thereafter the number
of directors containing the whole board shall be at least three. Subject to the
foregoing limitation and except for the first Board of Directors, the number of
directors shall be fixed by resolution of the Board of Directors and may be
increased at any time or from time to time by the directors by vote of a
majority of the directors then in office but not to a greater number than nine
without action by the stockholders. The number of directors may be decreased to
any number permitted by the foregoing at any time by the directors by vote of a
majority of the directors then in office, but only to eliminate vacancies
existing by reason of the death, resignation or removal of one or more
directors.
3. ELECTION AND TERM. All members of the Board of Directors shall be
classified, with respect to the time for which they each hold office, into three
classes. One class shall originally be elected for an initial one year term
expiring at the annual meeting of stockholders to be held in 1999, another class
shall be originally elected for an initial two year term expiring at
6
<PAGE>
the annual meeting of stockholders to be held in 2000, and another class shall
be originally elected for an initial three year term expiring at the annual
meeting of stockholders to be held in 2001, with each member of each class to
hold office until a successor is elected and qualified or until his earlier
resignation or removal. Thereafter, at each annual meeting of stockholders, the
successors of the class of directors whose term expires at that meeting shall be
elected to hold office for a three year term until their successors are elected
and qualified or until their earlier resignation or removal.
Except as otherwise provided in or fixed by or pursuant to the
Corporation's Certificate of Incorporation, nominations for the election of
directors may be made by the Board of Directors or by any stockholder of record
entitled to vote in the election of directors generally. However, any such
stockholders may nominate one or more persons for election as director or
directors at a stockholders' meeting only if written notice of intent to make
such nomination or nominations has been given either by personal delivery or by
mail to the Secretary of the Corporation not less than 30 days before the
meeting of stockholders at which such election is held. Each such notice shall
state (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (d) the consent of each nominee to serve as a director
of the Corporation if so elected, and shall be accompanied by a petition in
support of such nomination signed by at least 50 holders of record of stock
entitled to vote in the election of directors holding in the aggregate not less
than 5% of such stock. The chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
4. MEETINGS.
-- TIME. Meetings shall be held at such time as the Board
shall fix, except that the first meeting of a newly elected Board shall be held
as soon after its election as the directors may conveniently assemble.
-- PLACE. Meetings shall be held at such place within or
without the State of Delaware as shall be fixed by the Board.
-- CALL. No call shall be required for regular meetings for
which the time and place have been fixed. Special meetings may be called: by or
at the direction of the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, or the President, or of a majority of the directors in office.
-- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be
required for regular meetings for which the time and place have been fixed.
Written, oral, or
7
<PAGE>
any other mode of notice of the time and place shall be given for special
meetings in sufficient time for the convenient assembly of the directors
thereat. Notice need not be given to any director or to any member of a
committee of directors who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the directors need be specified in any
written waiver of notice.
-- QUORUM AND ACTION. A majority of the whole Board shall
constitute a quorum except when a vacancy or vacancies prevents such majority,
whereupon a majority of the directors in office shall constitute a quorum,
provided, that such majority shall constitute at least one-third of the whole
Board. A majority of the directors present, whether or not a quorum is present,
may adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
vote of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board. The quorum and voting provisions herein
stated not be construed as conflicting with any provisions of the General
Corporation Law and these Bylaws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any such
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
-- CHAIRMAN OF THE MEETING. The Chairman of the Board, if any
and if present and acting, shall preside at all meetings. Otherwise, the
Vice-Chairman of the Board, if any and if present and acting, or the President,
if present and acting, or any other director chosen by the Board, shall preside.
5. RESIGNATION AND REMOVAL OF DIRECTORS. Any director may resign at any
time by delivering his resignation in writing to the chairman of the board, if
any, the president, or the secretary or to a meeting of the board of directors.
Such resignation shall be effective upon receipt unless specified to be
effective at some other time, and without in either case the necessity of it
being accepted unless the resignation shall so state. Except as otherwise
provided in the certificate of incorporation or these by-laws relating to the
rights of the holders of any class or series of preferred stock, voting
separately by class or series, to elect directors under specified circumstances,
any director or directors may be removed from office at any time, but only for
cause and only by the affirmative vote, at any regular meeting or special
meeting of the stockholders, of not less than 50% of the total number of votes
of the then outstanding shares of capital stock of the corporation entitled to
vote generally in the election of directors, voting together as a single class,
but only if notice of such proposal was contained in the notice of such meeting.
Any vacancy in the board of directors resulting from any such removal shall be
filled only by vote of a majority of the directors then in office, although less
than a quorum, and any director or directors so chosen shall hold office until
the next election of the class for which such
8
<PAGE>
directors shall have been chosen and until their successors shall be elected and
qualified or until their earlier death, resignation or removal. No director
resigning and (except where a right to receive compensation shall be expressly
provided in a duly authorized written agreement with the corporation) no
director removed shall have any right to any compensation as such director for
any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the year
or otherwise; unless, in the case of a resignation, the directors, or, in the
case of removal, the body acting on the removal, shall in their or its
discretion provide for compensation.
6. VACANCIES. Vacancies and any newly created directorships resulting
from any increase in the number of directors shall be filled only by vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. Stockholders shall have no power to fill any vacancies
or newly created directorships. When one or more directors shall resign from the
board, effective at a future date, a majority of the directors then in office,
including those who have resigned, shall have power to fill such vacancy or
vacancies, the vote or action by writing thereon to take effect when such
resignation or resignations shall become effective. The directors shall have and
may exercise all their powers notwithstanding the existence of one or more
vacancies in their number, subject to any requirement of law or of the
certificate of incorporation or of these by-laws as to the number of directors
required for a quorum or for any vote or other actions.
7. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution of the Board, shall
have and may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the
General Corporation Law, and may authorize the seal of the Corporation to be
affixed to all papers which may require it.
8. WRITTEN ACTION. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
9. INTERESTED DIRECTORS AND OFFICERS.
(a) No contract or transaction between the Corporation and one
or more of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of the Corporation's directors or officers are directors or officers, or
have a financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the board or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if:
9
<PAGE>
(1) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
board of directors or the committee, and the board or committee in good
faith authorizes the contract or transaction by the affirmative votes
of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or
(2) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction
is specifically approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the stockholders. (b) Common or
interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
ARTICLE III
OFFICERS
The officers of the Corporation shall consist of a President, a
Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the
Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, one
or more Executive Vice Presidents, one or more other Vice-Presidents, one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers with such titles as the resolution of the Board of Directors choosing
them shall designate. Except as may otherwise be provided in the resolution of
the Board of Directors choosing him, no officer other than the Chairman or
Vice-Chairman of the Board, if any, need by a director. Any number of offices
may be held by the same person, as the directors may determine.
Unless otherwise provided in the resolution choosing him, each officer
shall be chosen for a term which shall continue until the meeting of the Board
of Directors following the next annual meeting of stockholders and until his
successor shall have been chosen and qualified.
All officers of the Corporation shall have such authority and perform
such duties in the management and operation of the Corporation as shall be
prescribed in the resolutions of the Board of Directors designating and choosing
such officers and prescribing their authority and duties, and shall have such
additional authority and duties as are incident to their office except to the
extent that such resolutions may be inconsistent therewith. The Secretary or an
Assistant Secretary of the Corporation shall record all of the proceedings of
all meetings and actions in writing of stockholders, directors, and committees
of directors, and shall exercise such additional authority and perform such
additional duties as the Board shall assign to him. Any officer may be removed,
with or without cause, by the Board of Directors. Any vacancy in any office may
be filled by the Board of Directors.
10
<PAGE>
ARTICLE IV
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors
shall prescribe.
ARTICLE V
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and shall be subject
to change, by the Board of Directors.
ARTICLE VI
CONTROL OVER BYLAWS
Subject to the provisions of the certificate or incorporation and the
provisions of the General Corporation Law, the power to amend, alter, or repeal
these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors
or by the stockholders except that the power to amend, alter or repeal Article
II Sections 2 and 3 may be exercised only by the stockholders acting by at least
75% vote of the outstanding voting shares.
<PAGE>
Void after June 30, 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.
HOME RETAIL HOLDINGS, INC.
COMMON STOCK PURCHASE WARRANT
HOME RETAIL HOLDINGS, INC. (the "Company"), having its
principal office at c/o Cambridge Partners, LLC, 535 Madison Avenue, 19th Floor,
New York, New York 10022 hereby certifies that, for value received, Liberty
BIDCO Investment Corporation, a Michigan corporation ("Bidco") 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 August 20, 1998 and before 5:00 P.M., New
York City time, on June 30, 2003 (the "Expiration Date") 40,602 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 to Liberty BIDCO Investment Corporation as of the
Original Issue Date (as defined below) and evidencing the right to purchase an
aggregate of 40,602 shares of Common Stock of the Company (representing
approximately 2% of the Company's Common Stock and Class B Common Stock on a
fully diluted basis as of the Original Issue Date), 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 20, 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.
<PAGE>
(e) The term "Purchase Price" shall be 165% of the initial
price to the public pursuant to which the Company first sells more than $5
million 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 immediately after the closing of the Company's first public offering
of securities registered under the Securities Act that takes place after the
Original Issue Date and ending on the earlier of the third 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 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
2
<PAGE>
Company will use its best efforts to 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 by 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 the Requested Shares be excluded from the
registration statement on the ground that the inclusion of such Requested Shares
will materially adversely affect the orderly sales and distribution of the
Common Stock being sold, the Company shall include first all securities to be
sold by the Company for its own account, second, Requested Shares and last all
securities to holders which have the right to require that their securities be
included in the registration, all 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 an 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 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.
3
<PAGE>
1.3. Obligations of the Company. When required under
Section 1.1 to use its best efforts to 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, but in any event
no fewer than five such states or jurisdictions; 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 (for purposes of this Warrant, the Form U-2
Uniform Consent to Service of Process in effect on the Original Issue Date shall
not constitute general consent to service of process).
(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, 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 Small Cap 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.
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.
5
<PAGE>
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, such
underwriter or such controlling person.
(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
6
<PAGE>
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.
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.
7
<PAGE>
3. Exercise of Warrant; Partial Exercise; Cashless Exercise;
Redemption.
3.1. Exercise in Full. Subject to the provisions hereof,
this Warrant may be exercised in full 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 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 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").
8
<PAGE>
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.
3.6. Redemption. The Warrant and/or the Common Stock issued
upon the exercise of the Warrant shall be subject to a put option by Bidco on
the terms contained in this section (the "Put Option"). Bidco, in its sole
discretion, shall have the right and option to have the Warrant redeemed by the
Company at the greater of: (i) $165,000.00 or (ii) the difference between the
Purchase Price and the then current Fair Market Value (the "Warrant Put Price");
and Bidco, in its sole discretion, shall have the right and option to have all
of the Common Stock issued upon the exercise of the Warrant redeemed by the
Company at the greater of: (i) $165,000.00 or (ii) the then current Fair Market
Value of such Common Stock (the "Stock Put Price") (in each respective case the
"Put Price"). In the event that the Put Option is exercised and Bidco has
partially exercised this Warrant such that it is a Holder of both Warrants and
Common Stock, the Put Price shall be the sum of the number of unexercised
Warrants over the original number of Warrants multiplied by the amount of the
Warrant Put Price had the Warrant remained completely unexercised, plus the
number of Shares issued upon exercise over the number of Shares originally
Issuable under the Warrant multiplied by the amount of the Stock Put Price had
the Warrant been completely exercised. In making such determination adjustments
to the number of Warrants and Shares provided for in the Warrant shall be taken
into account. For purposes of this Section 3.6, the term "fair market value" of
such Common Stock shall mean the average trading price for the Common Stock over
the ten (10) days immediately prior to the date of the Put Notice reported on
the Nasdaq, or if the Common Stock is not reported on the Nasdaq then as
reported on any nationally recognized securities exchange, or if not reported on
any nationally recognized securities exchange then as reported on the over the
counter market. Upon provision by Bidco of written notice to the Company of
Bidco's exercise of the Put Option (the "Put Notice"), the Company shall pay to
Bidco the Put Price in cash.
Bidco's Put Option shall not be exercisable until the earlier
of: (x) eighteen (18) months following a registration of the Common Stock by
filing a registration statement in compliance with the Securities Act; or (y)
June 30, 2000; provided, however, that Bidco agrees to provide the Company
notice six months prior to the exercise of the Put Option (the "Intent Notice"),
which Intent Notice shall be non-binding on Bidco such that Bidco shall not be
required to actually exercise the Put Option and that Bidco shall have
absolutely no liability or obligation whatsoever for costs, expenses or fees, of
any nature, incurred by the Company, its representatives or agents in reliance
upon or because of the Intent Notice.
9
<PAGE>
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.
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.
11
<PAGE>
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
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; (v) the issuance or
sale of any Options or Convertible Securities in connection with any future debt
financings of $5,000,000 or more of the Company or any of its subsidiaries; (vi)
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; and (vii) any public offering of Common Stock that results
in at least $4,000,000 in net proceeds to the Company.
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 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 Ohio
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.
Dated: August 20, 1998
HOME RETAIL HOLDINGS, INC.
By: /S/ DAVID DANOVITCH
--------------------------
President
[Corporate Seal]
Attest:
/S/ GREG DUKOFF
- --------------------
Secretary
15
<PAGE>
SCHEDULE I
FORM OF SUBSCRIPTION
(To be signed only upon exercise or surrender of each Warrant)
To: HOME RETAIL HOLDINGS, 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 HOME RETAIL HOLDINGS,
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.
16
<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 Home Retail Holdings, Inc., to which the
within Warrant relates, and appoints _____________ as attorney to transfer such
right on the books of Home Retail Holdings, 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)
17
<PAGE>
Void after June 30, 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.
HOME RETAIL HOLDINGS, INC.
COMMON STOCK PURCHASE WARRANT
HOME RETAIL HOLDINGS, INC. (the "Company"), having its
principal office at c/o Cambridge Partners, LLC, 535 Madison Avenue, 19th Floor,
New York, New York 10022 hereby certifies that, for value received, Greenfield
Commercial Credit, L.L.C., a Michigan corporation ("Greenfield") 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 August 20, 1998 and before 5:00 P.M., New
York City time, on June 30, 2003 (the "Expiration Date") 40,602 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 to Greenfield as of the Original Issue Date (as
defined below) and evidencing the right to purchase an aggregate of 40,402
shares of Common Stock of the Company (representing approximately 2% of the
Company's Common Stock and Class B Common Stock on a fully diluted basis as of
the Original Issue Date), 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 20, 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
<PAGE>
issuable or shall have been issued in exchange for or in replacement of Common
Stock or Other Securities pursuant to Section 6 or otherwise.
(e) The term "Purchase Price" shall be 165% of the initial
price to the public pursuant to which the Company sells more than $5 million 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 immediately after the closing of the Company's first public offering
of securities registered under the Securities Act that takes place after the
Original Issue Date and ending on the earlier of the third 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 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 use its best efforts to include the Requested Shares
in the registration statement,
2
<PAGE>
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 by 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 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 first
all securities to be sold by the Company for its own account and then all
securities (including the Requested Shares) to holders 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 an
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 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.
3
<PAGE>
1.3. Obligations of the Company. When required under
Section 1.1 to use its best efforts to 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, but in any event
no fewer than five such states or jurisdictions; 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, 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 Small Cap 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.
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.
5
<PAGE>
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, such
underwriter or such controlling person.
(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
6
<PAGE>
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.
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.
7
<PAGE>
3. Exercise of Warrant; Partial Exercise; Cashless Exercise;
Redemption.
3.1. Exercise in Full. Subject to the provisions
hereof, this Warrant may be exercised in full 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 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 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").
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
8
<PAGE>
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.
3.6. Redemption. The Warrant and the Common Stock
issued upon the exercise of the Warrant shall be subject to two put options by
Greenfield (each, respectively, the "First Put Option" and the "Second Put
Option"). Greenfield, in its sole discretion, shall have the right and option to
have five-sixths (5/6) of the Warrant, and five-sixths (5/6) of the Class A
Common Stock theretofore issued upon the exercise of the Warrant, redeemed by
the Company pursuant to the First Put Option at the greater of: (i) $125,000, or
(ii) the then fair market value of such Common Stock; and pursuant to the Second
Put Option, the remaining one-sixth (1/6) of the Warrant and one-sixth (1/6) of
the Class A Common Stock heretofore issued, at the greater of: (i) $25,000 or
(ii) the then fair market value of such Common Stock. For purposes of this
Section 3.6, the term "fair market value" of such Common Stock shall mean the
average trading price for the Common Stock over the ten (10) days immediately
prior to the date of the Put Notice reported on the Nasdaq, or if the Common
Stock is not reported on the Nasdaq then as reported on any nationally
recognized securities exchange, or if not reported on any nationally recognized
securities exchange then as reported on the over the counter market. Upon
provision by Greenfield of written notice to the Company of Greenfield's
exercise of the First Put Option or Second Put Option (the "Put Notice"), the
Company shall pay to Greenfield the put price in cash.
Greenfield's First Put Option shall not be exercisable until
thirteen (13) months after the date hereof; and the Second Put Option shall not
be exercisable until fifteen (15) months after the date hereof; provided,
however, that Greenfield agrees to provide the Company notice six months prior
to the exercise of the First Put Option Option (the "Intent Notice"), which
Intent Notice shall be non-binding on Greenfield., such that Greenfield shall
not be required to actually exercise the Put Option and that Greenfield shall
have absolutely no liability or obligation whatsoever for costs, expenses or
fees, of any nature, incurred by the Company, its representatives or agents in
reliance upon or because of the Intent Notice.
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
9
<PAGE>
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.
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 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
11
<PAGE>
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; (v) the issuance or
sale of any Options or Convertible Securities in connection with any future debt
financings of $5,000,000 or more of the Company or any of its subsidiaries; (vi)
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
12
<PAGE>
Original Issue Date; and (vii) any public offering of Common Stock that results
in at least $4,000,000 in net proceeds to the Company.
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
13
<PAGE>
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 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.
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;
14
<PAGE>
(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.
Dated: August 20, 1998
HOME RETAIL HOLDINGS, INC.
By: /S/ DAVID DANOVITCH
---------------------------
President
[Corporate Seal]
Attest:
/S/ GREG DUKOFF
- ---------------
Secretary
15
<PAGE>
SCHEDULE I
FORM OF SUBSCRIPTION
(To be signed only upon exercise or surrender of each Warrant)
To: HOME RETAIL HOLDINGS, 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 HOME RETAIL HOLDINGS,
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.
16
<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 Home Retail Holdings, Inc., to which the
within Warrant relates, and appoints _____________ as attorney to transfer such
right on the books of Home Retail Holdings, 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)
17
<PAGE>
Void after June 30, 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.
HOME RETAIL HOLDINGS, INC.
COMMON STOCK PURCHASE WARRANT
HOME RETAIL HOLDINGS, INC. (the "Company"), having its principal
office at c/o Cambridge Partners, LLC, 535 Madison Avenue, 19th Floor, New York,
New York 10022 hereby certifies that, for value received, ____________________
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 August __, 1998 and before
5:00 P.M., New York City time, on June 30, 2003 (the "Expiration Date") ____
fully paid and non-assessable shares of Common Stock of the Company, at the
price per share of $4.00. 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 29,261 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 __,
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.
<PAGE>
(e) The term "Purchase Price" shall be the then
applicable exercise price for one share of Common Stock.
(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 immediately after the closing of the Company's first
public offering of securities registered under the Securities Act that takes
place after the Original Issue Date and ending on the earlier of the third
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 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 use its best efforts to 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 by 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
<PAGE>
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 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 first all securities to be sold by the
Company for its own account and then all securities (including the Requested
Shares) to holders 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 an 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 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 to use its best efforts to 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,
<PAGE>
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, but in any event
no fewer than five such states or jurisdictions; 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.
(f) Comply with all applicable rules and
regulations of the SEC, 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.
<PAGE>
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.
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
<PAGE>
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, such
underwriter or such controlling person.
(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
<PAGE>
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 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 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 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
<PAGE>
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
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
<PAGE>
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.
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.
<PAGE>
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 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
<PAGE>
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; (v) the issuance or
sale of any Options or Convertible Securities in connection with any future debt
financings of $5,000,000 or more of the Company or any of its subsidiaries; (vi)
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; and (vii) any public offering of Common Stock that results
in at least $4,000,000 in net proceeds to the Company.
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),
<PAGE>
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.
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 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.
<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.
Dated: August ___, 1998
HOME RETAIL HOLDINGS, INC.
By: __________________________________
President
[Corporate Seal]
Attest:
________________________________
Secretary
<PAGE>
SCHEDULE I
FORM OF SUBSCRIPTION
(To be signed only upon exercise or surrender of each Warrant)
To: HOME RETAIL HOLDINGS, 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 HOME RETAIL HOLDINGS, 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) __________________________
__________________________
o 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.
<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 Home Retail Holdings, Inc., to which the within Warrant relates,
and appoints as attorney to transfer such right on the books of Home Retail
Holdings, 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
<PAGE>
HOME RETAIL HOLDINGS, INC.
1998 EQUITY INCENTIVE PLAN
1. PURPOSE
The purpose of this Equity Incentive Plan (the "Plan") is to
advance the interests, of Home Retail Holdings, Inc. (the "Company") by
enhancing its ability to attract and retain employees and other persons or
entities who are in a position to make significant contributions to the success
of the Company and its subsidiaries through ownership of shares of the Company's
Class A Common Stock ("Stock").
The Plan was adopted by the Company on June __, 1998, and
adopted by stockholders on _____________.
The Plan is intended to accomplish these goals by enabling the
Company to grant Awards in the form of Options Stock Appreciation Rights,
Restricted Stock or Unrestricted Stock Awards, Deferred Stock Awards,
Performance Awards, Loans or Supplement Grants, or combinations thereof all as
more fully described below.
2. ADMINISTRATION
Unless otherwise determined by the Board of directors of the
Company (the "Board"), the Plan will be administered by a Committee of the Board
designated for such purpose (the "Committee"). The Committee shall consist of at
least two directors. A majority of the members of the Committee shall constitute
a quorum, and all determinations of the Committee shall be made by a majority of
its members. Any determination, of the Committee under the Plan may be made
without notice or meeting of the Committee by a writing signed by a majority of
the Committee members. During such times as the Stock is registered under the
Securities Exchange Act of 1934 (the "1934 Act"), all members of the Committee
shall be disinterested persons within the meaning of Rule 16b-3 under the 1934
Act and "outside directors" within the meaning of Section 162(m)(4)(C)(i) of the
Internal Revenue Code of 1986, as amended (the "Code").
The Committee will have authority, not inconsistent with the
express provisions of the Plan and in addition to other authority granted under
the Plan, to (a) grant Awards at such time or times as it may choose; (b)
determine the size of each Award, including the number of shares of Stock
subject to the Award; (c) determine the type or types of each Award; (d)
determine the terms and conditions of each Award; (e) waive compliance by a
holder of an Award with any obligations to be performed by such holder under an
Award and waive any terms or conditions of an Award; (f) amend or cancel an
existing Award in whole or in part (and if an award is canceled, grant another
Award in its place on such terms and conditions as the Committee shall specify),
except that the Committee may not, without the consent of the holder of an
Award, take any action under this Clause with respect to such Award if such
action would adversely affect the rights of such holder, (g) prescribe the form
or forms of instruments that are required or deemed appropriate under the Plan,
including any written, notices and elections
<PAGE>
required of Participants (as defined below), and change such forms from time to
time; (h) adopt, amend and rescind rules and regulations for the administration
of the Plan; and (i) interpret the Plan and decide any questions and settle all
controversies and disputes that may arise in connection with the Plan. Such
determinations and actions of the Committee, and all other determinations and
actions of the Committee made or taken under authority granted by any provision
of the Plan, will be conclusive and will bind all parties. Nothing in this
paragraph shall be construed as limiting the power of the Committee to make
adjustments under Section 7.3 or Section 8.6.
With respect to persons subject to Section 16 of the 1934 Act,
transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the 1934 Act
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan will become effective on the date on which it is
approved by the stockholders of the Company. No Award may be granted under the
Plan ten years following the date of stockholder approval, but Awards previously
granted may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
Subject to the adjustment as provided in Section 8.6 below,
the aggregate number of shares of Stock that may be delivered under the Plan
will be 180,000. If any Award requiring exercise by the Participant for delivery
of Stock terminates without having been exercised in full, or if any Award
payable in Stock or cash is satisfied, in cash rather than Stock, the number of
shares of Stock as to which such Award was not exercised or for which cash was
substituted will be available for future grants.
Subject to Section 8.6(a) the maximum number of shares of
Stock as to which Options and Stock Appreciation Rights may be granted to any
Participant in any one calendar year is 80,000, which limitation shall be
construed and applied consistently with the rules under Section 162(m) of the
Internal Revenue Code.
Stock delivered under the Plan may be authorized but unissued
Stock or previously issued Stock acquired by the Company and held in treasury.
No fractional shares of Stock will be delivered under the Plan.
5. ELIGIBILITY AND PARTICIPATION
Each person in the employ of the Company or any of its
subsidiaries (an "Employee") and each other person or entity (including without
limitation non-Employee directors of the Company or a subsidiary of the Company)
who, in the opinion of the Committee, is in a position to make a significant
contribution to the success of the Company or its subsidiaries will be eligible
to receive Awards under the Plan (each such Employee, person or entity receiving
an Award, a "Participant"). A "subsidiary" for purposes of the Plan will be a
corporation in which the Company owns, directly or indirectly, stock possessing
50 % or more of the total combined voting power of all classes, of stock
<PAGE>
6. TYPES OF AWARDS
6.1. Options.
(a) Nature of Options. An Option is an Award giving the
recipient the right on exercise thereof to purchase Stock.
Both "incentive stock options," as defined in Section 422 of
the Internal Revenue of 1986, as amended (the "Code") (any Option intended to
qualify as an incentive stock option being hereinafter referred to as an "ISO"),
and Options that are not incentive stock options, may be granted under the Plan.
Plan ISOs shall be awarded only to Employees. Any Option not identified at the
time of grant as being either an ISO or a non-incentive stock option shall be a
non-incentive stock option.
(b) Exercise Price. The exercise price of an Option will be
determined by the Committee subject to the following:
(1) The exercise price of an ISO shall not be less
than 100% (110% in the case of an ISO granted to a ten-percent
stockholder) of the fair market value of the Stock subject to the
Option, determined as of the time the Option Is granted. A "ten
percent stockholder" is any person who at the time of grant, owns,
directly or indirectly, or is deemed to own by reason of the
attribution rules of section 424(d) of the Code, stock possessing more
than 10% of the total combined voting power of all classes of stock of
the Company or of any of its subsidiaries.
(2) In no case may the exercise price paid for Stock
which is part of an original issue of authorized Stock be less than the
par value per share of the Stock.
(3) The Committee may reduce the exercise price of an
Option at any time after the time of grant, but in the case of an
Option originally awarded as an ISO, only with the consent of the
Participant.
(c) Duration of Options. The latest due on which an Option may
be exercised will be the tenth anniversary (fifth anniversary, in the case of an
ISO granted to a ten-percent shareholder) of the day immediately preceding the
date the Option was granted, or such earlier date as may have been specified by
the Committee at the time the Option was granted.
(d) Exercise of Options. An Option will become exercisable at
such time or times, and on such conditions as the Committee may specify. The
Committee may at any time and from, time to time accelerate the time at which
all or any part of the Option may be exercised.
Any exercise of an Option must be in writing, signed by the
proper person and delivered or mailed to the Company, accompanied by (1) any
documents required by the Committee and (2) payment in full in accordance with
paragraph (e) below for the number of shares for which the Option is exercised.
<PAGE>
(e) Payment for Stock. Stock purchased on exercise of an
Option must be paid for as follows: (1) in cash or by check (acceptable to this
Company in accordance with guidelines established for this purpose), bank draft
or money order payable to the order of the Company or (2) if so permitted by the
Committee at or after the grant of the Option (with the consent of the optionee
of an ISO if permitted after the grant) or by the instrument evidencing the
Option, (i) through the delivery of shares of Stock which have been outstanding
for at least six months (unless the Committee approves a shorter period) and
which have a fair market value equal to the exercise price, (ii) by delivery of
a promissory note of the person exercising the Option to the Company, payable on
such terms as are specified by the Committee, (iii) by delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price, or (iv) by an combination of
the foregoing permissible forms of payment.
(f) Discretionary Payments. If (i) the market price of shares
of Stock subject to an Option (other than an Option which is in tandem with a
Stock Appreciation Right as described in Section 6.2 below) exceeds the exercise
price of the Option at the time of its exercise, and (ii) the person exercising
the Option so requests the committee in writing, the Committee may in its sole
discretion cancel the Option and cause the Company to pay in cash or in shares
of Common Stock (at a price per share equal to the fair market value per share)
to the person exercising the Option an amount equal to the difference between
the fair market value of the Stock which would have been purchased pursuant to
the exercise (determined on the date the Option is canceled) and the aggregate
exercise price which would have been paid.
6.2. Stock Appreciation Rights.
(a) Nature of Stock Appreciation Rights. A Stock Appreciation
Right is an Award entitling the holder on exercise to receive an amount in cash
or Stock or a combination thereof (such form to be determined by the Committee)
determined in whole or in part by reference to appreciation in the firm market
value of a share of Stock on the date of grant as compared to its fair market
value on the date of exercise or any performance standard selected or
established by the Committee.
(b) Grant of Stock Appreciation Rights. Stock Appreciation
Rights may be granted in tandem with, or independently of, Options granted under
the Plan. A Stock Appreciation Right granted in tandem with an Option which is
not an ISO may be granted either at or after the time the Option is granted. A
Stock Appreciation Right granted in tandem with an ISO may be granted only at
the time the Option is granted. The Committee may also grant Stock Appreciation
Rights which provide that following a change in control of the Company, as
determined by the Committee, the holder of such Right will be entitled to
receive, with respect to each share of Stock subject to the Right, an amount
equal to the excess of a specified value (which may include an average of
values) for a share of Stock during a period preceding such change in control
over the fair market value of a share of stock on the date the Right was
granted.
(c) Rules Applicable to Tandem Awards. When Stock Appreciation
Rights are granted in tandem with Options, the following will apply:
<PAGE>
(1) The Stock Appreciation Right will be exercisable
only at such time or times, and to the extent, that the related Option
is exercisable and will be exercisable in accordance with the procedure
required for exercise of the related Option.
(2) The Stock Appreciation Right will terminate and
no longer be exercisable upon the termination or exercise of the
related Option, except that a Stock Appreciation Right granted with
respect to less than the full number of shares covered by an Option
will not be reduced until the number of shares as to which the related
Option has been exercised or has terminated exceeds the number of
shares not covered by the Stock Appreciation Rights.
(3) The Option will terminate and no longer be
exercisable upon the exercise of the related Stock Appreciation Right.
(4) The Stock Appreciation Right will be transferable
only with the related Option.
(5) A Stock Appreciation Right granted in tandem with
an ISO may be exercised only when the market price of the Stock subject
to the Option exceeds the exercise price of such option.
(d) Exercise of Independent Stock Appreciation Rights. A Stock
Appreciation Right not granted in tandem with an Option will become exercisable
at such time or times, and on such conditions, as the Committee may specify. The
Committee may at any time accelerate the time at which all or any part of the
Right may be exercised.
Any exercise of an independent Stock Appreciation Right must
be in writing, signed by the proper person and delivered or mailed to the
Company, accompanied by any other documents required by the Committee.
6.3. Restricted and Unrestricted Stock.
(a) Grant of Restricted Stock. Subject to the terms and
provisions of the Plan, the Committee, at any time and from time to time, may
grant shares of Restricted Stock in such amounts and upon such terms and
conditions as the Committee shall determine subject to the restrictions
described below.
(b) Restricted Stock Agreement. The Committee may require, as
a condition to an Award, that a recipient of a Restricted Stock Award enter into
a Restricted Stock Award Agreement, setting forth the terms and conditions of
the award. In lieu of a Restricted Stock Award Agreement, the Committee may
provide the terms and conditions of an Award in a notice to the Participant of
the Award, on the Stock certificate representing the Restricted Stock, in the
resolution approving the Award, or in such other manner as it deems appropriate.
(c) Transferability and Other Restrictions. Except as
otherwise provided in this Section 6.3, the shares of Restricted Stock granted
herein may not be sold, transferred,
<PAGE>
pledged assigned, or otherwise alienated or hypothecated until the end of the
applicable period or periods established by the Committee and the satisfaction
of any other conditions or restrictions established by the Committee (such
period during which a share of Restricted Stock is subject to such restrictions
and conditions is referred to as the "Restricted Period"). Except as the
Committee may otherwise determine, if a Participant ceases to be an Employee or
otherwise suffers a Status Change (as defined at Section 7.2(a) below) for any
reason during the Restricted Period, the Company may purchase the shares of
Restricted Stock subject to such restrictions and conditions for the amount of
cash paid by the Participant for such shares, or such shares of Restricted Stock
shall be forfeited to the Company if no cash was paid by the Participant.
The Company shall also have the right to retain the
certificates representing shares of restricted Stock in the Company's possession
during the Restricted Period.
(d) Removal of Restrictions. Except as otherwise provided in
this Section 6.3, a share of Restricted Stock covered by a Restricted Stock
grant shall become freely transferable by the Participant upon completion of the
Restricted Period including the passage of any applicable period of time and
satisfaction of any conditions to vesting. However, unless otherwise provided by
the Committee, the Committee, in its sole discretion, shall have the right to
immediately waive all or part of the restrictions and conditions with regard to
all or part of the shares held by any Participant at any time.
(e) Voting Rights, Dividends and Other Distributions. During
the Restricted Period, participants holding shares of Restricted Stock granted
hereunder may exercise full voting rights and shall receive all regular cash
dividends paid with respect to such shares. Except as the Committee shall
otherwise determine, any other cash dividends and other distributions paid to
Participants with respect to shares of Restricted Stock including any dividends
and distributions paid in shares shall be subject to the same restrictions and
conditions as the shares of Restricted Stock with respect to which they were
paid.
(f) Other Awards Settled with Restricted Stock. The Committee
may, at the time any Award described in this Section 6 is granted, provide that
any or all the Stock delivered pursuant to the Award will be Restricted Stock.
(g) Unrestricted Stock. The Committee may, in its sole
discretion, sell to any Participant shares of Stock free of restrictions under
the Plan for a price which is not less than the par value of the Stock.
(h) Notice of Section 83(b) Election. Any Participant making
an election under Section 83(b) of the Code with respect to Restricted Stock
must provide a copy thereof to the Company within 10 days of filing such
election with the Internal revenue Service.
6.4. Deferred Stock.
A Deferred stock Award entitles the recipient to receive
shares of stock to be delivered in the future. Delivery of the Stock will take
place at such time or times, and on such conditions, as the Committee may
specify. The Committee may at any time accelerate the time at which delivery of
all or any part of the Stock will take place. At the time any Award described in
this Section 6 is granted, the Committee may provide that, at the time Stock
would otherwise
<PAGE>
be delivered pursuant to the Award, the Participant will instead receive an
instrument evidencing the Participant's right to future delivery of Deferred
Stock.
6.5. Performance Awards; Performance Goals.
(a) Nature of Performance Awards. A Performance Award entitles
the recipient to receive, without payment, amount in cash or Stock or a
combination thereof (such form to be determined by the Committee) following the
attainment of performance goals. Performance goals may be related to personal
performance, corporate performance, departmental performance or any other
category of performance established by the Committee. The Committee will
determine the performance goals, the period or periods during which performance
is to be measured and all other terms and conditions applicable to the Award.
(b) Other Awards Subject to Performance Condition
6.6. Loans and Supplemental Grants.
(a) Loans. The Company may make a loan to a Participant
("Loan"), either on the date of or after the grant of any Award to the
Participant. A Loan may be made either in connection with the purchase of Stock
under the Award or with the payment of any Federal, state and local income tax
with respect to income recognized as a result of the Award. The Committee will
have full authority to decide whether to make a Loan and to determine the
amount, terms and conditions of the Loan, including the interest rate (which may
be zero), whether the Loan is to be secured or unsecured or with or without
recourse against the borrower, the terms on which the Loan is to be repaid and
the conditions, if any, under which it may be forgiven. However, no Loan may
have a term (including extensions) exceeding ten years in duration.
(b) Supplemental Grants. In connection with any Award, the
Committee may at the time such Award is made or at a later date, provide for and
grant a cash award to the Participant ('Supplemental Grant") not to exceed an
amount equal to (1) the amount of any Federal, state and local income tax on
ordinary income for which the Participant may be liable with respect to the
Award, determined by assuming taxation at the highest marginal rate, plus (2) an
additional amount on a grossed-up basis intended to make the Participant whole
on an after-tax basis after discharging all the Participant's income tax
liabilities arising from all payments under this Section 6. Any payments under
this subsection (b) will be made at the time the Participant incurs Federal
income tax liability with respect to the Award.
7. EVENTS AFFECTING OUTSTANDING AWARDS
7.1. Death.
If a Participant dies, the following will apply:
(a) All Options and Stock appreciation Rights held by the
Participant immediately prior to death, to the extent then exercisable, may be
exercised by the Participant's executor or administrator or the person or
persons to whom the Option or right is transferred by will or the applicable
laws of descent and distribution, at any time within the one year period ending
with the first anniversary of the participant's death (or such shorter or longer
period as the
<PAGE>
Committee may determine), and shall thereupon terminate. In no event, however,
shall an Option or Stock Appreciation Right remain exercisable beyond the latest
date on which it could have been exercised without regard to this Section 7.
Except as otherwise determined by the Committee, all Options and Stock
Appreciation Right held by a Participant immediately prior to death that are not
then exercisable shall terminate at death.
(b) Except as otherwise determined by theCommittee, all
Restricted Stock held by the Participant must be transferred to the Company
(and, in the event the certificates representing such Restricted Stock are held
by the company, such Restricted Stock will be so transferred without any further
action by the Participant) in accordance with Section 6.3(d) above.
(c) Any payment or benefit under a Deferred Stock Award,
Performance Award, or Supplemental Grant to which the Participant was not
irrevocably entitled prior to death will be forfeited and the Award canceled as
of the time of death, unless otherwise determined by the Committee.
7.2. Termination of Service (Other Than By Death).
If a participant who is an Employee ceases to be an Employee
for any reason other than death, or if there is a termination (other than by
reason of death) of the consulting, service or similar relationship in respect
of which a non-Employee Participant was granted an Award hereunder (such
termination of the employment or other relationship being hereinafter referred
to as a "Status Change"), the following will apply:
(a) Except as otherwise determined by the Committee, all
Options and Stock Appreciation Rights held by the Participant that were not
exercisable immediately prior to the Status Change shall terminate at the time
of the Status Change. Any Options or Rights that were exercisable immediately
prior to the Status Change will continue to be exercisable for a period of three
months (or such longer period as the Committee may determine), and shall
thereupon terminate, unless the Award provides by its terms for immediate
termination in the event of a Status Change (unless otherwise determined by the
Committee) or unless the Status Change results from a discharge for cause which
in the opinion of the Committee casts such discredit on the participant as to
justify immediate termination of the Award (unless otherwise determined by the
Committee). In no event, however, shall an Option or Stock Appreciation Right
remain exercisable beyond the latest date on which it could have been exercised
without regard to this Section 7. For purposes of this paragraph, in the case of
a Participant who is an Employee, a Status Change shall not be deemed to have
resulted by reason of (i) a sick leave or other bona fide leave of absence
approved for purposes of the Plan by the committee, so long as the Employee's
right to reemployment is guaranteed either by statute or by contract, or (ii) a
transfer of employment between the Company and a subsidiary or between
subsidiaries, or to the employment of a corporation (or a parent or subsidiary
corporation of such corporation) issuing or assuming an option in a transaction
to which section 424(a) of the Code applies.
(b) Except as otherwise determined by the Committee, all
Restricted Stock held by the Participant at the time of the Status Change must
be transferred to the Company (and, in the event the certificates representing
such Restricted Stock are held by the Company, such
<PAGE>
Restricted Stock will be so transferred without any further action by the
Participant) in accordance with Section 6.3(c) above.
(c) Any payment or benefit under a Deferred Stock Award,
Performance Award, or Supplemental Grant to which the Participant was not
irrevocably entitled prior to the Status Change will be forfeited and the Award
cancelled as of the date of such Status Change unless otherwise determined by
the Committee.
7.3. Certain Corporate Transactions.
Except as otherwise provided by the Committee at the time of
grant, 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
the Company's outstanding 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 the Company's assets or a dissolution or
liquidation of the Company (a covered transaction"), the following rules shall
apply:
(a) Subject to paragraph (b) below, all outstanding Awards
requiring exercise will cease to be exercisable, and all other Awards to the
extent not fully vested (including Awards subject to conditions not yet
satisfied or determined) will be forfeited, as of the effective time of the
covered transaction, provided that the Committee may in its sole discretion, on
or prior to the effective date of the covered transaction, (1) make any
outstanding Option and Stock Appreciation Right exercisable in full, (2) remove
the restrictions from any Restricted Stock, (3) cause the Company to make any
payment and provide any benefit under any Deferred Stock Award, Performance
Award, or Supplemental Grant, (4) remove any performance or other conditions or
restrictions on any Award, and (5) forgive all or any portion of the principal
of or interest on a Loan; or
(b) With respect to an outstanding Award held by a participant
who, following the covered transaction, will be employed by or otherwise
providing services to a corporation which is a surviving or acquiring
corporation in the covered transaction or an affiliate of such a corporation,
the Committee may at or prior to the effective time of the covered transaction,
in its sole discretion and in lieu of the action desccribed in paragraph (a)
above, arrange to have such surviving or acquiring corporation or affiliate
assume any Award held by such participant outstanding hereunder or grant a
replacement award which, in the judgment of the Committee, is substantilly
equivalent to any Award being replaced.
7.4. Termination Following Change of Control.
Notwithstandng any other provision of this Plan, if the
Participant's employment terminates because of a "Qualified Termination" as
defined in Exhibit A, all unvested Options and Stock Appreciation Rights then
held by such person shall immediately become fully vested, all Options and Stock
Appreciation Rights then held by such person shall remain exercisable until the
earlier of (i) the fourth anniversary of such Qualified Termination and (ii) the
latest date on which such Option or Right could have been exercised without
regard to Seciton 7.1 and Section 7.2, and all other Awards shall immediately
become fully vested and all restrictions, conditions and performance goals with
respect to such Awards shall be deemed satisfied and shall no longer be
applicable.
<PAGE>
8. GENERAL PROVISIONS
8.1. Documentation of Awards.
Awards will be evidenced by such written instruments, if any,
as may be prescribed by the Committee from time to time. Such instruments may be
in the form of agreements to be executed by both the Participant and the
Company, or certificates, letters or similar instruments, which need not be
executed by the Participant but acceptance of which will evidence agreement to
the terms thereof.
8.2. Rights as a Stockholder, Dividend Equivalents.
Except as specifically provided by the Plan, the receipt of an
Award will not give a Participant rights as a stockholer, the Participant will
obtain such rights, subject to any limitations imposed by the Plan or the
instrument evidencing the Award, upon actual receipt of Stock. However, the
Committee may, on such conditions as it deems appropriate, provide that a
Participant will receive a benefit in lieu of cash dividends that would have
been payable on any or all Stock subject to the Participant's Award had such
Stock been outstanding. Without limitation, the Committee may provide for
payment to the Participant of amounts representing such dividends, either
currently or in the future, or for the investment of such amounts on behalf of
the Participant.
8.3. Conditions on Delivery of Stock.
The Company will not be obligated to deliver any shares of
Stock pursuant to the Plan or to remove restriction from shares previously
delivered under the Plan (a) until all conditions of the Award have been
satisfied or removed, (b) until, in the opinion of the Company's counsel, all
applicable Federal and state laws and regulation have been complied with, (c) if
the outstanding Stock is at the time listed on any stock exchange or The Nasdaq
National Market, until the shares to be delivered have been listed or authorized
to be listed on such exchange or market upon official notice of notice of
issuance, and (d) until all othe legal matters in connection with the issuance
and delivery of such shares have been approved by the Company's counsel. If the
sale of Stock has not been registered under the Securities Act of 1933, as
amended, the Company may require, as a condition to exercise of the Award, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of such Act and may require that the certificates
evidencing such Stock bear an appropriate legend restricting transfer.
If an Award is exercised by the Participant's legal
representative, the Company will be under no obligation to deliver Stock
pursuant to such exercise until the company is satisfied as to the authority of
such representative.
8.4. Tax Withholding.
The Company will withhold from any cash payment made pursuant
to an Award an amount sufficient to satisfy all federal, state and local
withholding tax requirements (the "withholding requirements").
<PAGE>
In the case of an Award pursuant to which Stock may be
delivered, the Committee will have the right to require that the Participant or
other appropriate person remit to the Company an amount sufficient to satisfy
the withholding requirements, or make other arrangements satsifactory to the
Committee with regard to such requirements, prior to the delivery of any Stock.
If and to the extent that such withholding is required, the Committee may permit
the Participant or such other person to elect at such time and in such manner as
the committee provides to have the Company hold back from the shares to be
delivered, or to deliver to the Company, Stock having a value calculated to
satisfy the withholding requirement. The Committee may make such share
withholding mandatory with respect to any Award at the time such Award is made
to a Participant.
If at the time an ISO exercised the Committee determines that
the Company could be liable for withholding requirements with respect to a
disposition of the Stock received upon exercise, the Committee may require as a
condition of exercise that the person exercising the ISO agree (a) to inform the
Company promptly of any disposition (within the meaning of section 424(c) of the
Code) of Stock received upon exercise, and (b) to give such security as the
Committee deems adequate to meet the potential liability of the Company for the
withholding requirements and to augment such security from time to time in any
amount reasonably deemed necessary by the Committee to preserve the adequacy of
such security.
8.5. Nontransferability of Awards.
Unless otherwise permitted by the Committee, no Award (other
than an Award in the form of an outright transfer of cash or Unrestricted Stock)
may be transferred other than by will or by the laws of descent and
distribution, and during a Participant's lifetime an Award requiring exercise
may be exercised only by the Participant (or in the event of the Participant's
incapacity, the person or persons legally appointed to act on the Participant's
behalf).
8.6. Adjustments in the Event of Certain Transactions.
(a) In the event of a stock dividend, stock split or
combination of shares, recapitalization or other change in the Company's
capitalization, or other distribution to common stockholders other than normal
cash dividends after the effective date of the Plan, the Committee will make any
appropriate adjustments to the maximum number of shares that may be delivered
under the Plan under Section 4 above.
(b) In any event referred to in paragraph (a), the Committee
will also make any appropriate adjustments to the number and kind of shares to
stock or securities subject to Awards then outstanding or subsequently granted,
any exercise prices relating to Awards and any other provision of Awards
affected by such change. The Committee may also make such adjustments to take
into account material changes in law or in accounting practices or principles,
merger, consolidations, acquisitions, dispositions or similar corporate
transactions, or any other event, if it is determined by the Committee that
adjustments are appropriate to avoid distortion in the operation of the Plan.
(c) In the case of ISOs or or purposes of the limts set forth
in the second paragraph of Section 4, the adjustments described in (a) and (b)
will be made only to the extent
<PAGE>
consistent with continued qualification of the option under Section 422 of the
Code (in the case of an ISO) or Section 162(m) of the Code (in the case of the
limits in Section 4).
8.7. Employment Rights, Etc.
Neither the adoption of the Plan nor the grant of Awards will
confer upon any person any right to continued retention by the Company or any
subsidiary as an Employee or otherwise, or affect in any way the right of the
Company or subsidiary to terminate an employment, service or similar
relationship at any time. Except as specifically provided by the Committee in
any particular case, the loss of existing or potential profit in Awards granted
under the Plan will not constitute an element of damages, in the event of
termination of an employment, service or similar relationship even if the
termination is in violation of an obligation of the Company to the Participant.
8.8. Deferral of Payments.
The Committee may agree at any time, upon request of the
Participant, to defer the date an which any payment under an Award will be made.
8.9. Past Services as Consideration.
Where a Participant purchases Stock under an Award for a price
equal to the par value of the Stock the Committee may determine that such price
has been satisfied by past services rendered by the Participant.
9. EFFECT, AMENDMENT AND TERMINATION
Neither adoption of the Plan nor the grant of Awards to a
Participant will affect the Company's right to grant to such Participant awards
that are not subject to the Plan, to issue to such Participant Stock as a bonus
or otherwise, or to adopt other plans or arrangements under which Stock may be
issued to Employees.
The Committee may at any time or times amend the Plan or any
outstanding Award for any purpose, which may at the time be permitted by law, or
may at any time terminate the Plan as to any further grants of Awards, provided
that (except to the extent expressly required or permitted by the Plan) no such
amendment will, without the approval of the stockholders of the Company,
effectuate a change for which stockholder approval is required in order for the
Plan to continue to qualify for the award of ISOs under section 422 of the Code,
for the award of performance-based compensation under Section 162(m) of the Code
or under rule16b-3 promulgated under Section 16 of the 1934 Act.
<PAGE>
EXHIBIT A
For purposes of Section 7.4 of the Plan, the following terms have the
following meanings:
"Base Salary" means Participant's annual base salary, exclusive of any
bonus or other benefits the Participant may receive.
"Cause" means the following, determined by the committee in its
reasonable judgment:
(i) willful failure to perform, or gross negligence in
the performance of, participant's duties and
responsibilities to the Company and its subsidiaries;
or
(ii) fraud, embezzlement or other material dishonesty with
respect to the Company or any of its subsidiaries; or
(iii) conviction of, or plea of nolo contendere to, a
felony or other crime involving moral turpitude; or
(iv) other conduct by participant that is materially
harmful to the business, interests or reputation of
the Company or any of its subsidiaries.
"Change of Control" means such time as:
(i) a "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of Voting Stock representing
more than 50% of the total voting power of the Voting
Stock of the Company on a fully diluted basis,
(ii) individuals who on ____________, 1998 constitute the
Board (together with any new directors whose election
by the Board or whose nomination for election by the
Company's stockholders was approved by a vote of at
least two-thirds of the members of the Board then in
office who either were members of the Board on
____________, 1998 or whose election or nomination
for election was previously so approved) cease for
any reason to constitute a majority of the members of
the Board then in office and
(iii) the merger or consolidation of the Company with or
into another corporation; or the merger or
consolidation of another corporation with and into
the Company, with the effect that, immediately after
such transaction, the Voting Stock of the entity
surviving such merger or consolidation received in
such transaction by the stockholders of the Company
immediately prior to such transaction represents the
ultimate beneficial ownership of less than 50% of
Voting Stock of the entity surviving such merger or
consolidation.
<PAGE>
"Disability" has the meaning given it in any long-term disability plan
of the Company in which Participant participates. Participant's employment shall
be deemed terminated for Disability when participant is entitled to receive
long-term disability compensation pursuant to such long-term disability plan. If
the Company does not maintain such a plan, participant shall be deemed
terminated for Disability if the Company terminates his employment due to
illness, injury, accident or condition of either a physical or psychological
nature as a result of which Participant is unable to perform substantially the
duties and responsibilities of his position for 180 days during a period of 365
consecutive calendar days.
"Good Reason" means the voluntary termination by Participant of his or
her employment after the occurrence, without participant's express written
consent, of any of the following events:
(i) assignment to Participant of duties materially
inconsistent with his or her positions, duties,
responsibilities, or reporting requirements with the
Company (or a subsidiary) immediately prior to a
Change of Control or a material adverse alteration in
Participant's status or the nature of his or her
responsibilities with the Company immediately prior
to a Change in Control; or
(ii) reduction in Participant's rate of Base Salary to
less than 100 percent of the rate of Base Salary paid
to the Participant immediately preceding the Change
of Control, or reduction in Participant's total cash
compensation opportunities, including salary,
incentives and other benefits, for any fiscal year to
less than 100 percent of the total cash compensation
opportunities made available to the Participant
immediately preceding the Change of Control (for this
purpose, such opportunities shall be deemed reduced
if the objective standards by which participant's
incentive compensation is measured become materially
more stringent or if the amount of such compensation
is materially reduced on a discretionary basis from
the amount that would be payable solely by reference
to the objective standards).
"Qualified Termination" means the termination of Participant's
employment during a Standstill Period (1) by the Company other than for Cause,
death or Disability, and (2) in the case of a Participant who at the time of the
Change of Control holds an office specifically designated by the Committee in
its sole discretion to have such right, by Participant for Good Reason.
"Standstill Period" is the period commencing on the date of a Change of
Control and continuing until the close of business on the last business day of
the 24th calendar month following such Change of Control.
"Voting Stock" means the capital stock of any class or kind ordinarily
having the power to vote for the election of directors, managers or other voting
members of the governing body of such Person.
<PAGE>
Exhibit 10.2
BUSINESS LOAN AGREEMENT WITH COVENANTS
THIS BUSINESS LOAN AGREEMENT WITH COVENANTS (this "Agreement") is made
this 12 day of August, at Cleveland, Ohio, by and among HOME RETAIL HOLDINGS,
INC. (formerly known as Gaylord Companies, Inc., and the surviving entity of a
merger between Gaylord Companies, Inc. and Home Retail Acquisition Corp.), a
Delaware Corporation, THE COOKSTORE, INC, an Ohio Corporation, and THE COOKSTORE
WORTHINGTON, INC., an Ohio Corporation, jointly and severally, (collectively,
the "Borrower", and each a "Borrower", unless the context otherwise requires),
with their principal place of business located at 4006 Venture Court, Columbus,
Ohio 43228, and LIBERTY BIDCO INVESTMENT CORPORATION, a Michigan Corporation
("BIDCO"), at 30833 Northwestern Highway, Suite 211, Farmington Hills, Michigan
48334-2582. This Agreement is intended to, and shall be, deemed effective as of
the Effective Date of the Reorganization Plan described below. Furthermore, this
Agreement and the financing described herein is intended by the parties hereto
to constitute the Exit Financing as that term is described in the Reorganization
Plan.
WHEREAS, the Borrowers filed for protection under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court, Southern
District of Ohio, Eastern Division, Case No. 97-60560, et seq. (the "Bankruptcy
Case"); and
WHEREAS, an Amended Plan of Reorganization Of Gaylord Companies, Inc.,
The Cookstore, Inc., and The Cookstore Worthington, Inc., dated June 24, 1998,
As Modified (the "Reorganization Plan"), has been Confirmed on July 10, 1998 by
the Bankruptcy Court (the "Confirmation Order") in the Bankruptcy Cases,
enabling the Borrowers to emerge from the Bankruptcy Cases as viable going
businesses, provided that the Borrowers obtain appropriate exit financing;
WHEREAS, during the pendency of the Bankruptcy Cases, Fremont Financial
Corporation, a California Corporation ("Fremont") lent up to $1,500,000 to The
Cookstore, Inc. and The Cookstore Worthington, Inc. pursuant to a certain Loan
and Security Agreement, Promissory Notes, Guarantees and other loan documents
dated April 23, 1998 (collectively, the "Fremont Financing Agreement"); and
WHEREAS, the Borrowers and BIDCO desire to payout, terminate and
replace the Fremont Financing Agreement by and through this Agreement;
NOW, THEREFORE, in consideration of the terms, covenants and conditions
hereinafter set forth, the above recitals which are incorporated herein by
reference, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. EXIT FINANCING: BIDCO shall lend or otherwise make available to
Borrower, upon the satisfaction of the terms and conditions hereinafter
set forth, and Borrower may borrow from BIDCO, the aggregate principal
sum of One Million Three Hundred Thousand Dollars ($1,300,000.00) (the
<PAGE>
"Exit Financing") together with interest thereon calculated on the
basis of a 360 day year, counting the actual number of days elapsed, at
the rate of:
three (3) percentage points above the rate published by the
Wall Street Journal for the first business day of every month
as the "prime" rate per annum (the "Note Rate"), until
maturity. The "prime" rate published for the first business
day of each month will change the Note Rate effective for that
month and shall be used to calculate the payment due (whether
interest only or principal and interest, as set forth below)
on the last business day of that month. The "prime" rate may
not necessarily be the lowest interest rate at which BIDCO is
willing to extend its credit facilities, nor is it necessarily
the interest rate used by BIDCO for its most credit-worthy
customers. After maturity hereof, the interest rate on all
principal or interest outstanding, whether by acceleration or
otherwise, shall be eleven (11) percentage points above such
"prime" rate.
Any and all advances for the Exit Financing shall be evidenced by a
Promissory Note (the "$1,300,000 Note").
The funding of the Exit Financing is expressly subject to the following
criteria being met to the sole satisfaction of BIDCO: favorable
findings upon completion of due diligence by BIDCO; subordination of
officer and shareholder debt to the obligations owed to BIDCO; the
execution and delivery of a valid and binding definitive acquisition
agreement between Home Retail Holdings, Inc and Aropi, Incorporated
upon terms acceptable to BIDCO.
Borrower acknowledges that the Exit Financing shall be funded in the
following manner, and for the following purposes:
(i) $1,053,373.69 has been simultaneously herewith paid via wire
transfer to Fremont being an amount equal to the total
principal and accrued interest then owed by the Borrowers to
Fremont (and to any and all participants in the Fremont
Financing Agreement); and
(ii) The remaining balance of $246,626.31 shall be wire transferred
to such account or accounts as shall be designated by
Borrowers in a separate written Draw Instruction, to be used
for the working capital of the Borrowers to enable them to
cause the Reorganization Plan to become effective and the
Borrowers emerge as viable going businesses from the
Bankruptcy Cases.
2. EXIT FINANCING WARRANTS: Effective on even date herewith, Home Retail
Holdings, Inc. shall execute and deliver to BIDCO Warrants for the
purchase of five percent (5%) of Home Retail Holdings, Inc.'s Common
Stock and Class B Common Stock on a fully diluted basis as of August
11, 1998 upon such terms and at an exercise price of $.01 as adjusted
pursuant to the Warrant of even date, as are acceptable to BIDCO in
accordance with the Letter of Understanding (Revised) dated August 5,
1998, between BIDCO and Home Retail Holdings, Inc. Such Warrants shall
have registration rights that provide BIDCO the right to have
<PAGE>
twenty-five percent (25%) of the Borrower's stock sold as a part of the
first following securities registration conducted by the Borrower, and
any remaining portion sold pursuant to subsequent securities
registrations.
3. PAYMENT: Commencing on the last business day of the month in which the
Closing occurs, Borrower shall pay the outstanding obligations as
follows:
FIRST SIX MONTHS: Payment of interest only, based on the Note
Rate, due on the last business day of each month, commencing
on August 31, 1998 through and including January 31, 1999.
PAYMENT UPON PUBLIC OFFERING OR PRIVATE PLACEMENT: Home Retail
Holdings, Inc. will make every reasonable effort to accomplish
and complete a public offering of additional capital stock to
be traded on the NASDAQ or a recognized stock market in
October, 1998. In such public offering, Home Retail Holdings,
Inc. will cause sufficient shares of its Class A Common Stock
to be included in the registration statement such that up to
twenty-five percent (25%) of the shares received by BIDCO upon
the exercise of its Warrant shall be sold pursuant to such
public offering. Furthermore, Home Retail Holdings, Inc. will
make every reasonable effort to accomplish similar and
additional public offerings in order that any remaining
portion of shares shall be registered in such subsequent
offerings, which render such shares freely tradeable by BIDCO
or its assignee. Furthermore, Home Retail Holdings, Inc. shall
reserve and make available such shares necessary until the
exercise of the Warrant. In the event due to market conditions
or other business factors Home Retail Holdings, Inc. does not
conduct the public offering of additional capital stock, it
has agreed that it shall conduct a private placement offering
of additional capital stock (Borrower shall use its best
efforts to sell all of the stock offered through the private
placement offering, although Home Retail Holdings, Inc. nor
any other Borrower can guaranty or assure BIDCO that such
stock so offered will be fully subscribed). The Exit
Financing, as evidenced by this Agreement and the $1,300,000
Note, shall be paid in full with the proceeds of the public
offering or private placement offering, whichever occurs
first.
MATURITY: In all events, payment in full of the obligations
hereunder shall be due January 31, 1999 (the "Maturity Date"),
at which time the entire balance of principal of the Exit
Financing, as evidenced by this Agreement, and the $1,300,000
Note, together with all accrued but unpaid interest, shall be
due and immediately payable.
Each payment received by BIDCO shall be applied first to all
outstanding fees and expenses due to BIDCO, then to accrued but unpaid
interest, then to principal. All payments shall be made to BIDCO at the
address set forth above or as otherwise directed in writing to
Borrower. It is understood and agreed that the amortization of the loan
will result in a "balloon payment" on the Maturity Date and there has
been no agreement by BIDCO to refinance such balloon payment.
<PAGE>
In the event any payment is not received by BIDCO on or before the date
when due, a late fee in the amount of five percent (5%) of the past-due
payment shall be immediately payable by Borrower to BIDCO.
4. PREPAYMENT: The $1,300,000 Note may be prepaid at any time and to the
extent such Prepayment occurs, Borrower shall pay to BIDCO a prepayment
penalty in an amount equal to twenty percent (20%) of the amount so
prepaid, which shall be due at the time of such Prepayment. The term
"Prepayment" shall include any payment or reduction of the balance due
under the $1,300,000 Note, regardless of whether such payment or other
reduction, (a) is voluntary or involuntary; (b) is occasioned by
BIDCO's acceleration of the $1,300,000 Note; (c) is made by Borrower or
by a third party; (d) results from BIDCO's receipt or collection of
proceeds of its collateral, including condemnation awards; (e) results
from BIDCO's exercise of its right of setoff; and/or (f) is made during
a bankruptcy, reorganization or other proceeding, or is made pursuant
to any plan of reorganization or liquidation; provided, however, the
term "Prepayment" shall not include (1) payment of the $1,300,000 Note
from the proceeds of the public stock offering or private placement
stock offering described in Section 3 above, or (2) an amendment or
restructuring of the Loan and Note Agreement whereby BIDCO hereafter
extends additional or substitute financing or refinancing to Borrowers.
Notwithstanding any prepayment of the $1,300,000 Note, the Warrant,
executed and delivered by Borrower on even date herewith, shall remain
in full force and effect in accordance with the terms thereof.
5. SECURITY: To secure the payment of the $1,300,000 Note, this Agreement,
and any other present or future liability of Borrower to BIDCO, whether
several, joint, or joint and several, Borrower hereby pledges and
grants to BIDCO a first continuing security interest in all of
Borrower's accounts, chattel paper, instruments and general
intangibles, machinery and equipment, inventory and supplies, all
furniture and fixtures and interest in joint ventures or other
entities, as more fully defined in the Security Agreement, of even
date, and all additions, accessions, replacements, substitutions,
increments, proceeds and products thereof and thereto, whether now
owned or hereafter acquired ("Collateral").
6. REPRESENTATIONS AND WARRANTIES: Borrower represents that:
6.1 Home Retail Holdings, Inc. is a corporation duly organized and
validly existing under the laws of the State of Delaware, in
good standing, and duly licensed or qualified as a foreign
corporation in all states wherein the nature of its property
owned or business transacted by it makes such licensing or
qualification necessary;
6.2 The Cookstore, Inc. is a corporation duly organized and
validly existing under the laws of the State of Ohio, in good
standing, and duly licensed or qualified as a foreign
corporation in all states wherein the nature of its property
owned or business transacted by it makes such licensing or
qualification necessary;
<PAGE>
6.3 The Cookstore Worthington, Inc. is a corporation duly
organized and validly existing under the laws of the State of
Ohio, in good standing, and duly licensed or qualified as a
foreign corporation in all states wherein the nature of its
property owned or business transacted by it makes such
licensing or qualification necessary;
6.4 All necessary corporate proceedings of each Borrower have been
duly taken to authorize the execution, delivery and
performance of the Loan Documents by Borrower and the
consummation of the loan transaction;
6.5 The execution and delivery of this Agreement, the $1,300,000
Note, the Security Agreement, and the Warrant (collectively,
the "Loan Documents") to which Borrower is a party are within
the power and authority of Borrower. The Loan Documents to
which Borrower is a party will be a legal, valid and binding
obligation of Borrower, enforceable against Borrower in
accordance with their respective terms except to the extent
that enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of
creditor's rights generally and subject to general principles
of equity. The obligation of Borrower to pay the principal of
the $1,300,000 Note, together with all interest accrued
thereon and other charges, is absolute and unconditional, and
there exists no right of setoff or recoupment, counterclaim,
cross-claim or defense of any nature whatsoever to payment of
the Obligations;
6.6 Neither the execution nor delivery of this Agreement, the
other Loan Documents, or the consummation of the loan
transaction contemplated hereby, will conflict with or result
in a breach of, or constitute a default under, any of the
terms, obligations, covenants, conditions or provisions of:
(1) the governing documents (the Articles of Incorporation,
By-Laws or Code of Regulations) of Borrower, or any other
corporate restriction, or (2) any contract, indenture,
mortgage, deed of trust, pledge, bank loan or credit agreement
or instrument to which Borrower is now a party, or by which
its properties may be bound or affected, or (3) the
Reorganization Plan and/or Confirmation Order, or (4) any
judgment, order, writ, injunction, decree or demand of any
court, arbitrator, grand jury, or any governmental agency, or
result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any property or
asset of Borrower (except in the favor of BIDCO) under the
terms or provisions of any of the foregoing. Borrower is not
in default of the performance, observance or fulfillment of
any of the terms, obligations, covenants, conditions or
provisions contained in the Reorganization Plan;
6.7 The balance sheets, profits and loss statements, and
statements of income and retained earnings and statement of
cash flows of Borrower, previously furnished to BIDCO, are
true and correct in all material respects and fairly represent
the financial condition of Borrower as at the dates of said
financial statements and the results of their operations for
the periods ending on said dates. Borrower does not have any
material contingent obligations, liabilities for taxes,
<PAGE>
long-term leases, or unusual forward or long-term commitments
not disclosed by, or reserved against in, said balance sheets
or the notes thereto; and at the present time there are no
material unrealized or anticipated losses from any unfavorable
commitments of Borrower. Said financial statements were
prepared in accordance with generally accepted accounting
procedures consistently applied ("GAAP"). Since the date of
the latest of such statements there has been no material
adverse change in the financial condition of Borrower from
that set forth in said balance sheets as at that date.
6.8 Borrower has good and marketable title to all of its
properties and assets, including those which constitute the
Collateral, free and clear of any liens, charges, encumbrances
or other adverse claims, whether legal or equitable, except
for the first security interest of BIDCO upon the Collateral
as of the date first set forth above.
6.9 There are no actions or proceedings pending (including,
without limitation, any adversary proceedings in the
Bankruptcy Case) by or against a Borrower before any court or
administrative agency, and Borrower has no knowledge or notice
of any pending, threatened or imminent litigation,
governmental investigations, or claims, complaints, actions or
prosecutions involving a Borrower, except for the Bankruptcy
Case and such ongoing collection matters in which the Borrower
is the plaintiff.
6.10 Borrower has filed all federal, state and local tax returns
(including, but not limited to, sales taxes, personal property
taxes, franchise taxes and income taxes) together with all
other reports which it is required by law to file. Borrower
has paid all taxes, assessments and other similar charges that
are due and payable prior to such taxes becoming a delinquency
or lien against the Borrower's property (except for any such
state and local taxes, assessments or charges, in an amount
not in excess of $92,000 in the aggregate, which are due and
payable with respect to periods prior to the Petition Date of
the Bankruptcy Case, which taxes shall be duly paid in
accordance with the terms of the Reorganization Plan).
6.11 Each Borrower is solvent and able to pay all of its debts
(including trade debts) as they come due. No transfer of
property is being made by a Borrower, and no obligation is
being incurred by a Borrower in connection with the
transactions contemplated by this Agreement or the other Loan
Documents with the intent to hinder, delay or defraud either
present or future creditors of Borrower.
6.12 Borrower is in compliance in all material respects with the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"). No Reportable Event or Prohibited Transaction has
occurred or is continuing with respect to any Plan; no
circumstances exist which would entitle the PBGC to institute
proceedings to terminate or appoint a trustee to administer a
Plan; the PBGC has instituted no such proceedings; neither
Borrower nor any Commonly Controlled Entity has completely or
partially withdrawn from a Multiemployer Plan; Borrower and
<PAGE>
each Commonly Controlled Entity have met their respective
minimum funding requirements under ERISA with respect to all
of their Plans, and the present value of all vested benefits
under each Plan does not exceed the fair market value of all
Plan assets allocable to such benefits, as determined on the
most recent valuation date of the Plan in accordance with
ERISA; and neither Borrower nor any Commonly Controlled Entity
has incurred any liability to the PBGC.
6.13 Borrower is in compliance and conformity, in all material
respects, with all laws (including without limitation all
applicable foreign, federal, state and local laws, including
environmental laws, safety laws, pension laws and employment
or labor laws), ordinances, rules, regulations and all other
legal requirements, the violation of which would have a
material adverse effect on Borrower's business, operations,
properties, assets or financial condition. Borrower has not
received any notice or order of any violation or claim of
violation of any such law, ordinance, rule, regulation, or
requirement from any governmental authority wherein the effect
of any such violation or violations in the aggregate may have
a material adverse effect on the business, properties,
operations, or financial condition of Borrower.
7. AFFIRMATIVE COVENANTS: So long as the $1,300,000 Note remains
outstanding, as regards its business operations, Borrower shall:
7.1 Maintain insurance with financially sound and reputable
insurers covering its properties and business against those
casualties and contingencies and in the types and amounts as
shall be in accordance with sound business practices and
industry standards. All such policies shall name BIDCO as a
loss payee, as its interests may appear, and must provide for
not less than thirty (30) days prior written notice to BIDCO
of any cancellation, change or modification of any term,
condition or amount of protection therein. Such insurance
policy shall be issued by insurance carriers and BIDCO may
reject any insurance carrier with a "Best Insurance Report"
rating of less than A, and a financial size category of less
than Class X.
7.2 Maintain its existence and business operations as presently in
effect in accordance with all applicable laws and regulations,
pay its debts and perform all of its obligations when due
under normal terms (including, but not limited to all debts
and obligations set forth in the Loan Documents), and pay all
taxes, assessments, fees and other governmental monetary
obligations on or before the date they are last payable
without penalty, except as they may be contested in good faith
if they have been properly reflected on its books and, at
BIDCO's request, adequate funds or security has been pledged,
escrowed or reserved to insure payment.
7.3 Maintain proper books, records and accounts in accordance with
GAAP, consistent with financial statements previously
submitted to BIDCO.
<PAGE>
7.4 Furnish to BIDCO whatever information, books and records BIDCO
may reasonably request, including at a minimum:
A. Within thirty (30) days after each month, a balance
sheet as of the end of that month, and a statement of
profit and loss and surplus (including a comparison
to previously submitted budgets), for that month and
from the beginning of that fiscal year to the end of
that month.
B. Within ninety (90) days after, and as of the end of
each of its fiscal years, detailed financial and
operating statements, including a balance sheet and a
statement of profit and loss and surplus. The
statements shall be audited by an independent
certified public accounting firm reasonably
acceptable to BIDCO.
C. As soon as they become available, Borrower's Form
10-Q , 10-K or 8-K, and any other filings made by
Borrower with the Securities Exchange Commission.
All financial and operating statements submitted to BIDCO
shall be prepared in accordance with GAAP, applied on a
consistent basis, and shall be accompanied by a Certificate of
Compliance, in the form attached as Exhibit A, executed by an
officer of Borrower.
From time to time upon request by BIDCO, and as BIDCO may
reasonably require, such further information regarding the
business affairs and financial condition of Borrower,
including, but not limited to, accounts payable and accounts
receivable agings, accounting and management recommendations
and a statement from Borrower certified by Borrower's
Secretary or Assistant Secretary affirming Borrower's
compliance with all terms and conditions of this Agreement and
that no Event of Default or unmatured default exists (the
"No-Default Certificates")
7.5 Furnish to BIDCO a written and detailed, forecasted annual
operating budget for each fiscal year during the Term not less
than sixty (60) days prior to the beginning of the subject
fiscal year.
7.6 Furnish BIDCO with copies of all of Borrower's material
correspondence, if any, with Borrower's shareholders,
directors, executive committees and the financial community.
7.7 Hold Board of Directors meetings no less than once each
quarter annum and invite BIDCO to send a representative to
each Directors meeting.
7.8 Notify BIDCO in the event that Borrower is or reasonably
expects to be in default of any of the provisions hereof.
<PAGE>
7.9 Borrower will execute such other and further documents and
instruments as BIDCO may request to implement the provisions
of this Agreement and to perfect and protect the security
interests to BIDCO contemplated herein.
7.10 Home Retail Holdings, Inc. will make every reasonable effort
to accomplish and complete a public offering of additional
capital stock to be traded on the NASDAQ or a recognized stock
market in October, 1998. In such public offering, Home Retail
Holdings, Inc. will cause sufficient shares of its Class A
Common Stock to be included in the registration statement such
that up to twenty-five percent (25%) of the shares received by
BIDCO upon the exercise of its Warrant shall be sold pursuant
to such public offering. Furthermore, Home Retail Holdings,
Inc. will make every reasonable effort to accomplish similar
and additional public offerings in order that any remaining
portion of shares shall be registered in such subsequent
offerings, which render such shares freely tradeable by BIDCO
or its assignee. Furthermore, Home Retail Holdings, Inc. shall
reserve and make available such shares necessary until the
exercise of the Warrant. In the event due to market conditions
or other business factors Home Retail Holdings, Inc. does not
conduct the public offering of additional capital stock, it
has agreed that it shall conduct a private placement offering
of additional capital stock (Borrower shall use its best
efforts to sell all of the stock offered through the private
placement offering, although Home Retail Holdings, Inc. nor
any other Borrower can guaranty or assure BIDCO that such
stock so offered will be fully subscribed). The proceeds
sought from such public and/or private financing will be
sufficient to pay in full the Exit Financing, and the actual
proceeds (after payment of the expenses of such offering)
shall be first used to pay in full the $1,300,000 Note,
together with any accrued but unpaid interest.
8. NEGATIVE COVENANTS: So long as the $1,300,000 Note remains outstanding,
as regards its business operations, Borrower will not without the
written consent of BIDCO:
8.1 Permit the ratio of its current assets to its current
liabilities at any time to be less than:
1.25:1.00
The above ratio of current assets to current liabilities shall
be computed on a basis consistent with financial statements
previously submitted to BIDCO and in conformance with GAAP.
8.2 Permit its net worth at any time to be less than:
($600,000.00) through 11/30/98, and $500,000.00 by
12/31/98 and thereafter.
The above ratio of net worth shall be computed on a basis
consistent with financial statements previously submitted to
BIDCO and in conformance with GAAP. For the purpose of this
calculation, net worth shall be reduced by loans to
stockholders and related party receivables.
<PAGE>
8.3 Acquire, repurchase, redeem or retire any shares of any class
of its capital stock, or declare or pay dividends or make any
other distributions upon any shares of any class of its
capital stock, without the consent of BIDCO, which shall not
be unreasonably withheld.
8.4 Incur, or permit to remain outstanding, debt for borrowed
money or installment obligations, except debt to BIDCO,
unsecured debt incurred in the ordinary course of business,
debt disclosed in writing to BIDCO prior to the date hereof
(including all obligations pursuant to the Reorganization
Plan) (the "Permitted Debt"). For the purposes of this
covenant, the sale of Borrower's accounts receivable shall be
deemed the incurring of debt for borrowed money.
8.5 Create or permit to exist any lien on any of its property,
real or personal, except: liens to BIDCO; liens incurred in
the ordinary course of business securing current nondelinquent
liabilities for taxes, worker's compensation, unemployment
insurance, social security and pension liabilities, and liens
for taxes being contested in good faith.
8.6 Except in the ordinary course of business or with the consent
of BIDCO (which consent shall not be unreasonably withheld),
consolidate with or merge into any corporation or business
entity, or permit any corporation or business entity to merge
into it (provided, that The Cookstore, Inc. and/or The
Cookstore Worthington, Inc. may be merged into their parent,
Home Retail Holdings, Inc.); nor convey, lease or sell all or
a material portion of its assets or business, nor lease,
purchase or otherwise acquire all or a material portion of the
assets or business of any other person, corporation or
business entity.
8.7 Guarantee or otherwise become or remain secondarily liable on
the undertaking of another, except on endorsement for deposit
and collection in the ordinary course of business.
8.8 Purchase or acquire any securities of, or make any loans or
advances to, or investment in, any person, firm or
corporation, except obligations of the United States
Government, open market commercial paper rated one of the top
two ratings by a rating agency of recognized standing and/or
certificates of deposit in commercial banks; provided,
however, that so long as Borrower is not then in default
hereunder or the payment thereof would cause the Borrower to
be in default hereunder, Borrower may also pay the Advisory
Agreement payments as approved by the Reorganization Plan to
Cambridge Partners, LLC, such Advisory Agreement payments
being subordinated at all times to the indebtedness owed to
BIDCO hereunder.
<PAGE>
8.9 Create any subsidiary or any other class of capital stock
other than the currently existing classes of Common Stock or
change its fiscal year.
8.10 Enter into any partnership or joint venture which shall be
related to the activities of Borrower.
8.11 Allow Home Retail Holdings, Inc. to sell, transfer or
otherwise dispose of any of their shares of Common Stock of
The Cookstore, Inc. or The Cookstore Worthington, Inc., to any
other person or entity.
8.12 Purchase or redeem any shares of any class of its capital
stock, except upon the exercise by BIDCO of the Put of the
Warrant.
9. EVENTS OF DEFAULT/ACCELERATION: There shall be a default of the
$1,300,000 Note and this Agreement, and the $1,300,000 Note and this
Agreement and all other liabilities of Borrower to BIDCO shall
immediately mature and be due and payable, without notice or demand,
unless BIDCO otherwise elects, upon the occurrence of any of the
following events:
9.1 Default in the payment of the $1,300,000 Note or any other
obligation owing to BIDCO or any other creditor, other than
unsecured debt incurred during the ordinary course of
business, and such default continues for a period of ten (10)
days without cure.
9.2 Default in the performance of any term or condition of this
Agreement or in any document given as security for the
$1,300,000 Note, or in any other agreement between Borrower
and any creditor, and such default continues without cure for
a period of ten (10) days.
9.3 Any warranty, representation, or statement made or furnished
to BIDCO by Borrower hereunder or otherwise is or becomes
untrue in any material respect.
9.4 If any "reportable event" as defined in ERISA occurs.
9.5 The dissolution, termination of existence, suspension of
business (including failure to open for business for more than
five (5) consecutive days), or insolvency of Borrower; or the
appointment of a receiver for any part of the property of
Borrower; or the making of an assignment for the benefit of
creditors by Borrower; or the commencement of bankruptcy or
insolvency proceedings by Borrower; or the commencement of
bankruptcy or insolvency proceedings against Borrower which
are not dismissed within thirty (30) days; or the inability of
Borrower generally to pay its debts as they mature; or death
of the President of Borrower (unless a reasonable replacement
is substituted within thirty (30) days).
<PAGE>
9.6 The material loss, theft, damage or destruction, without
insurance, or the encumbrance to or of any material part or
all of the Collateral other than as permitted in Section 8.5.
9.7 The entry, placement or issuance of any judgment, levy, lien,
writ of attachment, writ of garnishment, writ of execution or
similar process, against Borrower or any of Borrower's
property unless they do not have a material adverse impact on
Borrower's financial condition.
9.8 The sale of a material part of Borrower's assets or business,
outside the ordinary course of business, without BIDCO's
written consent which shall not be unreasonably withheld.
9.9 BIDCO shall deem itself insecure in good faith believing that
the prospect of payment of liabilities or performance under
the $1,300,000 Note is materially impaired.
9.10 Any event which results in the acceleration of the maturity of
any material indebtedness of Borrower to BIDCO or to others
under any notice, indenture, agreement or undertaking.
9.11 So long as BIDCO holds the Warrant; failure to observe and
perform any of the material terms and conditions of the
Warrant, of even date, entered into by Borrower and BIDCO.
10. REMEDIES ON DEFAULT: If the $1,300,000 Note is not paid at maturity,
whether by acceleration or otherwise, BIDCO shall have all of the
rights and remedies provided by any applicable law or agreement.
Further, and without extending the maturity date thereof, or otherwise
limiting the scope or nature of remedies of BIDCO in the event of a
default hereunder, BIDCO shall have the right, but not the obligation,
upon notice to Borrower, to deem that any or all said due and unpaid
interest payments are to be converted to and included as unpaid
principal under the $1,300,000 Note, and payment of principal and
interest thereon shall become due and payable from the due date
according to the terms of such $1,300,000 Note. Any requirement of
reasonable notice shall be met if BIDCO sends the notice to Borrower at
least ten (10) days prior to the date of sale, disposition or other
event giving rise to the required notice. BIDCO is authorized to cause
all or any part of the Collateral to be transferred to or registered in
its name or in the name of any other person, firm or corporation, with
or without designation of the capacity of the nominee. Borrower shall
be liable for any deficiency remaining after disposition of any
Collateral.
11. AROPI, INC. - SUBORDINATED DEBT - FIRST RIGHT OF REFUSAL:
11.1 Home Retail Holdings, Inc. has entered into a written
agreement with Aropi, Incorporated (the "Stock Agreement"),
whereby Home Retail Holdings, Inc. shall purchase the
outstanding capital stock of Aropi, Incorporated. Borrower
<PAGE>
hereby agrees and confirms that Borrower shall use its best
efforts to consummate the transaction upon the terms currently
in effect, that the terms of the Stock Purchase Agreement with
Aropi, Incorporated will not be changed without the prior
consent of BIDCO, and that Borrower shall not consummate the
Stock Purchase Agreement with Aropi, Incorporated through any
person or entity other than Borrower without BIDCO's prior
written consent. BIDCO shall have a first right of refusal, in
BIDCO's sole discretion, to extend a subordinated loan to
Borrower upon terms to be mutually agreed, in order to
partially finance the Aropi, Incorporate stock acquisition by
Borrower.
11.2 If at any time during the three (3) year period commencing
upon the earlier of (i) the date the $1,300,000 Note is repaid
in full, or (ii) January 31, 1999, the Borrower or any one or
more of the Borrowers desires to obtain financing by and
through a subordinated indebtedness note, debenture or other
such instrument from a third party creditor, then and in that
event BIDCO shall have a first right of refusal, in BIDCO's
sole discretion, to extend such a subordinated loan to
Borrower upon terms to be mutually agreed. Commencing upon the
earlier of (x) the prepayment of the $1,300,000 Note or (y)
January 31, 1999, Borrower shall pay a facility fee equal to
two percent (2%) of the average unused portion of BIDCO's
approved lending limit for such subordinated debt facility
less any advances to Borrower thereunder (measured as of the
end of each anniversary period therefor) unless BIDCO declines
to extend such a subordinated loan.
12. MISCELLANEOUS:
12.1 No delay on the part of BIDCO in the exercise of any right or
remedy shall operate as a waiver. No single or partial
exercise by BIDCO of any right or remedy shall preclude any
other future exercise of it or the exercise of any other right
or remedy. No waiver or indulgence by BIDCO of any default
shall be effective unless in writing and signed by BIDCO, nor
shall a waiver on one occasion be construed as a bar to or
waiver of any such right on any future occasion. Any election
to waive its right of acceleration shall not be construed as a
bar to or waiver of any right to elect acceleration on a
future occasion. An election by BIDCO to convert any unpaid
interest payment to principal shall not require BIDCO to make
a similar election in respect of subsequent unpaid interest
payments hereunder.
12.2 Any reference to BIDCO shall include any holder of the
$1,300,000 Note. The $1,300,000 Note is assignable and
transferrable individually or collectively upon written notice
to and consent of Borrower (such consent not to be
unreasonably withheld).
12.3 The $1,300,000 Note, and this Agreement are governed by Ohio
law. This Agreement is valid and binding upon the parties,
their respective successors, assigns, heirs and personal
representatives. This Agreement may only be amended in a
writing signed by all of the parties hereto.
<PAGE>
12.4 Within thirty (30) days of Closing, Borrower shall obtain a
Landlord Waiver on terms reasonably acceptable to BIDCO with
respect to each current and future leased facility, store,
warehouse and/or office space.
12.5 Borrower shall pay a facility fee of $53,000 upon the funding
hereof of the Exit Financing. Borrower is liable to BIDCO for
all reasonable costs and expenses, of every kind, incurred in
the making or collection of the $1,300,000 Note, including,
without limitation, actual attorney fees and court costs.
These costs and expenses shall include, without limitation,
any costs or expenses incurred by BIDCO in any bankruptcy,
reorganization, insolvency or other similar proceeding.
12.6 All notices required or permitted under the $1,300,000 Note,
or this Agreement shall be in writing and personally
delivered, sent by certified mail, return receipt requested or
by a reliable overnight delivery service, to the respective
address above, or to any other address required by the
respective party, or by facsimile transmission with
confirmation of receipt, and notice shall be deemed given on
the earlier of: a) two (2) business days after notice is
mailed as set forth above; or b) upon actual receipt.
12.7 The parties agree to perform any further acts and to execute
and deliver any additional documents which may be reasonably
necessary to carry out the intent and provisions of this
Agreement.
12.8 WAIVER OF JURY TRIAL. BORROWER AND BIDCO EACH WAIVES ANY RIGHT
TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER
SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN BIDCO AND
BORROWER ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION
HEREWITH OR THE TRANSACTION RELATED HERETO. This waiver shall
not in any way affect, waive, limit, amend or modify BIDCO's
ability to pursue remedies pursuant to any confession of
judgment or cognovit provision contained in the $1,300,000
Note, or any other instrument, document or agreement between
BIDCO and Borrower.
12.9 If any provision of this agreement is invalid, it shall be
ineffective only to the extent of its invalidity, and the
remaining provisions shall be valid and effective.
12.10 Borrower expressly waives presentment, demand, notice (other
than notice of an event of default if otherwise required by
this Agreement), protest, and all other demands and notices in
connection with the delivery, acceptance, performance, default
or enforcement of the $1,300,000 Note, or this Agreement.
<PAGE>
12.11 At no time shall the interest payable hereunder be deemed to
exceed the maximum interest rate permitted to be paid by
Borrower or received by BIDCO with respect to the indebtedness
represented by the $1,300,000 Note, or this Agreement under
applicable law (the "Legal Rate"). In the event any interest
is charged or received by BIDCO in excess of the Legal Rate,
Borrower acknowledges that any such excess interest shall be
the result of an accidental and bona fide error, and such
excess shall first be applied to reduce the principal then
unpaid hereunder (in inverse order of their maturities if
principal amounts are due in installments); second, applied to
reduce any obligation for other indebtedness of Borrower to
BIDCO; and third, any remaining excess returned to Borrower.
12.12 The headings herein are for convenience only, and shall not be
used for interpreting this Agreement. Wherever the context
requires, the singular shall include the plural, and the
masculine shall include the feminine and neuter.
12.13 This Agreement may be signed in multiple counterparts, and by
facsimile transmission, all of which, taken together, shall
constitute an original Agreement.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
day and year first set forth above.
WITNESS: HOME RETAIL HOLDINGS, INC.,
a Delaware Corporation
By: /s/ GREG DUKOFF
- ------------------------------ -------------------------------
Greg Dukoff, Secretary
THE COOKSTORE, INC.,
an Ohio Corporation,
By: /s/ GREG DUKOFF
- ------------------------------ -------------------------------
Greg Dukoff, Secretary
THE COOKSTORE WORTHINGTON, INC.,
an Ohio Corporation
By: /s/ GREG DUKOFF
- ------------------------------ -------------------------------
Greg Dukoff, Secretary
<PAGE>
LIBERTY BIDCO INVESTMENT CORPORATION
By: /s/ PEARL M. HOLFORTY
- ------------------------------ -------------------------------
Pearl M. Holforty, President
<PAGE>
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (the "First Amendment") is made
this 20th day of August, by and among LIBERTY BIDCO INVESTMENT CORPORATION,
whose principal office is located at 30833 Northwestern Highway, Suite 211,
Farmington Hills, Michigan 48334-2582 ("BIDCO") and HOME RETAIL HOLDINGS, INC.
(formerly known as Gaylord Companies, Inc., and the surviving entity of a merger
between Gaylord Companies, Inc. and Home Retail Acquisition Corp.), a Delaware
Corporation ("HRH"), THE COOKSTORE, INC, an Ohio Corporation ("TCI"), and THE
COOKSTORE WORTHINGTON, INC., an Ohio Corporation ("TCWI"), and AROPI,
INCORPORATED, an Iowa Corporation ("AROPI")(HRH, TCI, TCWI and AROPI hereinafter
collectively referred to as the "Borrower", and each a "Borrower", unless the
context otherwise requires).
RECITALS
A. HRH, TCI, TCWI and BIDCO entered into a Business Loan Agreement with
Covenants dated as of August 12, 1998 (the "Initial Agreement"),
pursuant to which BIDCO agreed to make available to HRH, TCI and TCWI a
loan of up to $1,300,000.00. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to them in the
Initial Agreement.
B. HRH has entered into a Stock Purchase Agreement (the "Stock Agreement")
with AROPI and the shareholders of AROPI for the purchase of all the
outstanding capital stock of AROPI;
C. HRH, TCI and TCWI have requested certain amendments to the Initial
Agreement, and have requested that BIDCO advance an additional Seven
Hundred Thousand Dollars ($700,000.00) to partially fund the purchase
of the AROPI stock and to provide working capital for the combined
operations of HRH, TCI, TCWI and AROPI.
D. In order that BIDCO may further secure the repayment of the amended
loan herein contemplated, HRH is willing to grant to BIDCO a security
interest in the stock of AROPI pursuant to a Stock Pledge Agreement.
E. As a material inducement to BIDCO to make the loan herein contemplated,
AROPI, for good and valuable consideration, is willing to become a
co-borrower hereunder, jointly and severally, and to pledge a security
interest in all of AROPI's assets to secure all obligations to BIDCO.
F. BIDCO is willing to make the loan herein described, upon the terms,
covenants and conditions herein set forth, and in reliance upon the
representations and warranties of Borrower herein contained.
<PAGE>
NOW, THEREFORE, in consideration of the foregoing Recitals, the terms,
covenants and conditions hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Amendments
1.1 The Initial Agreement is hereby amended to provide that BIDCO
shall lend or otherwise make available to Borrower, upon the satisfaction of the
terms and conditions set forth herein and in the Initial Agreement, and Borrower
may borrow from BIDCO, an additional principal sum of Seven Hundred Thousand
Dollars ($700,000.00) (the "Acquisition Financing") together with interest
thereon calculated on the basis of a 360 day year, counting the actual number of
days elapsed, at Note Rate. After maturity of the Acquisition Financing, the
interest rate on all principal or interest outstanding, whether by acceleration
or otherwise, shall be eleven (11) percentage points above such "prime" rate.
Such Acquisition Financing shall be used for the partial funding of the
acquisition by HRH of the outstanding capital stock or substantially all of the
assets of AROPI, and for working capital for the combined operations of the
combined Borrowers. Any and all advances for the Acquisition Financing shall be
evidenced by the $1,300,000 Note, as modified and amended by First Modification
and Amendment To Promissory Note of even date herewith, modifying and amending
the $1,300,000 Note. The $1,300,000 Note shall hereafter be known as the
"$2,000,000 Note".
1.2 At no time shall the aggregate outstanding principal, of the
Acquisition Financing and the Exit Financing, exceed the sum of Two Million
Dollars ($2,000,000.00).
1.3 The Initial Agreement is hereby modified and amended by replacing
the language "$130,000,000 Note" with the words "$2,000,000 Note" in each and
every place it appears therein.
1.4 The Borrower shall be jointly and severally liable for all
obligations arising pursuant to the $2,000,000 Note, the Initial Agreement, this
First Amendment, and any documents delivered with respect thereto. All funds
advanced by BIDCO to or for the benefit of the Borrower, whether pursuant to the
Initial Agreement or this First Amendmcnt, shall be repaid to BIDCO by Borrower
in the same manner as set forth in Section 3. the Initial Agreement.
1.5 The funding of the Acquisition Financing is expressly subject to
the following criteria being met to the sole satisfaction of BIDCO: favorable
findings upon completion of due diligence by BIDCO; subordination of officer and
shareholder debt to the obligations owed to BIDCO; and the execution and
delivery of a valid and binding definitive acquisition agreement between HRH,
AROPI and the shareholders of AROPI upon terms acceptable to BIDCO.
1.6 Concurrently herewith, HRH shall execute and deliver a Stock Pledge
Agreement to BIDCO, upon terms and conditions acceptable to BIDCO, granting a
security interest to BIDCO in all outstanding capital stock of AROPI.
<PAGE>
1.7 Concurrently herewith, HRH shall execute and deliver an Amendment
to Common Stock Purchase Warrant to BIDCO, upon terms and conditions acceptable
to BIDCO, granting a put option to BIDCO witb respect to the August 12, 1998
Warrant.
1.8 Concurrently herewith. HRH shall execute, issue and deliver a
Common Stock Purchase Agreement Warrant evidencing the right to purchase two
percent (2.0%) fully paid and nonassessable shares of Class A Common Stock of
HRH subject to a put option by HRH, all upon terms and conditions acceptable to
BIDCO.
1.8.0.0.0.0.0.1 Concurrently herewith, AROPI shall execute
and deliver a Security Agreement to BIDCO,
upon terms and conditions acceptable to
BIDCO, granting a security interest to BIDCO
in all outstanding assets of AROPI.
1.9 The last sentence of the paragraph entitled "PAYMENT UPON PUBLIC
OFFERING OR PRIVATE PLACEMENT" in Section 3 of the Initial Agreement is hereby
amended to read in its entirety as follows;
All obligations owed by Borrower to BIDCO, as evidenced by the
Initial Agreement and the $2,000,000 Note, shall be paid in
full with the proceeds of the public offering or private
placement offering, whichever occurs first.
1.10 The paragraph entitled "MATURITY" in Section 3 of the Initial
Agreement is hereby amended to read in its entirety as follows:
MATURITY: In all events, payment in full of the obligations
hereunder shall be due January 31, 1999 (the "Maturity
Date"), at which time the entire balance of principal of the
obligations owed by Borrower to BIDCO, as evidenced by the
Initial Agreement, the $2,000,000 Note, together with all
accrued but unpaid interest, shall be due and immediately
payable.
1.11 Section 4. of the Initial Agreement is hereby amended to read in
its entirety as follows:
4. PREPAYMENT: The $2,000,000 Note, may be prepaid without
penalty at any time. Notwithstanding any prepayment of the
$2,000,000 Note, the Warrant, executed and delivered by
Borrower on even date herewith, shall remain in full force and
effect in accordance with the terms thereof.
1.12 Section 5. of the Initial Agreement is hereby amended to indicate
that the security interests granted therein, and the Collateral identified
therein, shall secure the $2,000,000 Note, the Initial Agreement and this First
Amendment, together with any other present or future liability of Borrower to
BIDCO, whether several, joint, or joint and several. Moreover, HRH hereby grants
to BIDCO a security interest in the stock of AROPI, Inc., and AROPI, Inc. hereby
grants to BIDCO a security interest in all the accounts, chattel paper,
instruments and general intangibles, machinery and equipment, inventory and
supplies, all furniture and fixtures and
<PAGE>
interest in joint ventures or other entities of AROPI, all of which shall be
included within, and be added to, the definition of "Collateral" as that term is
defined in the Initial Agreement. The security interest in the Collateral may be
subordinated in an amount not greater than $2,000,000 only to a senior
commercial lender which finances the acquisition of AROPI.
1.13 The Borrower hereby reaffirms and represents that each of the
Representations and Warranties set forth in Section 6 of the Initial Agreement
are true as of the date hereof, and are applicable to the $2,000,000 Note, as if
such amended and modified Note was originally executed and delivered at the time
of the Initial Agreement. In addition, the following new Section 6.14 is added
to Section 6:
6.14 AROPI is a corporation duly organized and validly existing
under the laws of the State of Iowa, in good standing, and
duly licensed or qualified as a foreign corporation in all
states wherein the nature of its property owned or business
transacted by it makes such licensing or qualification
necessary.
1.14 Section 7. of the Initial Agreement is hereby amended to indicate
that the Borrower shall observe and maintain the Affirmative Covenants set forth
therein so long as the $2,000,000 Note, remains outstanding.
1.15 The last sentence of Subsection 7.10 of the Initial Agreement is
hereby amended to read in its entirety as follows:
The proceeds sought from such public and/or private financing
will be sufficient to pay in full all obligations owed by
Borrower to BIDCO, and the actual proceeds (after payment of
the expenses of such offering) shall be first used to pay in
full the $2,000,000 Note, together with any accrued but unpaid
interest.
1.16 Section 8. of the Initial Agreement is hereby amended to indicate
that the Borrower shall observe and maintain the Negative Covenants set forth
therein so long as the $2,000,000 Note, remains outstanding.
1.17 Subsection 8.2 of the Initial Agreement is hereby amended to read
in its entirety as follows:
Permit its net worth at any time to be less than:
Time Period Not Worth
August 20, 1998 through September 30, 1998 ($150,000)
October 1, 1998 through November 30, 1998 $100,000
December 1, 1998 and thereafter $500,000
The above net worth measurement shall be computed on a basis
consistent with financial statements previously submitted to
BIDCO and in
<PAGE>
conformance with GAAP. For the purpose of this calculation,
net worth shall be reduced by loans to stockholders and
related party receivables.
1.18 The definition of "Permitted Debt" in Subsection 8.4 of the
Initial Agreement is hereby amended to include senior commercial financing in an
amount not to exceed $2,000,000 to fund the acquisition by HRH of the capital
stock of AROPI and working capital of the Borrowers.
1.19 Subsection 8.5 of the Initial Agreement is hereby amended to
permit a security interest and lien to be granted to a senior commercial
financing in an amount not to exceed $2,000,000 to fund the acquisition by HRH
of AROPI and working capital of the Borrowers.
1.20 Subsection 8.6 of the Initial Agreement is hereby amended to
permit AROPI to be mergcd into its new parent, HRH.
1.21 Subsection 8.8 of the Initial Agreement is hereby amended to
permit HRH to acquire the outstanding capital stock of AROPI pursuant to the
terms of the Stock Agreement.
1.22 Subsection 8.8 of the Initial Agreement is hereby amended to read
as follows in its entirety:
8.11 Allow HRH to sell, transfer or otherwise dispose of any
shares of the common stock of TCI, TCWI, or AROPI, to any
other person or entity.
1.23 Section 9. of the Initial Ageement is hereby amended to indicate
that there shall be a default of the $2,000,000 Note, the Initial Agreement, and
the First Amendment, and the $2,000,000 Note, the Initial Agreement and the
First Amendment, and all other liabilities of Borrower to BIDCO shall
immediately mature and be due and payable, without notice or demand, unless
BIDCO otherwise elects, upon the occurrence of any of the events set forth in
Section 9 of the Initial Agreement.
2. Borrower's Representations. Warranties and Events of Default.
2.1 Except as amended hereby, the terms, provisions, conditions and
agreements of the Initial Agreement are hereby ratified and confirmed and shall
remain in full force and effect. Borrower expressly acknowledges that this First
Amendment shall not constitute a novation, a waiver, or an accord and
satisfaction. Each and every representation and warranty of the Borrower set
forth in the Initial Agreement is hereby confirmed and ratified in all material
respects and such representations and Warranties shall be deemed to have been
made and undertaken as of the date of this First Amendment as well as at the
time they were made and undertaken.
2.2 The Borrower further represents and warrants that:
2.2.0.1 No Event of Default now exists or will exist
immediately following the execution bereof or after giving effect to
the transctions contemplated hereby.
<PAGE>
2.2.0.2 All necessary corporate or shareholder actions on the
part of the Borrower to authorize the execution, delivery and
performance of this First Amendment, the First Modification and
Amendment to Promissory Note, the Stock Pledge Agreement, the Amendment
to Common Stock Purchase Warrant, the New Warrant and Put, and the
Aropi Security Agreement (the "Amendment Documents") and all other
documents or instruments required pursuant hereto or thereto have been
taken; the Amendment Documents and each such other document or
instrument have been duly and validly executed and delivered and are
legally binding and binding upon the parties thereto and enforceable in
accordance with their respective terms, except to the extent that the
enforceability thereof may be limited by bankruptcy, insolvency or like
laws or by general equitable principals.
2.2.0.3 The execution, delivery and performance of Amendment
Documents and all other documents or instruments required pursuant
hereto or thereto, and all actions and transactions contemplated hereby
and thereby will not (A) violate, be in conflict with, result in a
breach of or constitute (with due notice or lapse of time or both) a
default under (1) any provision of the Articles of Incorporation, Code
of Regulations or Bylaws of the Borrower, (2) any arbitration award or
any order of any court or of any other governmental agency or
authority, (3) any license, permit or authorization granted to the
Borrower or under which the Borrower operates, or (4) any applicable
law, rule, order or regulation, indenture, agreement or other
instrument to which the Borrower is a party or by which the Borrower or
any of its properties is bound and which has not here waived or
consented to, or (B) result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever, except as expressly
permitted in the Initial Agreement, upon any of the properties of the
Borrower.
2.2.0.4 No consent, approval or authorization of, or filing,
registration or qualification with, any governmental authority or any
other person or entity is required to be obtained by the Borrower in
connection with the execution, delivery or performance of the Amendment
Documents or any document or instrument required in connection herewith
or therewith which has not already been obtained or completed.
3. Affirmation and Agreement of the Borrower. The Borrower has executed this
First Amendment to consent to the amendments to the Initial Agreement made
pursuant hereto and to acknowledge that the security interests and liens
granted by the Borrower to BIDCO pursuant to the Security Agreement and other
Amendment Documents shall secure all Obligations, as increased pursuant to the
terms hereof.
4. Fees and expenses. As required under the Initial Agreement, the Borrower
shall reimburse the BIDCO upon demand for all out-of-pocket costs, charges and
expenses of the BIDCO (including reasonable fees and disbursements of legal
counsel to BIDCO in connection with the preparation, negotiation, execution and
delivery of this First Amendment and the other agreements or documents relating
hereto or required hereby. Furthermore, the Borrower shall pay an additional
facility fee of $7,000 upon the funding of the Acquisition Financing.
<PAGE>
5. Reference to Initial Agreement. Except as amended hereby, the Initial
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects. On and after the effectiveness of this First
Amendment, each reference in the Initial Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import, and each reference to
the Initial Agreement in any Note or other Loan Document, or other agreement,
document or instrument executed and delivered pursuant to the Initial Agrement,
shall be deemed a reference to the Initial Agreement as amended hereby.
6. Counterparts. This First Amendment may be executed in as many counterparts as
may be convenient, and via facsimile transmission, each of which when so
executed shall be deemed to be an original for all purposes, and shall become
binding when the Borrower and BIDCO have executed at least one counterpart.
7. Further Acts. The parties agree to perform any further acts and to execute
and deliver any additional documents which may be reasonably necessary to carry
out the intent and provisions of this First Amendment.
8. Binding Effect; Governing Law. This First Amendment shall be binding upon
and shall inure to the benefit of the Borrower and BIDCO, and their respective
heirs, personal representatives, successors and assigns. This First Amendment
shall be governed by Ohio law.
IN WITNESS WHEREOF, the parties have signed this First Amendment to Loan
Agreement, intending to be legally bound thereby as of the Effective Date.
BORROWER
WITNESS: HOME RETAIL HOLDINGS, INC.,
a Delaware Corporation
/s/ PHILLIP J. KARDIS By: /s/ GREG DUKOFF
- -------------------------- ------------------------
Greg Dukoff, Secretary
THE COOKSTORE, INC.,
an Ohio Corporation,
/s/ PHILLIP J. KARDIS By: /s/ GREG DUKOFF
- -------------------------- ------------------------
Greg Dukoff, Secretary
THE COOKSTORE WORTHINGTON, INC.,
an Ohio Corporation
/s/ PHILLIP J. KARDIS By: /s/ GREG DUKOFF
- -------------------------- ------------------------
Greg Dukoff, Secretary
<PAGE>
AROPI, INCORPORATED,
an Iowa Corporation
By: /S/ GLEN KAAS
--------------------------------------
Its: President
BIDCO
Signed in the presence of: LIBERTY BIDCO INVESTMENT CORPORATION
(as to all signatures)
By: /s/ JAMES C. ZABRISKIE
- ------------------------------ ----------------------------------
James C. Zabriskie, Vice President
- ------------------------------
<PAGE>
LOAN AND SECURITY AGREEMENT
(dated as of August 20, 1998)
GREENFIELD COMMERCIAL CREDIT, L.L.C. ("Lender")
Gentlemen:
This Agreement, including all amendments thereto (the "Agreement"),
effective as of the date accepted by you, sets forth the terms and conditions
upon which you will make loans and advances and extend other financial
accommodations (the "Loans") (as set forth herein and in riders attached hereto)
to the undersigned (as "Borrower") for the benefit of Borrower and the other
parties signing this Agreement as Guarantors, collectively referred to herein as
"we," "us" or "our"):
1. DEFINITIONS. As used herein:
(A) "Advances" means loans to Borrower under this Agreement and the
Revolving Credit Loan Rider and evidenced by the Revolving Credit Note.
(B) "Bankruptcy Cases" means the bankruptcy cases of Borrower, The
Cookstore, Inc. and The Cookstore Worthington, Inc. under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code"), Case Nos. 97-60560,
97-60565 and 97-60566, pending in the United States Bankruptcy Court for the
Southern District of Ohio, Eastern Division.
(C) "Collateral" means all of our presently owned and hereafter
acquired or arising:
(i) accounts (whether or not earned by performance), proceeds of
any letter of credit naming us as a beneficiary, chattel paper, contracts,
contract rights, instruments and documents (individually and collectively
referred to as "Accounts");
(ii) general intangibles (including, without limitation, tax
refunds, tax refund claims, trade names, goodwill, trademarks, copyrights,
processes, patents, patent rights, patent applications, licenses, inventories,
royalties, and/or commission and permits, choses-in-action) (individually and
collectively referred to as "Intangibles");
(iii) goods, merchandise and other personal property, wherever
located, to be furnished under any contract of service or held for sale or
lease, all raw materials, work in process, finished goods and materials and
supplies of any kind, nature or description which are or might be used or
consumed in our business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods, merchandise and other
personal property including without limitation such goods which give rise to any
Accounts or Intangibles and which goods have been returned to or repossessed or
stopped in transit by us ("Inventory");
(iv) tangible goods (other than Inventory), equipment and
fixtures, including, without limitation, office machines, computer equipment and
accessories, tools, dies, furniture, and vehicles together with all accessions,
parts and appurtenances thereto appertaining or attached or kept or used or
intended for use in connection therewith, and all substitutions, renewals,
improvements and replacements of and additions thereto (sometimes hereinafter
individually and collectively referred to as "Equipment");
<PAGE>
(v) all other property now or at any time hereafter in your
possession (including monies, deposit accounts, claims and credit balances); and
(vi) all interests in any lease of real property or personal
property, whether as a lessor or lessee, including all options to purchase any
leased property, and all leasehold improvements;
(vii) all stock owned by Borrower in each Guarantor;
(viii) books, blueprints, drawings and records related to any of
the foregoing as described in subsection (i) through (v) above;
(ix) all recoveries of cash or proceeds of property in the
Bankruptcy Cases, or in any superseding or any other bankruptcy case, of any of
the foregoing Persons, under any or all of Section 544 through and including
Section 553 of the Bankruptcy Code.
and all proceeds (including proceeds of any insurance policies) and products of
and accessions to all the foregoing described property in which we may have any
right, title or interest.
(D) "Default" shall have the meaning set forth in Section 14 of this
Agreement.
(E) "Guarantor" means each of the Persons executing this Agreement
as so identified on the signature pages below and any Person executing this
Agreement at any time hereafter in such capacity.
(F) "Indebtedness" means all of our present and future obligations,
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred acquired, owing or arising, whether under
written or oral agreement, operation of law, or otherwise, and includes, without
limiting the foregoing, (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance, or security interest upon
property owned by us, even though we have not assumed or become liable therefor,
(iii) obligations and liabilities created or arising under any lease (including
capitalized leases) or conditional sales contract or other title retention
agreement with respect to property used or acquired by us, even though the
rights and remedies of the lessor, seller or lender are limited to repossession,
(iv) all unfunded pension fund obligations and liabilities, and (v) deferred
taxes.
(G) "Loan Account" means the account established and maintained by
Lender on its books and records for each of the Loans.
(H) "Loan Documents" means this Agreement, the Notes and all other
documents and instruments executed pursuant to or in connection with this
Agreement and the Loans.
(I) "Notes" means the Revolving Credit Note and the Bulge Loan Note.
(J) "Obligations" means all present and future loans, advances,
debts, liabilities, obligations, covenants, duties and Indebtedness owing by us
to you, whether evidenced by any note, or other instrument or document, whether
arising from an extension of credit, opening of a letter of credit, loan,
guaranty (including the Guaranteed Obligations as defined in Section 4 below),
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by you in our
-2-
<PAGE>
debts owing to others), absolute or contingent, due or to become due, including,
without limitation, all interest, charges, expenses, fees, attorneys' fees and
any other sums chargeable to us hereunder or under any other agreement with you,
including, without limitation, the Notes.
(K) "Obligor" means Borrower or any Guarantor of the Obligations,
individually or collectively.
(L) "Offering" means any public or private placement offering of
capital stock of Borrower completed by Borrower.
(M) "Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
(N) "Prime Rate" means the interest rate published from day to day
in the WALL STREET JOURNAL in its "Money Rates" column as the "Prime Rate."
Should such publication not continue to publish the Prime Rate or a substitute
rate, then Lender will select a comparable announced rate. The Prime Rate will
change at any time the "Prime Rate" changes.
(O) "Term Sheet" means any document attached to this Agreement or to
any Rider which contains other terms and conditions of this transaction.
(P) Any accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings customarily given to them in accordance with
generally accepted accounting principles.
(Q) All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Uniform Commercial Code of
the state set forth in Section 18.(B) ("Code") to the extent the same are
defined therein.
2. LOANS.
(A) Revolving Credit Loan; Loan Advances, Revolving Credit Note. You
will establish a revolving credit loan facility (the "Revolving Credit Loan")
and, subject to the terms of this Agreement, you may, in your sole discretion
and upon our request, make Advances to us from time to time, pursuant to the
Revolving Credit Loan Rider attached hereto and made a part hereof (the
"Rider"). You may, in your sole discretion and without notice to us, disburse
any or all of the proceeds of any or all of the Advances made by you to such
person or persons as you deem necessary to insure that the security interest in
or lien upon the Collateral shall at all times have the priority represented by
us in this Agreement. You may, in your sole discretion, at any time reduce the
Percentage Advance Rate or the Advance amounts set forth in any Rider. You may,
from time to time, reimburse yourself for any loan, interest due, fees or
expenses, or any third party for any of our Obligations by charging our Loan
Account with you. You may deduct from the Advances under this Agreement reserves
for accrued interest and such other reserves as you deem proper and necessary.
Our obligation to repay Advances made pursuant to the Revolving Credit Loan
shall be evidenced by a Revolving Credit Note in form acceptable to Lender
executed simultaneously herewith, the terms of which are incorporated herein by
this reference.
(B) Bulge Loan. You will establish a nonrevolving bulge loan facility in the
aggregate principal sum of $500,000.00 (the "Bulge Loan"), under which you will
advance to us at closing the sum of $260,000.00. At such time as we have
received the Equity Injection (as defined in Section 10.(U) below), you will
make advances to us upon our request of up to an additional aggregate sum of
$240,000.00. Our obligation to repay the Bulge Loan shall be evidenced by a
Bulge Loan Note in form acceptable to Lender executed simultaneously herewith,
the terms of which are incorporated herein by this reference. As of and after
October 15, 1998, the outstanding principal balance of the Bulge Loan shall
constitute an Advance under the Revolving Credit Loan.
-3-
<PAGE>
(C) Interest and Other Charges. We shall pay you interest on the
daily outstanding balance of the Notes at a rate determined by reference to the
Prime Rate set forth in the Rider and the Notes. In no event whatsoever shall
the interest rate and other charges charged hereunder exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in the
final determination, deem applicable hereto. In the event that a court
determines that you have received interest or other charges hereunder in excess
of the highest rate applicable hereto, you shall promptly, in your sole
discretion, either apply such amount to the Obligations or refund such amount to
us and the provisions herein shall be deemed amended to provide for such
permissible rate.
(D) Maturity. If demand is not sooner made, the Loans shall be
payable in full from the proceeds of the first Offering to be consummated after
the date hereof or in all other events no later than January 29, 1999 (the
"Maturity Date").
(E) Monthly Accounting. You will provide us, monthly, with an
account of advances, charges and payments made pursuant to this Agreement. Such
account shall be deemed correct, accurate and binding upon us and an account
stated (except for reverses and reapplications of payments made as provided in
Section 18.(G) hereof, and corrections or errors discovered by you), unless we
notify you in writing to the contrary within thirty (30) days after each account
is rendered.
3. COLLATERAL.
(A) Grant of Security Interest. As security for the Obligations,
Borrower and each Guarantor hereby grant you a continuing first priority
perfected security interest in the Collateral. We acknowledge that nothing
contained in this Agreement or in any Rider shall be (i) construed as your
agreement to resort or look to a particular type of Collateral as security for
any loan to us, or limit in any way your right to resort to any or all of the
Collateral as security for any of the Obligations, or (ii) deemed to limit or
reduce any security interest in or lien upon any portion of the Collateral for
the Obligations.
(B) Perfection of Security Interest; Protection of Security
Interest. We shall, at our expense, perform all steps reasonably requested by
you at any time to perfect, maintain, protect, and enforce your security
interest in the Collateral, including, without limitation, executing and filing
financing or continuation statements, and amendments thereof, in form and
substance satisfactory to you, delivering Uniform Commercial Code search reports
before and after closing, placing notations on our books of account to disclose
your security interest therein, and taking such other steps as are reasonably
deemed necessary by you to maintain your control of and security interest in the
Collateral, and delivering to you all letters of credit on which we are named
beneficiary. You may file, without our signature, one or more financing
statements disclosing your security interest under this Agreement. We agree that
a carbon, photographic, photostatic, or other reproduction of this Agreement or
of a financing statement is sufficient as a financing statement. If any
Collateral is at any time in the possession or control of any warehouseman,
bailee or any of our agents or processors, we shall notify such person of your
security interest in such Collateral and, upon your request, instruct them to
hold all such Collateral for your account subject to your instructions. From
time to time, we shall, upon your request, execute and deliver confirmatory
written instruments pledging to you the Collateral, but our failure to do so
shall not affect or limit your security interest or other rights in and to the
Collateral. Until all Obligations have been fully satisfied, your security
interest in the Collateral shall continue in full force and effect.
(C) Attorney-in-Fact. We hereby appoint you and any designee of
yours as our attorney-in-fact and authorize you or such designee, at our sole
expense, to exercise at any times in your or such designee's discretion all or
any of the following powers, which powers of attorney, being coupled with an
interest, shall be irrevocable until all Obligations have been paid in full: (a)
receive, take, endorse, assign, deliver, accept and deposit, in your name or our
name, any and all cash, checks, commercial paper, drafts, remittances and other
instruments and documents relating to the Collateral or the proceeds thereof,
(b) transmit to account debtors, other obligors or any bailees notice of your
interest in the Collateral or request from account debtors or such other
obligors or bailees at any time, in our name or your name or any designee,
information concerning the Collateral and any amounts owing with respect
thereto, (c) notify account debtors or other obligors to make payment directly
to you, or notify bailees as to the disposition of Collateral, (d) take or
-4-
<PAGE>
bring, in your name or our name, all steps, actions, suits or proceedings deemed
by you necessary or desirable to effect collection of or other realization upon
the accounts and other Collateral, (e) after a Default, change the address for
delivery of mail to us and to receive and open mail addressed to us, (f) after a
Default, extend the time of payment of, compromise or settle for cash, credit,
return of merchandise, and upon any terms or conditions, any and all accounts or
other Collateral which includes a monetary obligation and discharge or release
the account debtor or other obligator, without affecting any of the Obligations,
and (g) execute in our name and file against us in your favor financing
statements or amendments with respect to the Collateral.
4. GUARANTIES. As an inducement to Lender to enter into the
transactions contemplated by this Agreement, each Guarantor agrees with Lender
as follows:
(A) Guarantee of Obligations.
(i) Each Guarantor hereby (x) guarantees, as principal obligor
and not as surety only, to Lender the prompt payment of the principal of and any
and all accrued and unpaid interest (including interest which otherwise may
cease to accrue by operation of any insolvency law, rule, regulation or
interpretation thereof) on the Advances and all other Obligations, including the
Notes, of Borrower to Lender under this Agreement when due, whether by scheduled
maturity, acceleration or otherwise, all in accordance with the terms of this
Agreement and the Notes, including, without limitation, default interest,
indemnification payments and all reasonable costs and expenses incurred by
Lender in connection with enforcing the Obligations of Borrower hereunder,
including without limitation the reasonable fees and disbursements of counsel,
(y) guarantees the prompt and punctual performance and observance of each and
every term, covenant or agreement contained in this Agreement and the Notes to
be performed or observed on the part of Borrower and (z) agrees to make prompt
payment, on demand, of any and all reasonable costs and expenses incurred by
Lender in connection with enforcing the obligations of the Guarantors hereunder,
including, without limitation, the reasonable fees and disbursements of counsel
(all of the foregoing being collectively referred to as the "Guaranteed
Obligations.")
(ii) If for any reason any duty, agreement or obligation of
Borrower contained in this Agreement shall not be performed or observed by
Borrower as provided therein, or if any amount payable under or in connection
with this Agreement shall not be paid in full when the same becomes due and
payable, each Guarantor undertakes to perform or cause to be performed promptly
each of such duties, agreements and obligations and to pay forthwith each such
amount to Lender regardless of any defense or setoff or counterclaim which
Borrower may have or assert, and regardless of any other condition or
contingency.
(B) Nature of Guaranty. The obligations of each Guarantor hereunder
constitute an absolute and unconditional and irrevocable guaranty of payment and
not a guaranty of collection and are wholly independent of and in addition to
other rights and remedies of Lender and are not contingent upon the pursuit by
Lender of any such rights and remedies, such pursuit being hereby waived by each
Guarantor.
(C) Waivers and Other Apreements. Each Guarantor hereby
unconditionally (i) waives any requirement that Lender, upon the occurrence of a
Default first make demand upon, or seek to enforce remedies against, Borrower or
any other Guarantor before demanding payment under or seeking to enforce the
obligations of any Guarantor hereunder, (ii) covenants that the obligations of
the Guarantors hereunder will not be discharged except by complete performance
of all obligations of Borrower contained in this Agreement and the Notes, (iii)
agrees that the obligations of the Guarantors hereunder shall remain in full
force and effect without regard to, and shall not be affected or impaired,
without limitation, by any invalidity, irregularity or unenforceability in whole
or in part of this Agreement, the Notes or any security agreement ("Security
Document"), or any limitation on the liability of Borrower thereunder, or any
limitation on the method or terms of payment thereunder which may or hereafter
be caused or imposed in any manner whatsoever (including, without limitation,
usury laws), (iv) waives diligence, presentment and protest with respect to, and
-5-
<PAGE>
any notice of default or dishonor in the payment of any amount at any time
payable by Borrower under or in connection with this Agreement or the Notes, and
further waives any requirement of notice of acceptance of, or other formality
relating to, the obligations of the Guarantors hereunder and (v) agrees that the
Guaranteed Obligations shall include any amounts paid by Borrower to Lender
which may be required to be returned to Borrower or any Guarantor or to any
representative, trustee, custodian or receiver for Borrower or any such
Guarantor.
(D) Obligations Absolute. The obligations, covenants, agreements and
duties of the Guarantors under this Agreement shall not be released, affected or
impaired by any of the following whether or not undertaken with notice to or
consent of any Guarantor: (i) an assignment or transfer, in whole or in part, of
the Advances made to Borrower or of this Agreement or any Note although made
without notice to or consent of the Guarantors, or (ii) any waiver by Lender or
by any other person, of the performance or observance by Borrower of any of the
agreements, covenants, terms or conditions contained in this Agreement, any Note
or any Security Document, or (iii) any indulgence in or the extension of the
time for payment by Borrower of any amounts payable under or in connection with
this Agreement or any Note, or of the time for performance by Borrower of any
other obligations under or arising out of this Agreement or any Note, or the
extension or renewal thereof, or (iv) the modification, amendment or waiver
(whether material or otherwise) of any duty, agreement or obligation of Borrower
set forth in the Loan Documents (the modification, amendment or waiver from time
to time of the Loan Documents being expressly authorized without further notice
to or consent of any Guarantors), or (v) the voluntary or involuntary
liquidation, sale or other disposition of all or substantially all of the assets
of Borrower or any receivership, insolvency, bankruptcy, reorganization, or
other similar proceedings, affecting Borrower or any of its assets, or (vi) the
merger or consolidation of Borrower or any Guarantor with any other person, or
(vii) the release or discharge, by operation of law, of Borrower or any
Guarantor from the performance or observance of any agreement, covenant, term or
condition contained in the Loan Documents, or (viii) any other cause whether
similar or dissimilar to the foregoing which would release, affect or impair the
obligations, covenants, agreements or duties of the Guarantors hereunder.
(E) No Investigation by Lender. Each Guarantor hereby waives
unconditionally any obligation which, in the absence of such provision, Lender
might otherwise have to investigate or to assure that there has been compliance
with the law of any jurisdiction with respect to the Guaranteed Obligations
recognizing that, to save both time and expense, each Guarantor has requested
that Lender not undertake such investigation. Each Guarantor hereby expressly
confirms that the obligations of such Guarantor hereunder shall remain in full
force and effect without regard to compliance or noncompliance with any such law
and irrespective of any investigation or knowledge of Lender of any such law.
(F) Indemnity. As a separate, additional and continuing obligation,
each Guarantor unconditionally and irrevocably undertakes and agrees with Lender
that, should the Guaranteed Obligations not be recoverable from the Guarantors
under Section 4.(A) for any reason whatsoever (including, without limitation, by
reason of any provision of this Agreement or the Notes or any other agreement or
instrument executed in connection herewith being or becoming void,
unenforceable, or otherwise invalid under any applicable law) then,
notwithstanding any knowledge thereof by Lender at any time, each Guarantor as
sole, original and independent obligor, upon demand by Lender, will make payment
to Lender of the Guaranteed Obligations by way of a full indemnity in such
currency and otherwise in such manner as is provided in this Agreement and the
Notes.
(G) Subordination, Subrogation, Etc. Each Guarantor agrees that any
present or future indebtedness, obligations or liabilities of (i) Borrower to
any Guarantor, or (ii) any Guarantor to any other Guarantor, shall be fully
subordinate and junior in right and priority of payment to any present or future
indebtedness, obligations or liabilities of Borrower to Lender. Each Guarantor
waives any right of subrogation to the rights of Lender against Borrower or any
other person obligated for payment of the Guaranteed Obligations and any right
of reimbursement or indemnity whatsoever arising or accruing out of any payment
which any Guarantor may make pursuant to this Agreement and the Notes, and any
right of recourse to security for the debts and obligations of Borrower, unless
and until the entire principal balance of and interest on the Guaranteed
Obligations shall have been paid in full.
-6-
<PAGE>
(H) Waiver. To the extent that it lawfully may, each Guarantor
agrees that it will not at any time insist upon or plead, or in any manner
whatsoever claim or take any benefit or advantage of any applicable present or
future stay, extension or moratorium law, which may affect observance or
performance of the provisions of the Loan Documents; nor will it claim, take or
insist upon any benefit or advantage of any present of future law providing for
the evaluation or appraisal of any security for its obligations hereunder or
those of Borrower under this Agreement and under the Notes prior to any sale or
sales thereof which may be made under or by virtue of any instrument governing
the same; nor will it, after any such sale or sales claim or exercise any right,
under any applicable law, to redeem any portion of such security so sold.
5. CHARGES AND INSURANCE.
(A) Charges. You may, in your discretion, at any time discharge any
lien or encumbrance on or against any of the Collateral, or bond the same, pay
any insurance, maintain guards, pay any service bureau, or obtain any record and
charge the cost thereof to our loan account.
(B) Insurance. We shall insure the Collateral in your name against
loss or damage by fire, theft, burglary, pilferage, loss in transit and such
other hazards as you shall specify in amounts, under policies and by insurers
acceptable to you. Each policy shall include a provision for thirty (30) days
prior written notice to you of any cancellation or substantial modification and
shall show you as mortgagee/secured party and loss payee in a manner acceptable
to you. All premiums shall be paid by us and the policies shall be delivered to
you. If we fail to do so, you may (but shall not be required to) procure such
insurance at our expense.
6. EXAMINATION OF RECORDS; REPORTING.
(A) Examination of Records. You may at all reasonable times have
access to, examine, audit, make extracts from and inspect our records, files,
books of account and the Collateral. We will deliver to you any instrument
necessary for you to obtain records from any service bureau maintaining records
for us. All instruments and certificates prepared by us showing the value of any
of the Collateral shall be accompanied, upon request, by copies of related
purchase orders and invoices. You may, at any time after default, remove from
our premises our books and records or require us to deliver them to you and you
may, without expense to you, use such of our personnel, supplies and premises as
may be reasonably necessary for maintaining or enforcing your security interest.
(B) Reporting. We shall furnish you, upon request, information and
statements showing our business affairs, financial condition and the results of
our operations, including, but not limited to, the following Reports "):
(i) a consolidated financial statement for Borrower and the
Guarantors, containing an income statement and balance sheet, and accounts
receivable and accounts payable agings, by the fifteenth (15th) day of each
month for the immediately preceding month, together with a certification signed
by an officer of Borrower in form acceptable to Lender;
(ii) weekly updated perpetual inventory certifications with a
computer disk;
(iii) copies of all tax returns, including payroll withholding,
unemployment, sales and income, as and when filed.
(iv) Copies of Borrower's Form 10-Q, 10-K and all other filings
with the Securities Exchange Commission ("SEC") and
(v) Such other documents and information relating to the
business and financial condition of Borrower and Guarantors as Lender may
reasonably require from time to time.
-7-
<PAGE>
7. OTHER LIENS. We represent and warrant that all Collateral is and
will continue to be owned by us free and clear of all liens, claims and
encumbrances whatsoever, whether prior or subordinate to the liens we have
granted you, except the subordinate security interests in favor of Liberty Bidco
Investment Corporation ("Liberty Bidco "), and that we will not, without your
prior written approval, which may be withheld in your sole discretion, sell,
encumber or dispose of or permit the sale, encumbrance or disposal of any
Collateral, except for sales of Inventory in the ordinary course of business.
8. GENERAL WARRANTIES AND REPRESENTATIONS.
We warrant and represent that:
(A) We are each duly organized and existing in good standing under
the laws of our respective states of incorporation set forth on Schedule 8(A),
are qualified to do business and are in good standing in all states in which
qualification and good standing are necessary in order for us to conduct our
business and own our property and have all requisite power and authority to
conduct our business, to own our property and to execute, deliver and perform
all of our Obligations;
(B) We have not, during the preceding five (5) years, been known by
or used any other Assumed Names or Trade Names other than as set forth on
Schedule 8(B);
(C) The execution, delivery and performance by us of this Agreement
will not constitute a violation of any applicable law or of our Articles or
Certificate of Incorporation, By-Laws or Code of Regulations, or any agreement
or document to which we are a party or bound;
(D) We possess adequate assets, licenses, patents, patent
applications, copyrights, trademarks, trademark applications, and tradenarnes
for the conduct of our business;
(E) Except as heretofore disclosed to you in writing or herein, we
have (i) no pending or threatened litigation, actions or proceedings which would
materially and adversely affect our business assets, operations or condition,
financial or otherwise, or the Collateral and (ii) no Indebtedness, other than
the Obligations and Indebtedness to Liberty Bidco;
(F) We have good, indefeasible, and merchantable title to the
Collateral, and there is no lien or encumbrance thereon other than the security
interests granted to you and Liberty Bidco, except as set forth on Schedule 8(F)
attached;
(G) We are not a party to any contract, or subject to any charge,
corporate restriction, judgment, decree or order materially and adversely
affecting our business, assets, operations or condition, financial or otherwise,
and are not subject to any labor dispute; and, no labor contract is scheduled to
expire during the term of this Agreement, except as heretofore disclosed to you
in writing;
(H) We are not in violation of any applicable statute, regulation or
ordinance, in any respect materially and adversely affecting the Collateral or
our business, assets, operations or condition, financial or otherwise, except
for the reports required to be filed with the SEC as set forth on Schedule 8(H)
(the "SEC Reports");
(I) We are not in default beyond any applicable grace period with
respect to any note, indenture, loan agreement, mortgage, lease, deed or other
agreement to which we are a party or bound;
(J) The financial statements delivered to you fairly present our
financial condition and results of operations and those of such other Persons
described therein as of the date thereof; and there has been no material and
adverse change in such financial condition or operations since the date of the
statements;
-8-
<PAGE>
(K) We have received no notice that we are not in full compliance
with any of the requirements of the Employee Retirement Income Security Act of
1974, as amended, ("ERISA") and its regulations and, to the best of our
knowledge, there exists no event described in Section 4043 of ERISA, excluding
subsections 4043(b)(2) and 4043(b)(3) thereof, with respect to us;
(L) We have filed all tax returns and other reports we are required
by law to file and have paid all taxes and similar charges that are due and
payable;
(M) Our Chief Executive Offices, Principal Places of Business and
the Locations of Collateral Records are as set forth on Schedule 8(M);
(N) We have not received any notice alleging and are not aware of
any facts indicating noncompliance with any State or Federal law governing the
use, generation, storage or release of any hazardous waste or substance;
(O) We have no Subsidiaries or Affiliates other than as set forth on
Schedule 8(A). For each subsidiary or affiliate shown on Schedule 8(A), the
Location of Collateral and chief executive officer of each such subsidiary or
affiliate are as set forth on Schedule 8(O);
(P) All properties on which Collateral is located are leased
properties, except as set forth on Schedule 8(O);
(Q) All Collateral which is tangible personal property is kept only
at the locations set forth on Schedule 8(O);
(R) Schedule 8(A) hereto correctly sets forth the corporate name and
jurisdiction of incorporation of Borrower and each Guarantor ("Subsidiary").
Each such Subsidiary and each corporation becoming a Subsidiary of Borrower or
any Guarantor after the date hereof is and will be a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and is and will be duly qualified to do business in each
additional jurisdiction where such qualification is or may be necessary under
applicable law. Each Subsidiary of Borrower and each Guarantor has and will have
all requisite corporate power to own or lease the properties used in its
business and to carry on its business as now being conducted and as proposed to
be conducted. All outstanding shares of capital stock of each class of each
Subsidiary of Borrower and each Guarantor have been and will be validly issued
and are and will be fully paid and nonassessable and are and will be owned,
beneficially and of record, by Borrower or such Guarantor, or another Subsidiary
of Borrower or such Guarantor, free and clear of any Liens;
(S) Borrower and Guarantors will use the proceeds of the Loans for
their general corporate purposes, to purchase the stock of Aropi, Inc., and to
repay in full at closing all certain Indebtedness. Neither Borrower nor any
Guarantor nor any of their respective Subsidiaries extends or maintains, in the
ordinary course of business, credit for the purpose, whether immediate,
incidental, or ultimate, of buying or carrying margin stock (within the meaning
of Regulation U of the Board of Governors of the Federal Reserve System), and no
part of the proceeds of any Advance will be used for the purpose, whether
immediate, incidental, or ultimate, of buying or carrying any such margin stock
or maintaining or extending credit to others for such purpose. After applying
the proceeds of each Advance, such margin stock will not constitute more than
25% of the value of the assets (either of Borrower or any Guarantor alone or of
Borrower and the Guarantors and their respective Subsidiaries on a consolidated
basis) that are subject to any provisions of this Agreement or any security
document (as defined in Section 9(A)(v) below) that may cause the Advances to be
deemed secured, directly or indirectly, by margin stock;
-9-
<PAGE>
(T) No report or other information furnished in writing by or on
behalf of Borrower or any Guarantor to Lender in connection with the negotiation
or administration of this Agreement contains any material misstatement of fact
or, when considered together with Borrower's filings with the SEC and all other
information so furnished to Lender, omits to state any material fact or any fact
necessary to make the statements contained therein not misleading in light of
the circumstances in which they were made. Neither this Agreement, the Notes,
the Security Documents nor any other document, certificate, or report or
statement or other information furnished to Lender by or on behalf of Borrower
or any Guarantor in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or, when considered together
with Borrower's filings with the SEC and all other information so furnished to
Lender, omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading in light of the circumstances in
which they were made. There is no fact known to Borrower or any Guarantor which
materially and adversely affects, or which in the future may (so far as Borrower
or any Guarantor can now foresee) materially and adversely affect, the business,
properties, operations or condition, financial or otherwise, of Borrower, any
Guarantor or any of their respective Subsidiaries, which has not been set forth
in this Agreement or in the other documents, certificates, statements, reports
and other information furnished in writing, including Borrower's 1997 Form 10-K
filing with the SEC, to Lender by or on behalf of Borrower or the Guarantors in
connection with the transactions contemplated hereby;
(U) Borrower and the Guarantors are engaged as an integrated group
in the sale of cookware through various retail stores located in shopping malls
in the states set forth on Schedule 8(O). The integrated operation requires
financing on such a basis that credit supplied can be made available from time
to time to Borrower and the Guarantors, as required for the continued successful
operation of Borrower and the Guarantors and the integrated operation as a
whole, and Borrower and the Guarantors have requested Lender to make credit
available to Borrower primarily for the purpose of financing the integrated
operation of Borrower and Guarantors, with each of Borrower and Guarantors
expecting to derive benefit, directly or indirectly, from the credit extended by
Lender, both in its separate capacity and as a member of the integrated group,
inasmuch as the successful operation and condition of each of Borrower and the
Guarantors is dependent upon the continued successful performance of the
functions of the integrated group as a whole;
(V) Each of Borrower and the Guarantors is solvent, able to pay its
Indebtedness as it matures, and has capital sufficient to carry on its business
and all businesses in which it is about to engage, and the present fair saleable
value of the assets of each of Borrower and each such Guarantor is greater than
the amount of Borrower's or such Guarantor's, as the case may be, Indebtedness.
Borrower and the Guarantors on a consolidated basis are solvent, able to pay
their Indebtedness as it matures, and have capital sufficient to carry on their
business and all businesses in which they are about to engage, and the present
fair saleable value of their assets on a consolidated basis is greater than the
amount of their Indebtedness on a consolidated basis; and
(W) We have no Indebtedness other than as set forth on Schedule
11(E).
(X) We have no contracts or agreements with Cambridge Holdings,
L.L.C. ("Cambridge"), other than as set forth on Schedule 8(X) (the
"Contracts").
(Y) The proceeds of the $1,300,000 loan disbursed by Liberty Bidco
Investment Corporation ("Liberty Bidco") to us (except Aropi, Incorporated) on
August 12, 1998, were expended by us as set forth on Schedule 8(Y).
(Z) All representations and warranties of Aropi Incorporated and
Glenn Kaas as set forth in the Stock Purchase Agreement of even date (as
identified below) are incorporated herein by this reference as representations
and warranties of Borrower and Guarantor Aropi, Incorporated.
9. CONDITIONS TO OBLIGATIONS OF LENDER.
(A) Conditions for Closing. The obligation of Lender to close the
Loans hereunder is subject to receipt by Lender of the following documents,
fully executed, and completion of the following matters, in form and substance
satisfactory to Lender:
(i) Charter Documents. Certificates of recent date of the
appropriate authority or official of Borrower and each Guarantor's respective
state of incorporation (listing all charter documents of Borrower and each
Guarantor, respectively, on file in that office if such listing is available)
certifying as to the good standing and corporate existence of Borrower and each
-10-
<PAGE>
Guarantor, respectively, together with copies of such charter documents of
Borrower and each Guarantor, certified as of a recent date by such authority or
official and certified as true and correct as of the date hereof by a duly
authorized officer of Borrower and each such Guarantor, respectively;
(ii) By-Laws and Corporate Authorizations. Copies of the by-laws
or comparable governing document of Borrower and each Guarantor together with
all authorizing resolutions and evidence of other corporate action taken by
Borrower and each Guarantor to authorize the execution, delivery and performance
by Borrower and each Guarantor of the Loan Documents to which Borrower and such
Guarantor, respectively, is a party and the consummation by Borrower and such
Guarantor, respectively, of the transactions contemplated hereby, certified as
true and correct as of the date hereof by a duly authorized officer of Borrower
and each Guarantor, respectively;
(iii) Incumbency Certificates. Certificates of incumbency of
Borrower and each Guarantor containing, and attesting to the genuineness of, the
signatures of those officers authorized to act on behalf of Borrower and such
Guarantor in connection with the Loan Documents to which Borrower or such
Guarantor is a party and the consummation by Borrower and such Guarantor of the
transactions contemplated hereby, certified as true and correct as of the date
hereof by a duly authorized officer of Borrower and each such Guarantor,
respectively;
(iv) Notes. The Revolving Credit Note and Bulge Loan Note duly
executed on behalf of Borrower;
(v) Security Documents. This Loan and Security Agreement duly
executed on behalf of Borrower and each Guarantor granting to Lender, as
collateral security for the Indebtedness, the Collateral intended to be provided
pursuant to Section 3, together with the following in fully executed form
(collectively referred to herein, together with any other document executed in
connection with this Agreement granting to Lender a security interest in or lien
on any property of Borrower or any Guarantor, as the "Security Documents"):
a. Recording, Filing, Etc. Evidence of the recordation,
filing and other action (including payment of any applicable taxes or fees) in
such jurisdictions as Lender may deem necessary or appropriate with respect to
any Security Interest, including the filing of financing statements and similar
documents which Lender may deem necessary or appropriate to create, preserve or
perfect the liens, security interests and other rights intended to be granted to
Lender thereunder, together with Uniform Commercial Code record searches in such
offices as Lender may request;
b. Landlord's Agreements. A Landlord's Agreement executed by
each landlord of real property leased by Borrower or Guarantor where any
Inventory is located, in the form of Exhibit A attached hereto or as acceptable
to Lender, provided that each such Landlord's Agreement may be provided to
Lender not later than 30 days after the date hereof;
c. Patent, Trademark, Copyright and License Mortgage. A
Patent, Trademark, Copyright and License Mortgage in form acceptable to Lender.
d. Assignments of Trademarks. Assignments of all United
States registered trademarks in a form which will be accepted for filing with
the United States Patent and Trademark Office.
-11-
<PAGE>
e. Casualty and Other Insurance. Evidence that the casualty
and other insurance required pursuant to Section 5 of this Agreement is in full
force and effect;
(vi) Closing Certificate. A closing certificate for Borrower and
each Guarantor in form acceptable to Lender duly executed by an officer of
Borrower and each Guarantor;
(vii) Legal Opinions. The favorable written opinion of counsel
for Borrower and each Guarantor with respect to such matters as Lender may
reasonably request;
(viii) Consents, Approvals, Etc. Copies of all governmental and
nongovernmental consents, approvals, authorizations, declarations, registrations
or filings, if any, required on the part of Borrower or any Guarantor in
connection with the execution, delivery and performance of the Loan Documents or
the transactions contemplated hereby or as a condition to the legality, validity
or enforceability of the Loan Documents, certified as true and correct and in
full force and effect as of the date hereof by a duly authorized officer of
Borrower, or, if none is required, a certificate of such officer to that effect;
(ix) Loan Origination Fee; Costs and Expenses. Pay to Lender a
Loan Origination Fee in the amount of One Hundred Ten Thousand and 00/100
Dollars ($110,000.00) together with all costs and expenses payable to Lender as
provided herein. Any unused amount of the Due Diligence Investigation Fees of
Twenty Thousand and 00/100 Dollars ($20,000.00) paid to Lender to date shall be
credited against amounts due hereunder. The Loan Origination Fee shall be deemed
fully earned when paid.
(x) Payoff Letters and Lien Terminations. Payoff letters from
all Persons to whom Borrower or any Guarantor is indebted on any Indebtedness,
except Permitted Indebtedness (as defined in Section 11.(E) below), in form and
substance acceptable to Lender, together with UCC financing statement
terminations and other documents and instruments necessary or reasonably desired
by Lender to effect and evidence payment in full as of the date hereof of all
Indebtedness other than Permitted Indebtedness and the Obligations and the
release and discharge of all liens and security interests in their favor with
respect to property of Borrower and the Guarantors.
(xi) Subordination Agreements. Subordination Agreements executed
by Liberty Bidco and Glenn Kaas (each a "Creditor"), Borrower, Guarantors and
Lender subordinating all Indebtedness of Borrower to each of said Creditors, and
all security interests and liens granted as security for such Indebtedness, to
the Loans and Security Documents, together with UCC Financing Statements
evidencing such subordination, in all respects in form acceptable to Lender; and
such other subordination agreements as Lender shall require in form acceptable
to Lender.
(xii) Consummation of Stock Purchase Transaction. Execution
simultaneously herewith on an irrevocable basis of a Stock Purchase Agreement
providing for the purchase by Borrower of one hundred percent (100%) of the
issued and outstanding capital stock of Aropi Incorporated and delivery to
Lender within fifteen (15) days of the date hereof of a complete copy of the
Stock Purchase Agreement and all documents executed in connection therewith.
(xiii) Warrants. The Warrants (as defined in Section 12).
(xiv) Other Matters. Such other documents, and completion of
such other matters, as Lender may reasonably request.
(B) Further Conditions for Disbursement. The obligation of Lender to
make any Advance (including the first Advance) is further subject to the
satisfaction of the following conditions precedent:
-12-
<PAGE>
(i) The representations and warranties contained in Section 8
hereof and in any of the Loan Documents shall be true and correct on and as of
the date such Advance is made (both before and after such Advance is made) as if
such representations and warranties were made on and as of such date;
(ii) No Default shall exist or shall have occurred and be
continuing on the date such Advance is made (whether before or after such
Advance is made); and
(iii) In the case of any Advance under the Revolving Credit
Loan, Lender shall have received, when due, all Reports required pursuant to
Section 6.(B) as of the close of business on the last business day of the week
next preceding the date such Advance is made. Borrower shall be deemed to have
made a representation and warranty to Lender at the time of the making of, and
the continuation or conversion of, each Advance to the effects set forth in
clauses (A) and (B) of this Section 9. For purposes of this Section 9.(B), the
representations and warranties contained in Section 8 hereof shall be deemed
made with respect to both the financial statements referred to therein and the
most recent financial statements delivered pursuant to Section 6.
(C) Post-Closing Conditions. The following shall be satisfied after
closing:
(i) UCC Searches. By September 30, 1998, Lender shall have
verified to its satisfaction that all security interests and liens on the
Collateral, except those in favor of Lender and Liberty Bidco, or as permitted
herein, have been discharged and terminated of record; and that all liens and
security instruments in favor of Lender are filed of record.
(ii) Evidence of Use of Loan Proceeds. By September 30, 1998,
Lender shall have received such evidence as it shall deem sufficient as to the
disbursement of the proceeds of the Loans and the loan by Liberty Bidco to
Borrower and Guarantors of even date.
(iv) Completion of Lender's Due Diligence. Borrower and
Guarantor Aropi shall permit Lender, upon reasonable advance notice, full access
to Aropi's books and records and personnel for the purpose of allowing Lender to
complete its due diligence investigation relating primarily to inventory and
such other matters as Lender shall determine based on such investigation during
the period from the date hereof through September 18, 1998. Borrower shall
permit to Lender promptly upon Lender's written request payment for Lender's
fees and expenses for Lender's due diligence investigation of Borrower as of the
date hereof and through September 18, 1998 less deposits made.
(v) Cash Flow Projection. Borrower shall deliver to Lender by
not later than September 11, 1998, a consolidated (Borrower and Guarantors)
monthly cash flow projection for the calendar years 1999, 2000 and 2001 prepared
on a basis consistent with the consolidated financial projections (Borrower and
Guarantors) prepared as of and prior to the date hereof and upon the following
assumptions: (i) Borrower does not complete an Offering at any time during such
period, (ii) Borrower and Guarantors continue to own and operate their business
in a consistent manner and with the same number of owned retail stores and (iii)
taking account of such additional knowledge and information relating to the
business operations of the Guarantors as Borrower shall acquire after the date
hereof (the "Post-Closing Projection").
10. AFFIRMATIVE COVENANTS. We covenant that, so long as any Obligations
remain outstanding and this Agreement is in effect, we shall:
(A) Pay to you on demand all reasonable fees and expenses which you
incur in connection with (i) the forwarding of loan proceeds, (ii) the
processing of loan advances, (iii) the establishment and maintenance of the lock
box and of all other accounts created in connection with the transaction
contemplated hereby, and (iv) examination of the Collateral;
-13-
<PAGE>
(B) Promptly file all tax returns and other reports which we are
required to file and promptly pay all taxes, assessments and other charges,
except as are contested in good faith and for which adequate reserves are
established and maintained;
(C) Promptly notify you in writing of any litigation affecting us,
whether or not the claim is covered by insurance, and of any suit or
administrative proceeding which may materially and adversely affect the
Collateral or our business, assets, operations or condition, financial or
otherwise;
(D) Notify you in writing (i) promptly upon the occurrence of any
event described in Section 4043 of ERISA, other than a termination, partial
termination or merger of a "Plan" (as defined in ERISA) or a transfer of a
Plan's assets, and (ii) prior to any termination, partial termination or merger
of a Plan or a transfer of a Plan's assets;
(E) Give you thirty (30) days prior written notice of our opening or
closing any place of business;
(F) Maintain our corporate existence and our qualification and good
standing in all states necessary to conduct our business and own our property
and maintain adequate assets, licenses, patents, copyrights, trademarks and
tradenames to conduct our business;
(G) Promptly notify you in writing of any labor dispute to which we
are or may become subject and the expiration of any labor contract to which we
are a party or bound;
(H) Promptly notify you in writing of any violation of any law,
statute, regulation or ordinance of any governmental entity, or of any agency
thereof, applicable to us which may materially and adversely affect the
Collateral or our business, assets, operations or condition, financial or
otherwise;
(I) Notify you in writing within five (5) business days of our
default beyond any applicable cure period under any note, indenture, loan
agreement, mortgage, lease, or other agreement to which we are a party or bound;
(J) Promptly notify you in writing of any default beyond any
applicable cure period under any Indebtedness or indebtedness owing to us;
(K) Promptly notify you in writing of the making of any capital
expenditures materially affecting our business, assets, operations or
conditions, financial or otherwise;
(L) Execute and deliver to you, upon request, such documents and
agreements as you may, from time to time, reasonably request to carry out the
terms and conditions of this Agreement;
(M) Promptly, and in any event within five (5) days of the receipt
thereof, deliver any communication in any way concerning any act or omission on
our part regarding the use, generation, storage or release of a hazardous waste
or substance. We agree to indemnify and hold you harmless from any and all loss,
damage, cost, liability or expense (including reasonable attorney fees) arising
out of our use, generation, storage or release of any hazardous waste or
substance;
(N) Promptly, and in any event within five (5) days of the receipt
thereof, deliver to you a copy of any communication from the Federal Department
of Labor concerning any alleged wrongful act or omission on our part in
connection with the payment of minimum and/or overtime wages to an employee;
-14-
<PAGE>
(O) Promptly, and in any event within five (5) days of the receipt
thereof, deliver to you a copy of any communication concerning any violation of
a state or Federal law which could result in the forfeiture of the Collateral;
(P) Maintain the liens and security interests granted to you as
first, prior and only liens upon the Collateral, except as permitted under
Section 11.(K);
(Q) Provide to you true and accurate copies, and evidence of the
filing, of the SEC Reports by not later than September 30, 1998;
(R) Provide you not less than thirty (30) days in advance of the
acquisition and delivery of any Inventory to any location other than as set
forth on Schedule 8(O) (each such location referred to as a "New Location") with
the address of the New Location, including the county, and not less than fifteen
(15) days prior to such acquisition and delivery, with such duly executed UCC
Financing Statements as Lender shall require;
(S) Provide to you, upon filing with the SEC, copies of each
registration statement, and upon issuance, each offering statement or
prospectus, with respect to any proposed public or private offering of
securities of Borrower (each an "Offering"); and
(T) Comply in all respects with the Order Approving Disclosure
Statement and Confirming Amended Plan of Reorganization of Gaylord Companies,
Inc., The Cookstore, Inc., and The Cookstore Worthington, Inc., executed in the
United States Bankruptcy Court for the Southern District of Ohio, Eastern
Division on July 10, 1998, as amended (the "Order"), and provide to you such
evidence thereof as you may from time to time reasonably request.
(U) Use our best efforts to obtain an additional aggregate cash
equity investment in Borrower of $500,000 by not later than October 15, 1998
(the "Equity Injection").
11. NEGATIVE COVENANTS. Without your prior written
consent, we covenant that, so long as any Obligations remain outstanding and
this Agreement is in effect, we shall not:
(A) Merge or consolidate with or acquire any other Person;
(B) Declare or pay cash dividends upon any of our stock or
distribute any of our property or make (except in the ordinary course of
business) any loans or extensions of credit, or investments in, any Person, or
redeem, retire, purchase or acquire, directly or indirectly any of our stock, or
make any material change in our capital structure or in our business or
operations which might adversely affect the repayment of the Obligations;
(C) Enter into any transaction which materially and adversely
affects the Collateral or our ability to repay the Obligations;
(D) Become liable for the indebtedness of any Person, except by
endorsement of instruments for deposit;
(E) Incur Indebtedness, other than trade payables arising in the
ordinary course of our business, the Obligations, and Permitted Indebtedness as
set forth on Schedule 11(E);
(F) Make a sale to any customer on a bill-and-hold, guaranteed sale,
sale and return, sale on approval, consignment, or any other repurchase or
return basis, except for retail sales to customers in the ordinary course;
-15-
<PAGE>
(G) Remove the Collateral which is tangible personal property from
the Collateral Locations set forth on Schedule 8(O) unless we give you thirty
(30) days prior written notice and the same is removed to a location within the
continental United States of America;
(H) Use any other corporate or fictitious name;
(I) Pay any Indebtedness, other than the Obligations and trade
payables, or as otherwise permitted hereunder;
(J) Pay any Indebtedness to any of the persons named on Schedule
11(K), except as set forth thereon;
(K) Create, assume or otherwise suffer to exist any mortgage, lien
or other encumbrance of any kind against the Collateral, without Lender's prior
written approval, except for miscellaneous liens which arise in the ordinary
course of business, such as landlord liens, liens for taxes not due and payable
and similar miscellaneous liens, provided that the related obligation is paid
when due and the related lien is thereupon discharged;
(L) (As to Borrower only) At any time own less than 100% of the
outstanding capital stock of each Guarantor ("Subsidiary Shares"), or pledge or
assign or agree to pledge or assign to any Person any Subsidiary Shares; or
(M) Pay any amounts to Cambridge in excess of the amounts payable
under the Contracts.
12. WARRANTS.Borrower shall issue to you on the date hereof one or more
warrants (the "Warrants") for the purchase of a total of two percent (2.0%) of
the Common Stock and Class B Common Stock of Borrower (the "Borrower's Stock")
on a fully diluted basis as of August 20, 1998, upon such terms and conditions
and at an exercise price and with registration and put rights, all as are
acceptable to you.
13. TERMINATION. Either party shall have the right to terminate this
Agreement at the end of the Term of this Agreement or at any time thereafter by
giving the other party written notice by registered or certified mail, which
termination shall be effective upon receipt. Upon the effective date of
termination, all Obligations shall become immediately due and payable. This
Agreement shall also terminate upon payment in full of all Obligations at any
time, which payment may be made without premium or penalty at any time.
14. DEFAULT. Any one or more of the following events shall constitute a
default ("Default") under this Agreement: (a) we shall fail to pay when due, or
breach, any Obligations, or (b) Obligor shall (i) become insolvent, (ii)
generally not pay its respective debts as they become due, (iii) make an
assignment for the benefit of creditors, (iv) attempt to enter into a
composition of debts, or (v) make any material misrepresentation to you or fail
to observe or perform in any material respect any covenants or conditions in
connection with this Agreement, any Rider or any other instrument related to the
Loan hereto, or (c) there shall be filed by or against any Obligor a petition in
bankruptcy for liquidation or for reorganization, or a custodian, receiver or
agent is appointed or authorized to take charge of its properties, and such
proceeding or case shall continue undismissed, or an order, judgment or decree
approving or ordering any of the foregoing shall be entered and continued
unstayed and in effect, for a period of sixty (60) or more days; or any Obligor
authorizes any such action; or (d) there hereafter occurs any material and
adverse change in the business, assets, operations and condition, financial or
otherwise, of any Obligor, or (e) any Obligor shall be in default beyond any
applicable cure period under any agreement to which it is a party, or (f) any
guaranty of the Obligations shall be terminated or revoked.
Obligor acknowledges that while there are events of default set forth,
the Indebtedness is due upon demand, and if demand is not made, then upon the
Maturity Date. Demand may occur with or without there being an event of default.
-16-
<PAGE>
14.A. CASH COLLECTIONS ON DEFAULT. Upon the occurrence of a Default, at
your request, a lockbox collection system shall be established and we shall
execute such documents as you shall require to establish procedures for the
delivery to you immediately following receipt by us of all cash proceeds of the
sale of the Collateral and the direct payment to us of all amounts due us from
third parties as proceeds of sale of the Collateral, for direct application to
the Loans, and we agree to perform such other acts as you shall require, all to
assure the immediate delivery to you for application to the Loans of all
proceeds of the Collateral, all upon such terms and conditions as are acceptable
to you.
15. YOUR RIGHTS AND REMEDIES.
(A) If a Default occurs under this Agreement, or any Rider or any
other document or instrument executed by the undersigned or any Guarantor, you
may, at your election, without notice of your election and without demand, do
any one or more of the following: (a) declare our Obligations, whether evidenced
by a revolving credit note, a term note or otherwise, to be immediately due and
payable; (b) stop advancing money or extending credit to or for our benefit
under the Agreement or any Rider; (c) exercise any and all of the rights
accruing to a secured party under the Code and any other applicable law; (d)
take possession of the Collateral and keep it on our premises, at no cost to
you, or remove any part of it to such other place(s) as you may desire or we
shall, upon your demand, at our cost, assemble the Collateral and make it
available to you at a place reasonably convenient to you.
(B) You may sell and deliver any Collateral at public or private
sales, for cash, upon credit or otherwise, at such prices and upon such terms as
you deem commercially reasonable, at your discretion, and may, if you deem it
reasonable, postpone or adjourn any sale of the Collateral by an announcement at
the time and place of sale of such postponed or adjourned sale without giving a
new notice of sale. We agree that you have no obligation to preserve rights to
the Collateral or marshall any Collateral for the benefit of any Person. You are
hereby granted a license or other right to use, without charge, our labels,
patents, copyrights, name, trade secrets, trade names, trademarks and
advertising matter, or any similar property, in completing production,
advertising or selling any Collateral and our rights under all licenses and all
franchise agreements shall inure to your benefit. Any requirement of reasonable
notice shall be met if such notice is mailed postage prepaid to us at our
address set forth below at least five (5) business days before sale or other
disposition. The proceeds of sale shall be applied first to all expenses of
sale, including attorneys' fees, and second to (in whatever order you elect) all
Obligations. You will return any excess to us and we shall remain liable for any
deficiency.
(C) IN THE EVENT OF A DEFAULT HEREUNDER, WE HEREBY WAIVE ALL RIGHTS
TO NOTICE AND HEARING PRIOR TO THE EXERCISE BY YOU OF YOUR RIGHTS TO REPOSSESS
THE COLLATERAL WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH
COLLATERAL WITHOUT NOTICE OR HEARING AND ALL RIGHTS OF SET-OFF AND COUNTERCLAIM
AGAINST YOU.
16. BANKRUPTCY PROVISIONS. In consideration of the agreements of Lender
hereunder and under the Loan Documents, Borrower and Guarantors each agree that,
in the event any one or more of them (as a "Debtor" or "Debtors") files for
relief under Title 11 of the United States Code ("Bankruptcy Code") or is
otherwise subject to an order for relief under the Bankruptcy Code.
(A) Relief From Stay. Lender shall be entitled to relief from the
automatic stay imposed by Bankruptcy Code Section 362 on or against the exercise
of any and all rights and remedies otherwise available to Lender under this
Agreement, the Loan Documents or applicable law, if Debtor fails to file a Plan
of Reorganization within 120 days or fails to obtain confirmation of a Plan of
Reorganization within 180 days, after entry of the order for relief. Borrower
specifically acknowledges that "cause" exists for such relief within the meaning
of Section 362(d) of the Bankruptcy Code.
(B) Cash Collateral. Any attempt by Debtor to use "Cash Collateral"
(as defined in Section 363 of the Bankruptcy Code) shall be subject to the prior
entry of an order pursuant to Section 363 of the Bankruptcy Code ("Cash
Collateral Order") specifically incorporating the principal terms set forth on
Schedule 16(B) attached hereto and Borrower shall under no circumstances seek to
use Cash Collateral other than on the terms provided in this Agreement. Any such
-17-
<PAGE>
Cash Collateral Order shall permit the use of Cash Collateral only until the
earliest to occur of: (i) a Default under any of the provisions of this
Agreement or the Loan Documents (other than a Default occasioned solely by the
bankruptcy of Debtor), (ii) the appointment of a Chapter 11 trustee or examiner
in Debtor's case, (iii) the dismissal of Debtor's case or its conversion to a
case under Chapter 7 of the Bankruptcy Code, or (iv) the entry of an order
modifying or terminating the automatic stay or prohibiting the further use of
cash collateral. Upon the occurrence of any of the events described in (i)
through (iv) of the preceding sentence, Debtor's ability to use Cash Collateral
shall terminate immediately and automatically; such termination shall not,
however, affect or impair the rights, interests or liens granted to Lender under
this Agreement or the other Loan Documents.
All existing and future revenue and cash shall constitute Cash
Collateral, subject to Lender's choate, fully perfected and presently
enforceable liens and security interests, and, to the extent they are used and
consumed by Debtor after filing of the petition or entry of the order for
relief, Debtor specifically agrees that they are collateral for Lender's secured
claims under Section 506 of the Bankruptcy Code in the amount so used.
To the extent it is determined that Section 552(a) of the Bankruptcy
Code applies to limit Lender's interest under the Loan Documents and this
Agreement Lender shall be deemed to have, as adequate protection for the use of
Cash Collateral, a continuing perfected protection for the use of Cash
Collateral, a continuing perfected post-bankruptcy lien and security interest in
all Collateral, and all revenue and cash, whether derived from operations prior
to or subsequent to or the filing of a voluntary of involuntary petition for
relief with respect to Debtor. As further adequate protection for Debtor's use
of Cash Collateral, Debtor shall maintain at all times an adequate and
appropriate amount and type of coverage of insurance, including endorsements
issued therewith covering the Collateral in amounts not less than that required
under the Loan Documents. To the extent that the collateral securing Lender's
claims in Debtor's bankruptcy case is deemed or proves to be insufficient to pay
Lender's claims in full, Lender's secured claims shall be deemed to have been
inadequately protected by the provisions of the Cash Collateral Order, and they
shall therefore have administrative expenses of the kind specified in Sections
503(b) and 507(b) of the Bankruptcy Code, which superpriority shall be equal to
the priority provided under the provisions of Section 364(c)(1) of the
Bankruptcy Code over all other costs and administrative expenses incurred in the
case of the kind specified in, or ordered pursuant to, Sections 105, 326, 327,
330, 331, 503(b), 506(c), 507(a), 507(b) or 726 of the Bankruptcy Code and shall
at all times be senior to the rights of Debtor or any successor trustee in the
resulting bankruptcy proceeding or any subsequent proceeding under the
Bankruptcy Code.
During the pendency of Debtor's bankruptcy, if it is determined that
any of the rights granted hereunder or by any of the Loan Documents are security
interests or liens, they shall be deemed perfected without the necessity of the
filing of any documents or commencement of proceedings otherwise required under
non-bankruptcy law for the perfection of security interests, with such
perfection being binding upon any subsequently appointed trustee, either in
Chapter 11 or under any other Chapter of the Bankruptcy Code, and upon other
creditors of Borrower who have or may hereafter extend secured or unsecured
credit to Debtor.
(C) Surcharge Waiver. Debtor and/or any other representative of
Debtor's bankruptcy estate waives any right to seek a surcharge of Lender's
collateral under 11 U.S.C. section 506(c) or any other provision of applicable
law.
(D) Other Waivers. Borrower waives any right to seek an order under
11 U.S.C. sections 363, 364, 1129 or any other provision of the Bankruptcy Code,
imposing liens or security interests of senior or equal priority with the liens
and security interests of Lender in the Collateral or the Cash Collateral.
-18-
<PAGE>
(E) Other Actions Not Prohibited. Nothing contained in this Section 16
shall be deemed to limit or restrict Lender's rights to seek in the bankruptcy
court any relief that Lender and the applicable Agent under the applicable Loan
may deem appropriate in the event of a bankruptcy commenced by or against
Borrower or any Guarantor, and in particular, Lender shall be free to seek the
dismissal or conversion of any case filed by Borrower or any Guarantor, the
appointment of a trustee or examiner, and relief from the automatic stay.
17. WAIVER; AMENDMENTS; SUCCESSORS AND ASSIGNS. Your failure to exercise
any right, remedy or option under this Agreement or any Rider or other agreement
between you and us or delay by you in exercising the same will not operate as a
waiver. No waiver by you will be effective unless in writing and then only to
the extent stated. No waiver by you shall affect your right to require strict
performance of this Agreement. Your rights and remedies will be cumulative and
not exclusive. This Agreement cannot be changed or terminated orally. All terms,
conditions, promises, covenants, provisions and warranties shall inure to the
benefit of and bind your and our respective representatives, successors and
assigns.
18. MISCELLANEOUS.
(A) If any provision of this Agreement shall be prohibited or
invalid, under applicable law, it shall be ineffective only to such extent,
without invalidating the remainder of this Agreement.
(B) This Agreement shall be interpreted in accordance with the
Governing Law of the State Michigan.
(C) All of our representations and warranties contained in this
Agreement shall survive the execution, delivery and acceptance thereof by the
parties.
(D) No termination of this Agreement or of any guaranty of the
Obligations shall affect or impair the powers, obligations, duties, rights,
warranties, representations or liabilities of the parties hereto and all shall
survive such termination.
(E) Each Obligation may, in your discretion, be evidenced by notes
or other instruments issued or made by us to you. If not so evidenced, such
Obligation shall be evidenced solely by entries upon your books and records.
(F) All Obligations shall constitute one loan secured by the
Collateral. You may, in your sole discretion: (i) exchange, enforce, waive or
release any of the Collateral or (ii) apply Collateral and direct the order or
manner without affecting your right to take any other action with respect to any
other Collateral.
(G) You shall have the continuing and exclusive right to apply or
reverse and re-apply any and all payments to any portion of the Obligations. To
the extent that we make a payment or you receive any payment or proceeds of the
Collateral for our benefit, which are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to a trustee,
debtor in possession, receiver or any other party under any bankruptcy law,
common law or equitable cause, then, to such extent, the Obligations or part
thereof intended to be satisfied shall be revived and continue as if such
payment or proceeds had not been received by you.
(H) We shall reimburse you for all expenses incurred or to be
incurred by you in connection with (a) the negotiation, preparation and closing
of this Agreement (to be paid at closing); (b) the protection, perfection or
preservation of your security interest in or lien upon the Collateral; (c) your
inspection or verification of the Collateral and the filing of UCC Financing
Statements; (d) any court or bankruptcy proceeding relating to the Agreement or
any claim or action by any Person against you which would not have been asserted
were it not for your relationship with us hereunder or otherwise; (e) actions
taken with respect to the Collateral and your security interest or lien therein;
and (f) enforcement of any of your rights and remedies with respect to the
Obligations or Collateral. The foregoing expenses shall include, without
limitation: (i) reasonable fees, costs and expenses of your attorneys and
paralegals; (ii) interest on the foregoing at the highest applicable interest
rate provided under the Rider, which shall be part of the Obligations, payable
on demand and secured by the Collateral. In addition, we shall pay to you a fee
-19-
<PAGE>
of Seven Hundred Fifty and 00/100 Dollars ($750.00) per day plus expenses for
each inspection and verification of the Collateral, which shall occur not less
frequently than every ninety (90) days. In recognition of your right to have all
your expenses incurred or to be incurred in connection with this Agreement and
the fees due you secured by the Collateral, you shall not be required to record
any discharge of your lien or termination of your security interest unless and
until we deliver to you a general release acceptable to you.
(I) We agree to give you written notice of any action or omission by
you or your agents in connection with this Agreement that may be actionable
against you or that may be a defense to payment of the Obligations for any
reasons. We further agree that unless such a notice specifically describing the
action or omission is given by us within thirty (30) days after we have
knowledge or with the exercise of reasonable diligence should have had knowledge
of the occurrence of said action or omission we shall not assert, and we shall
be deemed to have waived, any claim or defense arising therefrom.
(J) If you shall breach your obligation under this Agreement to make
an advance under the terms of this Agreement, notwithstanding our conformance
with the provisions thereof, we agree that our sole remedy on account thereof
shall be to recover liquidated damages on account of such breach, computed as
hereinafter provided, in recognition of the fact that the damages which we might
incur are uncertain and speculative. Liquidated damages to which we shall be
entitled shall be equal to sixty (60) times the interest payable for one day on
the loans outstanding as of the day that you are deemed to have failed to fund.
In any event, you shall never be liable to us for special, indirect and
consequential damages, whatever the nature of your breach hereunder.
(K) We authorize and direct you to disburse, for our account, the
proceeds of loans made by you to us to such Person as any of our chairman and
chief executive officer or president shall direct, whether in writing or orally.
(L) Any notice required hereunder shall be in writing, and addressed
to the party to be notified as follows:
If to Greenfield: Mr. Donald G. Barr, Jr., President
Greenfield Commercial Credit, L.L.C.
1301 West Long Lake Road, Suite 190
Troy, Michigan 48098
with a copy to: Robert D. Mollhagen, Esq.
Howard & Howard Attorneys, P.C.
The Phoenix Building, Suite 500
222 Washington Square, North
Lansing, Michigan 48933-1817
If to Borrower and/or Mr. David E. Danovitch
any Guarantor: Home Retail Holdings, Inc.
535 Madison Avenue, 19th Floor
New York, New York 10022
and
Mr. Glenn Kaas, Chief Operating Officer
Home Retail Holdings, Inc.
4264 Winters Chapel Road, Building B
Atlanta, Georgia 30360
with a copy to: William E. Sudow, Esq.
Brown & Wood, LLP
815 Connecticut Avenue NW
Washington, D.D. 20006-4004
or to such other address as each party may designate for itself by like notice.
-20-
<PAGE>
(M) We represent and warrant to you that, with respect to the
financing transaction herein contemplated, no Person is entitled to any
brokerage fee or other commission, except that Laux & Company and
J.R.P.Consulting Corp. have earned fees payable at closing, and we agree to
indemnify and hold you harmless against any and all such claims.
(N) The Section titles contained in this Agreement are without
substantive meaning and are not part of the Agreement.
19. WAIVER OF JURY TRIAL.
Our legal counsel has advised us that (i) there may be a constitutional
right to a jury trial in connection with any claim, dispute or lawsuit arising
out of this Agreement or any Rider and (ii) such constitutional right may be
waived. After consultation with our counsel (which has included our counsel's
review of this Agreement), we believe that it is in our best interest in this
commercial transaction to waive such right. Accordingly, we hereby waive our
right to a jury trial, and further agree that the best forum for hearing any
claim, dispute or lawsuit, if any, arising in connection with this Agreement or
any Rider or our relationship with you, shall be a court of competent
jurisdiction sitting without a jury.
20. NO ORAL AGREEMENTS.
We acknowledge that this Agreement and each Rider represents the final
agreement between you and us and the terms of such documents may not be
contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements that may have or will be exchanged between you (including your
officers, employees and agents) and us.
Very truly yours,
BORROWER: GUARANTORS:
HOME RETAIL HOLDINGS, INC., THE COOKSTORE, INC.,
a Delaware corporation an Ohio corporation
By: /s/ GREG DUKOFF By: /s/ GREG DUKOFF
------------------------------- --------------------------
Greg Dukoff Greg Dukoff
Its: Secretary Its: Secretary
Accepted at: New York, New York THE COOKSTORE WORTHINGTON, INC.,
on August 20, 1998 an Ohio corporation
GREENFIELD COMMERCIAL CREDIT, L.L.C. By: /s/ GREG DUKOFF
--------------------------
Greg Dukoff
Its: Secretary
By: /s/ DONALD G. BARR
-------------------------------
Donald G. Barr, Jr.
Its: President
-21-
<PAGE>
AROPI, INCORPORATED,
an Iowa corporation
By: /s/ GLENN KAAS
--------------------------
Glenn Kaas
Its: President
-22-
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of August 20
1998 between HOME RETAIL HOLDINGS, INC., a Delaware corporation (the "Company"),
and GLENN KAAS, a resident of the State of Georgia ("Employee").
WHEREAS, the Company desires to employ Employee as the Chief Executive
Officer ("CEO") and President of the Company, and Employee desires to be
employed by the Company; and
WHEREAS, Company and Employee desire to set out in writing the terms of
Employee's employment with the Company.
NOW, THEREFORE, in consideration of the employment of Employee by the
Company, and the premises and mutual covenants and agreements herein contained,
the parties hereto agree as follows:
Definitions.
"Affiliate" shall mean an individual, any spouse,
parent, sibling, or child of such individual, or a corporation, any corporation
controlling such corporation, any corporation controlled by such corporation, or
any shareholder or shareholders, individually or collectively, in control of
such corporation.
"Aropi" means Aropi, Incorporated, an Iowa
corporation.
"Base Salary" is defined in Section 3(a).
"Board" means the Board of Directors of the Company.
"Cause" means during the Term of Employee's
employment pursuant to this Agreement one of the following has occurred: (i)
Employee has committed a felony not involving the use of a motor vehicle or has
been imprisoned following conviction of a felony involving the use of a motor
vehicle, (ii) defalcation of fraudulent conduct by Employee, (iii) Employee has
committed or engaged in willful misconduct or gross negligence in the
performance of his duties to the Company, (iv) failure by Employee to devote his
full business time and attention to his duties hereunder (other than any such
failure resulting from Employee's incapacity due to Disability), or (v) willful
breach of one or more material express obligations under this Agreement by
Employee, provided that any such act results in a material injury to the
Company. For purposes of this paragraph, no act, or failure to act, on
Employee's part shall be considered "willful" if it was done, or omitted to be
done, in good faith and with reasonable belief that such act or omission was in,
or not opposed to, the best interest of the Company. The Cause shall be stated
specifically in the notice of termination given pursuant to Paragraph 8(a).
"Change of Control" means the date on which the
Stockholders (as defined in the Tag-Along Agreement) as of the date hereof have
collectively transferred 50% or more of the Shares of the Company to persons
other than their Affiliates.
"Termination Date" shall mean the date that the
Employee ceases to be employed by the Company regardless of whether or not the
Employee's employment is terminated without Cause or for Good Reason pursuant to
Paragraph 6(1) below.
"Disability" shall exist if because of ill health,
physical, or mental disability, or any other reason beyond his control, and
notwithstanding reasonable accommodations made by the Company, the Employee
shall have been unable, unwilling or shall have failed to perform his duties
under this Agreement, as determined in good faith by the Company's Board of
Directors, for a period of 120 consecutive days, or if, in any 12-month period,
the Employee shall have been unable or unwilling or
<PAGE>
shall have failed to perform his duties for a period of 180 days, irrespective
of whether or not such days are consecutive.
"Good Reason" means (i) any instruction or directive
of the Board of Directors of the Corporation which does not result from facts or
circumstances which would allow the termination of Employee for Cause and which
has the effect of substantially eliminating the duties, responsibilities and
authority of Employee or scope of the position, but only, however, to the extent
that (a) the Employee has notified the Company in writing of the substantial
elimination, specifying in reasonable detail the nature of the substantial
elimination and stating that the substantial elimination is grounds for Good
Reason, and (b) the Company has failed to cure the substantial elimination
within 60 days after the notice is sent or given under this Agreement, or (ii)
the occurrence of a Change of Control.
"Offering" is defined in the Stock Purchase
Agreement.
"Offering Price" is defined in the Stock Purchase
Agreement
"Option Term" means for a period of three years from
the date hereof, if the Offering occurs within six months from the date hereof.
If the Offering occurs after six months from the date hereof, then the Option
Term shall mean a period of three years from the date of the Offering.
"Shares" means any and all common and/or preferred
shares of stock of the Company issued and outstanding (including any options or
warrants in regard thereto).
"Stock Purchase Agreement" means that certain Stock
Purchase Agreement dated the date hereof by and among the Company, the Employee
and Aropi, Incorporated, an Iowa corporation.
"Tag-Along Agreement" means the Tag-along Agreement
dated as of the date hereof among the Company and certain Stockholders,
including without limitation, Employee.
Term And Duties.
For a period of three years from the date from the
date of this Agreement (the "Term"), Employee shall serve the Company as CEO and
President, and shall have such duties as set forth in the Bylaws of the Company,
and as may be assigned to Employee from time to time by the Board. Employee
shall perform his duties hereunder, and shall report directly to the Board.
For so long as Employee is employed by the Company, Employee
agrees (i) to devote substantially all of his time, energy, and skill necessary
or appropriate with respect to the performance of the duties of his employment
(vacations allowable under this Agreement and absences due to illness excepted),
and (ii) not to engage directly or indirectly in any other active employment
(other than pursuant to this Agreement) without the prior written consent of the
Board.
Compensation And Benefits.
During the Term and subject to the terms and conditions of
this Agreement:
Employee shall receive a base salary of (i) $105,000
for the first 12 months, (ii) $115,500 for the second 12 months, and (iii)
$127,050 for the third 12 months (pro rated for periods of less than 12 months)
paid in arrears in accordance with the Company's normal payroll and withholding
procedures (collectively, "Base Salary").
Employee's Base Salary shall be subject to review and
adjustment by the Board on each yearly anniversary date of this Agreement during
the Term; provided, however, that during the Term, Employee's Base Salary may be
increased (but not decreased) from the amounts set forth above at the discretion
of the Board.
<PAGE>
Employee shall be eligible for a bonus each year
during the Term as may be determined by the Board in its sole discretion as of
the end of the Company's fiscal year, based on an evaluation of the Company's
performance during the past twelve months and Employee's contribution to that
performance.
Employee shall be entitled to all State of Georgia,
federal and Company-established holidays and 30 business days of vacation per
calendar year.
Employee and members of his immediate family shall be
entitled to participate, at the Company's expense, in the hospitalization,
health and accident, and major medical coverage plan adopted by the Company.
Employee shall also be entitled to any and all other benefit packages and plans
as are made generally available to other employees, officers or directors of the
Company, on terms not less favorable than the terms available to other
employees, except as may be limited by applicable law or regulation, and such
benefits shall be proportionate to salary to the extent such allocation method
applies among other employees, including but not limited to any officer and/or
directors liability insurance the Company may purchase.
In addition to Employee's Base Salary, Employee shall
receive, $700.00 per month for an automobile allowance ("Car Allowance"). Any
mileage incurred for the benefit of the Company will also be reimbursed by the
Company to the Employee at the mileage allowance equal to that set forth in the
Internal Revenue Code of 1986, as amended (or any successor Code) ("Mileage
Allowance"). The Car Allowance shall be paid with the Employee's Base Salary.
The Mileage Allowance shall be repaid the same as any other Company Expense
incurred and as provided for in Paragraph 4 below.
If the Offering (as defined in the Stock Purchase
Agreement) has occurred, then within 180 days of the Conversion Date, the
Company will develop a stock option plan which will grant to the Employee
options to purchase additional shares of the Company's stock of not less than 5%
of the issued and outstanding shares of the Company as of the Conversion Date on
a fully diluted basis. The terms and conditions of the options shall be on terms
and conditions customary for Chief Executive Officers similarly employed as
Employee and predicated either (i) on reasonable financial pre-tax earnings
and/or net operating income before tax or (ii) a business plan the Company is to
attain during each of the three years of the Employee's employment. The stock
option plan shall be developed in consultation with an independent third party
specializing in the development of stock option incentive programs for
executives of publicly traded companies.
Signing Bonus.
In addition to the compensation set forth in Section 3 above,
the Employee shall be:
(a) paid the amount of $125,000 in twelve (12) consecutive
equal monthly payments of $10,416.66, commencing 60 days from the date hereof in
accordance with the normal payroll practice of the Company (the "Signing Bonus
Compensation").
(b) granted during the Option Term an option by the Company to
purchase an aggregate of five thousand (5000) shares of the voting common stock
of the Company at a purchase price per share equal to the Offering Price (the
"Option").
The Employee may exercise this Option at any time
during the Option Term by delivering written notice of the exercise to the
Company, specifying the number of Shares to be purchased and the Purchase Price
to be paid therefor and accompanied by payment in full. Such exercise shall be
effective upon receipt by the Company of such written notice together with the
required payment. The Employee may purchase less than the number of Shares
subject to the Option, provided that no partial exercise of the Option may be
for any fractional Share or for less than ten (10) whole Shares.
<PAGE>
The Option shall be in the form similar to the
Company's Common Stock Purchase Warrant attached hereto as Exhibit A" and
incorporated herein by reference.
Reimbursement of Employee Expenses.
The Company recognizes that Employee, in connection with the
services to be performed by him for the Company, will be obliged to expend
monies for travel, entertainment of customers, and similar business expenses.
The Company agrees to reimburse Employee for all reasonable travel,
entertainment, and miscellaneous expenses incurred in the conduct of the
business of the Company. In order for Employee to receive reimbursement from the
Company for the foregoing expenses he must submit receipts for said expenses to
the Company not less often than monthly. In addition thereto, Employee must
submit a written itemized statement as to the nature of the expenses or follow
such other policy or procedures that the Company may adopt from time to time.
Employee shall be reimbursed in accordance with such policy and practice
following Employee's submission of bills to the Company. In addition, the
Company may issue to Employee credit cards which employee shall use solely in
furtherance of the business of the Company pursuant to this Agreement. The
expenses shall be paid directly to the credit card companies by the Company.
Employee shall submit to the Company a detailed written statement as to the
nature of the charges and shall submit to the Company a detailed list of persons
entertained and the company or companies such persons are associated with in
connection with such entertainment expense. Should Employee fail to provide such
documentation within a reasonable time following receipt of the credit card bill
from the credit card issuer, the Company may deduct the amount of any
undocumented charges from any amounts due Employee by the Company. Should the
Board review and disapprove of any expenses incurred by the Employee, the
Company may deduct the amounts of any disapproved expenses from any amounts due
Employee by the Company. No expenses shall be disapproved if 1) such expenses
were reasonable in nature and amount, 2) such expenses were incurred in
compliance with any policies adopted by the Board, and 3) such expenses were
documented as provided herein.
Records; Non-Competition.
All records, notes, correspondence, files, memoranda,
reports, price lists, customer lists, drawings, plans,
sketches, documents, equipment, data, apparatus, and like
items, and all copies thereof, relating to the Company's
Business, confidential information, or trade secrets that are
prepared by Employee, are disclosed to Employee, or come into
Employee's possession, shall be and remain the sole and
exclusive property of the Company. Employee agrees, at the end
of the Term, or at any other time upon the Company's request,
to promptly deliver to the Company the originals and all
copies of any of the foregoing that are in Employee's
possession, custody, or control, and any other property
belonging to the Company.
Employee acknowledges that as the President of Aropi,
the Employee has had access to a substantial portion of the
proprietary and confidential information of the business of
Aropi, including its trade secrets and business plans; the
benefits to the Company's shareholders for their purchase of
Aropi's stock would be denied if it were not for the
protections set forth in this Paragraph 5; and during the
course of his employment with the Company pursuant to this
Agreement, the Employee will continue to receive and have
access to the proprietary and confidential information of the
Company, and he will also receive and have access to
confidential financial information and proprietary information
relating to the operations and business of the Company.
Accordingly the Employee is willing to enter into the
covenants described in Paragraph 5(c) below, in order to
provide the Company with reasonable protection for those
interests.
The Employee hereby agrees that, from the date hereof
to and until the first anniversary of the Termination Date,
the Employee shall not, directly or indirectly:
<PAGE>
1. As a stockholder of any corporation or partner of
any partnership or as an owner, investor, principal
or agent, or in any other manner, engage in any
business which competes within ten miles of any
Company store open at the Termination Date.
2. solicit, induce, influence or attempt to
influence, or cause any business, firm, or
corporation which directly competes with the Company
to solicit, induce, influence or attempt to
influence, the employment of any key employee(s) of
the Company;
3. engage in, be employed by or participate, directly
or indirectly, in the operation or management of any
business which competes with the Company on the
Termination Date;
Notwithstanding anything contained herein to the contrary, the
ownership, in the aggregate, of less than 5% of the outstanding shares of
capital stock of any corporation with one or more classes of its capital stock
listed on a national securities exchange or publicly traded on the
over-the-counter market shall not constitute a violation of this Paragraph 5.
This Paragraph 5 is not intended to, and shall not preclude
Employee from working for any company that is not a specialty cookware store
(such as a department store that may sell similar products, but is not solely a
specialty cookware store), nor is this Paragraph 5 intended to or shall it
preclude the Employee from working for any entity which, either directly or
indirectly, owns or manages a specialty cookware store as long as Employee does
not participate in any day-to-day activities or management of the company's
subsidiaries, divisions, etc., as the case may be.
The covenants contained in Paragraph 5(c), above, are
intended to be separate and severable and enforceable as such.
The Employee hereby agrees that in the event of any
offer of employment or if any other proposal or arrangement
for employment is made to the Employee by any third party or
parties which could reasonably be anticipated to give rise to
a breach of one or more of the covenants contained in
Paragraph 5(c) above he will immediately inform the third
party or parties of the existence of the covenants contained
herein.
The Employee hereby specifically acknowledges that
the agreements contained in this Paragraph 5 are reasonable
under the circumstances and in light of the reasons enumerated
in Paragraph 5(b), above. Nevertheless, to the extent that any
obligation to refrain from competing within a geographic area,
for a period of time, or with respect to a particular scope of
commerce, is held by a court of competent jurisdiction to be
invalid or unenforceable, such obligation shall be deemed
modified to the extent necessary to render it enforceable, and
the obligations imposed by Paragraph 5 shall be fully enforced
as so modified.
Termination.
Termination for Cause. The employment of Employee
under this Agreement may be terminated prior to the end of the Term or any
renewal term hereof immediately by the Company for Cause upon notice of
termination served personally or in accordance with Paragraph 8(a) hereof, such
Cause being specified in the notice. In the event that Employee is terminated by
the Company for Cause, Employee shall only be entitled to salary accrued
hereunder and unpaid as of the date of such termination.
<PAGE>
Termination for Disability. The employment of
Employee under this Agreement may be terminated prior to the end of the Term by
the Company in the event of Employee's Disability upon notice of termination
served personally or in accordance with Paragraph 8 hereof, such Disability
being specified in the notice. In the event that the Company delivers to
Employee a notice of termination for Disability, such notice will be effective
on the 15th day following delivery thereof. Upon the termination of this
Agreement due to the Employee's Disability during the Term, the Company shall
pay to the Employee a lump sum equal to 1 year of salary otherwise due hereunder
reduced by the amount of income that the Employee is entitled to receive for
such period pursuant to any Company sponsored disability income insurance
contract.
Termination Without Cause: Resignation for Good
Reason. The Company may terminate Employee's employment without Cause subject to
this Paragraph 6(c). At such time that a Change of Control has occurred,
Employee shall have the right at any time within six (6) months after the
occurrence of the Change of Control, to terminate and cancel this Agreement with
no liability whatsoever for his termination of this Agreement, which termination
shall constitute a Good Reason. If during the Term, (i) the Employee's
employment is terminated by the Company without Cause and not for Disability, or
(ii) the Employee voluntarily terminates his employment during the Employment
Period for Good Reason, then the Company shall pay the Employee in one lump sum,
a sum of money equal to the Base Salary he would have earned during the
succeeding 12 months from the Termination Date (plus any and all payments due
and owing in regard to the Signing Bonus Compensation) and shall reimburse the
Employee for any expenses incurred pursuant to Paragraph 4 hereof before the
Termination Date, within thirty (30) days of the date of termination.
Survival of Obligations. The obligation of the
Company to pay any amounts to Employee remaining unpaid at the Termination Date
of this Agreement shall survive the termination of this Agreement under this
Paragraph 6.
Severability. If any part of this Agreement is for any reason
found to be unenforceable, then all other parts of it nevertheless shall remain
enforceable.
Miscellaneous.
Communications. Unless otherwise specified, whenever
this Agreement requires or permits any consent, approval, notice, request, or
demand from one party to another, that communication must be in writing (which
may be by telecopy) to be effective and is deemed to have been given if by
telecopy, when transmitted to the appropriate telecopy number (and all
communications sent by telecopy must be promptly confirmed promptly by
telephone; but any requirement in this parenthetical does not affect the date
when the telecopy is deemed to have been delivered, if by certified or
registered mail, on the third business day after it is enclosed in an envelope
and properly addressed, stamped, sealed, and deposited in the appropriate
official postal service with a return receipt requested, or if by any other
means, when actually delivered. Until changed by notice pursuant to this
Agreement, the address (and fax number) for the Company and Employee are:
Employee: Mr. Glenn Kaas
4135 Station Mill Court
Norcross, Georgia 30092
Telecopy: (770) 448-9758
with a copy to: Jack K. Holland, Esq.
Arnall Golden & Gregory
2800 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3450
Telecopy: (404) 873-8611
<PAGE>
Company: Home Retail Holdings, Inc.
535 Madison Avenue, 19th Floor
New York, NY 10022
Attn: David E. Danovitch, Esq.
Telecopy: (212) 508-6501
with a copy to: William E. Sudow, Esq.
Brown & Wood
815 Connecticut Avenue, N.W.
Suite 701
Washington, D.C. 20006
Telecopy: (202) 223-0485
Relocation. Notwithstanding anything contained herein,
Employee shall not be required to relocate his home or be employed outside of
Metropolitan Atlanta.
Entire Agreement; Counterparts. This Agreement constitutes the
entire agreement between the parties hereto with respect to the subject matter
hereof and supersedes all prior oral and written agreements between the parties.
This Agreement may not be modified, amended, or otherwise changed in any manner
except by a writing executed by the parties hereto. This Agreement may be
executed in a number of identical counterparts (including counterparts or
signature pages executed and transmitted by telecopy) with the same effect as if
all signatories had signed the same document. All counterparts must be construed
together to constitute one and the same instruments
Binding Effect. This Agreement binds and inures to the benefit
of the Company, Employee, and their respective heirs, devisees, personal
representatives, permitted successors, and permitted assigns.
Waiver. The waiver by one party of a breach of any provision
of this Agreement by the other party shall not operate or be construed as a
waiver of any subsequent breach of the same or any other provision by the other
party. Either party hereto may waive the benefit of any provision or condition
for its benefit contained in this Agreement.
Time of Essence. TIME IS OF THE ESSENCE OF THIS AGREEMENT.
Construction. Each party hereto hereby acknowledges that all
parties hereto participated equally in the drafting of this Agreement and that,
accordingly, no court construing this Agreement shall construe it more
stringently against one party than the other.
Governing Law. This Agreement shall be governed by, and
construed under, the laws of the State of Georgia.
Assignment. This Agreement, and the rights accruing hereunder,
may not be assigned by either party without the prior written consent of the
other party.
Other References. Unless otherwise specified (a) where
appropriate, the singular includes the plural and vice versa, and words of any
gender include each other gender, (b) heading and caption references may not be
construed in interpreting provisions, (c) monetary references are to currency of
the United States of America, (d) paragraph and exhibit references are to
paragraphs in and exhibits attached to this Agreement, (e) references to
"telecopy," "facsimile," "fax," or similar terms are to facsimile or telecopy
transmissions, (f) references to "including" mean including without limiting the
generality of any description preceding that word, (g) the rule of construction
that references to general items that follow references to specific items are
limited to the same type or character of those specific items is not applicable
in this Agreement, (h) references to any person include that person's heirs,
personal representatives, successors, trustees, receivers, and permitted
assigns, (i) references to any law include every amendment or supplement to it,
rule and regulation adopted under it, and successor or
<PAGE>
replacement for it, and (j) references to any document include every renewal and
extension of it, amendment and supplement to it, and replacement or substitution
for it.
EXECUTED as of the date first stated above.
/s/ GLENN KAAS
--------------
Glenn Kaas
HOME RETAIL HOLDINGS, INC.
By: /S/ DAVID DANOVITCH
-----------------------
Name:
------------------
Title:
-----------------
<PAGE>
EXHIBIT 21
List of Subsidiaries
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
The Cookstore, Inc. Ohio
The Cookstore Worthington, Inc. Ohio
Aropi, Incorporated Iowa
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement on Form SB-2 of our report
dated August 6, 1998, relating to the consolidated financial statements of
Gaylord Companies, Inc. 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
September 14, 1998
<PAGE>
INDEPENDENT AUDITORS CONSENT
We hereby consent to the use in the Rolling Pin Kitchen Emporium, Inc.
Registration Statement (Registration Statement) dated September 15, 1998 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
September 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,070,503
<SECURITIES> 0
<RECEIVABLES> 15,118
<ALLOWANCES> 0
<INVENTORY> 889,996
<CURRENT-ASSETS> 2,032,298
<PP&E> 684,369
<DEPRECIATION> 334,619
<TOTAL-ASSETS> 2,390,748
<CURRENT-LIABILITIES> 2,636,208
<BONDS> 0
0
300,000
<COMMON> 40,950
<OTHER-SE> (1,076,186)
<TOTAL-LIABILITY-AND-EQUITY> 2,390,748
<SALES> 3,724,157
<TOTAL-REVENUES> 3,724,157
<CGS> 3,508,874
<TOTAL-COSTS> 3,508,874
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,710
<INCOME-PRETAX> (1,626,005)
<INCOME-TAX> 400,649
<INCOME-CONTINUING> (2,026,654)
<DISCONTINUED> (668,377)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,695,031)
<EPS-PRIMARY> (.70)
<EPS-DILUTED> (.70)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 212,681
<SECURITIES> 0
<RECEIVABLES> 4,329
<ALLOWANCES> 0
<INVENTORY> 882,168
<CURRENT-ASSETS> 1,114,606
<PP&E> 687,322
<DEPRECIATION> 379,294
<TOTAL-ASSETS> 1,436,237
<CURRENT-LIABILITIES> 2,786,591
<BONDS> 0
0
300,000
<COMMON> 40,950
<OTHER-SE> (1,691,304)
<TOTAL-LIABILITY-AND-EQUITY> 1,436,237
<SALES> 1,135,645
<TOTAL-REVENUES> 1,135,645
<CGS> 1,447,387
<TOTAL-COSTS> 1,447,387
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,504
<INCOME-PRETAX> (765,119)
<INCOME-TAX> 0
<INCOME-CONTINUING> (765,119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (765,119)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
